Wednesday, February 03, 2010

Liquidationist nonsense

One critique I hear from right wing/libertard/Austrian "economists" is that we should not have stimulus to increase demand because it would "interfere with necessary readjustment in the economy". At which point I say... wha?!

Look: the whole concept of "readjustment" is that there are insufficient slack resources in the economy to allow the free market to adjust supply to meet un-met demand. That is, "readjustment" assumes there is a supply crisis, where the economy simply doesn't have the necessary resources to adjust supply to fulfill un-met demands. And yes, it's possible for that to happen. That was the case for most of the 19th century in the United States, where there was a severe shortage of human capital available to do things like, say, build trans-continental railroads, and the supply of monetary capital was hamstrung by adherence to the gold standard. The problem is, that is not what we have right now. We have 10% unemployment, showing no shortage of human capital available to hire, and we have 0% interest rate on short-term Treasuries, showing that there is no shortage of monetary capital available to use for investments (and that there in fact is a *surplus* of investment capital, being parked at 0% interest in Treasuries for lack of any place to actually invest it). What we have right now is a demand crisis, not a supply crisis -- a crisis caused by lack of demand, not by lack of supply.

And what is the Austrian response to this reality? Well... the Austrian critique of the notion that 0% interest rates and 10% unemployment means that there is no shortage of the capital needed to adjust supply to meet demand is to stamp their feet and whine their evidence-free talking point about how the government is somehow, via Magical Force apparently, impeding the market from doing so. The problem is, we have NUMBERS saying that this is not true. I realize that Austrians prefer their magical thinking to numbers (their solution to any time you present them with actual facts and figures is to basically stamp their feet and say "numbers don't mean anything!"), but such a rejection of empirical reality, such a rejection of inconvenient facts that contradict their talking point, is astounding in its delusional nature.

Magical thinkers, bah. On the same scale as the cretins who believe the world is 8,000 years old, a back massage will cure cancer, and crystals have healing power. Magical thinking was all we had for thinking about the economy in the 19th century before the final development needed for modern statistical tools when, in 1901, Russian mathematician Aleksandr Lyapunov defined the Central Limit Theorem and thereby enabled us to, well, actually measure all this stuff and find out whether there really *was* an "adjustment crisis" caused by government intervention. And for this *current* crisis, this may have been the case in 2006 when the government was propping up the real estate bubble by basically endorsing rubber-stamping liar loans to homeless bums off the street, but certainly is not the case now. We have actual *measurements* now. We don't need to rely on magical thinking anymore like the economists of the 19th century who could only hypothesize about things they had no way to measure.

Some people just need to move into the 20th century, methinks. It'd be great if they could move into the 21st century someday, too, but I suppose one must start with the achievable first, sigh!

-- Badtux the Snarky Economics Penguin

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