We Are All Keynesians Now -- At Least According to National Review

Please read this article and tell me, have the editors of National Review have gone mad?

Now that you have read the piece by Ramesh Ponnuru and former Bush Treasury economist David Beckworth you are invited, nay, strongly encouraged to pick yourself up off the floor and ask yourself if you actually read that article in National Review.

Unfortunately, you read it right; NRO, the legacy of William F. Buckley, Jr. is advocating inflation as the way to kick start the economy.

According to the article:

"The Fed’s initial response to the recession that began in 2007 and deepened in 2008 was to tighten money. It did so actively by paying banks interest on reserves at a rate higher than they could get from alternative safe investments such as U.S. Treasury securities. The banks, therefore, were incentivized to hold money instead of investing it. The Fed passively tightened by failing to offset the sharp drop in the total number of dollars being spent in the economy. When this number — called nominal spending — drops, it is because the demand to hold money increases or the supply of money decreases. By mid-2008 both forces were at work. Households and firms were holding more money and spending less at the same time financial firms were creating fewer assets that serve as money. When the number of dollars spent falls, so of course must the number of dollars made (nominal income). Either prices have to fall, the real economy has to shrink, or both. We got some of both. The Fed has not done nearly enough since then to correct its mistake."

Or to put it in plain language, people stopped spending and started saving, and banks did likewise.

Banks wouldn't invest in T-bills because they were seen as bad investments. They were seen as bad investments because they didn't pay well compared to other opportunities and, more importantly, Obama's spending spree made Treasury Bills appear too risky; who knew if the government would pay them back, or pay them back in worthless dollars?

That's the point that is ignored here; these "traditional investments" are dangerous in an inflationary period. Inflation traditionally helps the borrower, because he pays his loan back with money that is worth less than when he borrowed it.

Banks, on the other hand, earn less in an inflationary period, but there is more money floating around.

However, lending to the government during an inflationary period is risky because there just isn't as much profit in it as there is during a period of stable currency, and it is even more risky because the government may change the rules midstream and the lender has no recourse.

And of course inflation eats away at the buying power of the citizenry, making the public cut back, which reduces economic activity over the long haul.

Can it be that, as conservatives, Ponnuru and Beckworth are arguing for precisely that?

If the Reagan era taught us anything it is that reducing taxes and inflation stimulates economic activity, increasing revenues to the government.

The reality is inflation is a tax, albeit a hidden one, because it facilitates more government spending. It is difficult to believe that National Review is calling for a tax increase on the American People, albeit one that can be hidden in price increases.

Unfortunately, it appears Ponnuru and Beckworth have fallen into the trap of thinking of inflation as something different than taxation.

But it is indeed a tax, as those of us who recall the 1970's remember that the Carter years ended in a period of Stagflation, something the Keynesians said was impossible; stagnant economic growth and inflation.

As things stand now, there is no incentive to cut spending - something that our betters in Washington are unwilling to do anyway. Would any conservative really believe the answer is to print our way out of it ala Weimar Germany?

Of course those advocating for an inflationary policy won't put it that baldly; they argue for a 5% inflation of the currency. But they surely cannot be so foolish as to misunderstand that government is a chained dragon, and letting the beast off the chain means a dragon running wild.

Nobody has found a way to stop inflation once started except through the most arduous of efforts (which can only come in a most painful fashion) and given the mountains of debt we are currently amassing that simply won't happen until the value of a dollar approaches absolute zero.
 
The economy is not suffering from an excess in austerity, but from an overlarge government eating up too much of the assets and over regulating the private sector. It really is that simple.

Inflation will simply let the government off the hook for spending, giving it more money to play with. There will be no effort to rein in spending, no effort to rein in regulation, no effort to reduce the size and scope of our out-of-control Leviathan.

Take a look at this chart.
 
                    Gross Federal Deb       Debt Held by Public

FY 2013*        $17.5 trillion                 $10.6 trillion

FY 2012          $16.4 trillion                 $9.7 trillion

FY 2011         $14.8 trillion                 $8.5 trillion

FY 2010         $13.5 trillion                 $8.2 trillion

FY 2009         $11.9 trillion                 $6.8 trillion

FY 2008         $10.0 trillion                 $5.3 trillion
 

While the balance between private and public debt has not changed much over the past five years, the gross numbers have. Remember, a trillion dollars is a thousand BILLION. And the total assets of U.S. economy are only equal to $188 Trillion dollars - that's everything - or 13.4 times GDP.

So, we have crossed the entire Gross Domestic Product (roughly $14 trillion) in terms of what we owe http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188-trillion-134xgdp/, and our debt is eating up that much of the economy.

We got to this point because government bails out one debtor, but at the expense of economic growth in general – inflate the currency and everyone pays, the productive as well as the unproductive.

"It is once again time for regime change. The crisis in Europe and our stagnation at home both have primarily monetary causes, and a solution will require a new approach to monetary policy that learns from both the successes and the failures of the past."

If by monetary policy they mean chronic overspending, then I agree with the article in NRO. But their argument for ending austerity measures belies the obvious here.

The fact is that the crisis in Europe stems from an overly generous welfare state spending entirely too much money for entirely too long, and the crisis here at home could have been averted had WE not spent our way to the poor house. It is not a crisis of monetary policy, but of political will.

After all, the U.S. housing bubble was driven by government money in the housing market, by over-regulation, and demands by politicians that credit standards be lowered.

And it was the "too big to fail" mantra that caused government money to bail out the banks, rather than let bankruptcy take it's course.

I could go on, but the point has been made:  A true Conservative argues for an economy governed by Adam Smith's "hidden hand" and not by men. Men cannot see the results of their actions in a clear way, and often have motives that do not jibe with the health of the broader economy.

The Conservative view is that the best medicine for an ailing economy is to get government out of the way of recovery, which means reducing government spending and regulation. To argue for inflation is to argue for more government, because that is the ultimate end of currency manipulation, after all.

Government is what caused this problem to begin with, and government is empowered by money. Giving more money to government is guaranteed to make it grow, and it is the growth of that government that has caused our current economic crisis. 

It is sad to see such a great and iconic institution as National Review stray so far from traditional conservative principles. Fortunately, however far a few in the current generation of leaders may stray from the hard path of conservative economic principles, the immutable laws of economics will raise up a new generation to stand athwart history to yell “stop.”

Timothy Birdnow is a St. Louis based writer. His website is www.tbirdnow.mee.nu