By Peter B. Meyer – 5th of December 2012
Contrary to the general opinion; disasters don’t provide any economic growth or any wealth advantage. The U.S. government announced that gross domestic product grew in the third quarter at an annualized rate of about 2 percent, which today is revised to 2.7%. That’s hardly vigorous growth, but considering the previous quarter’s annualized rate of 1.3 percent, the news was received with optimism. But optimism is unwarranted. As the U.S. Commerce Department’s Bureau of Economic Analysis explained: “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment.”
To put it another way, what grew was not the real economy but GDP - a statistical construct that is subject to a myriad of assumptions and dubious measurements as, for example, inflation. And the reason GDP grew at a higher rate is that the government and consumers spent more than previously.
So despite what pundits, politicians, and the news media tell us, this doesn’t bode well for the future because economic growth, as opposed to GDP growth, requires investment
, which is made possible by saving
. But saving is consumption deferred
. One reason people save is to consume more in the future than they can purchase today. An economy cannot consume its way to real, sustainable growth.
Commentators never tire of saying that consumption accounts for more than 70 percent of the economy. But this is highly misleading. Adam Smith accurately wrote, “Consumption is the sole end and purpose of all production.” That implies that consumption isn’t the way to make an economy grow by consuming more. That only sabotages the potential for real growth.
John Maynard Keynes who thought recessions, made the fallacy popular and depressions were signs of inadequate aggregate demand and that therefore saving was harmful. But it’s not true. Rather a recession is the inevitable consequence of a previous boom, or bubble, prompted by money inflation and cheap-credit policies pursued by the government’s central bankers. These policies stimulate interest-rate-sensitive sectors of the economy, such as housing and stages of production remote from the consumer goods level that depend on real savings for sustenance.
But when the Federal Reserve System creates money out of thin air in order to lower interest rates, it gives the illusion of new savings - deferred consumption - and therefore misleading signals to entrepreneurs, who direct resources and labor to parts of the economy that never would have expanded without the inflation. The recession occurs when the central banks print too much money, true consumer preferences come to light, and the inflation-induced investment is revealed for what it is: malinvestment
Economic recovery requires a shift in resources and labor from where they were mistakenly diverted to where people’s real consumption/saving preferences direct them. This process is costly and time-consuming - and that’s where the need for saving comes in. If the recovery is to proceed, government and its central bankers must keep hands off, and interest rates have to be allowed to find their true market levels. If growth is to resume and employment increases, market corrections can’t be impeded. But politicians and central bankers aren’t typically willing to step aside in such circumstances because they want to be seen to be doing something
- even if the something is the wrong thing to do. That’s the position we’re in today.
Long-term investing is risky enough. When government adds to the risk - when no one can be sure what new taxes and regulations may be coming down the pike - investment becomes all the more dicey.
What’s horrifying is that President Obama, Fed Chairman Ben Bernanke, and Congress have been doing precisely the opposite of what economic recovery requires. In addition to the programs, the Obama administration has tried to prevent the housing market from correcting for the massive distortions wrought by the Fed and federal housing programs as they inflated the infamous bubble. Again the government and its central bank seem determined to re-inflate the housing bubble. For example, under QE3
the Fed for the foreseeable future will buy $40 billion worth of mortgage bonds each month
, providing easy money and low interest rates for the mortgage market. “Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.” Bernanke said.
This is precisely the sort of policy that set the table for the housing bubble and consequent Great Recession in the first place. No good comes from artificial stimulation of markets.
The Fed also plans to continue to hold the federal funds rate
to near zero well into 2015. To the extent this keeps other rates down, people will be discouraged from saving and encouraged to spend and borrow. Thus, the government is discouraging savings needed for sustainable economic growth.
“Policy makers have cost the U.S. economy a decade or more of normal economic growth,” is said. That represents real hardship for millions of people. The politicians and their appointees once again have shown themselves to be incompetent managers of the economy - which is to say of our lives
. It is time that all privileges, regulations, and interventionist entities - including the Fed - were eliminated and that a free economy is allowed to emerge. Economic growth is too important to leave to the government. "The broken-window fallacy,"
wrote Henry Hazlitt in his 1946 gem Economics in One Lesson
, "under a hundred disguises, is the most persistent -- and rabble-rousing -- misunderstanding in the history of economics."
Taking his cue from the 19th-century French economist Frederic Bastiat, Hazlitt tells the story of a vandal who breaks a bakery window. The baker supposedly stimulates the economy with his purchase of a new window. Never mind that he'd hoped to buy a new suit with the money and the glazier's gain is the tailor's loss.
"No new 'employment' has been added," Hazlitt sums up. "There is no upside to wealth destruction. But try telling that to the folks who calculate GDP.
"It is very likely the ‘Sandy’ hurricane will be given credit for any fourth-quarter fake economic growth. After all, that's how government affects the GDP. The more it spends, the higher economic growth appears to be." And it gets worse: Private-sector production - the stuff that doesn't get shifted from one pocket to another is falling. With consequence, real economic growth is falling even more.