Wednesday, August 21, 2013

Proof That a Broken Clock is Right Twice a Day

Proverb: A normally unreliable person or instrument can occasionally provide correct information, even if only by accident.

Or in this case, an unattended desk calendar is right once per year….

That broken clock, or unattended calendar, would be James Galbraith of University of Texas at Austin, son of John Kenneth.  In a recent interview, he offers many wrong suggestions, but stumbles on one absolutely correct position.  Let’s start with the wrong ones:

Washington has been shooting the economy in the foot for quite a long time, since 2010 at least.

Or perhaps since 2007, or 2001, or 1971, or 1929, or 1913.  Or, I guess, just about any odd numbered or even numbered year….

Regarding what advice he would give the Fed right now:

My advice would be, don’t do anything that is going to cause undo turmoil. If there is no compelling reason to do it, don’t do it. If it hurts, stop. It is the same advice I would give a small child.

The same advice he would give to a small child.  The most powerful entity on the face of the earth and the best he can do is to treat it like a small child?

How about policies to help the average American:

…if they wanted to help stabilize the middle class, [there are] two major measures that would have to be taken. First of all, would be a very substantial increase in the minimum wage, really putting their back into that. The president says he is for $9. I think $12 would be something that would have a significant effect on the structure of American labor markets and on the earnings of working people.

There is a good one.  Why not $20 or $30?  On the minimum wage, it seems to me that almost all economists of all stripes consider such an action to be harmful.  But not the son of John Kenneth.

And the second thing would be on housing and foreclosures. And here, we just don’t see anything. The president has been talking up the line about dispatching Fannie Mae and Freddie Mac with a bullet to the head of each and, well, that would certainly liquidate the middle class.

Of course, the president will do no such thing, and if he wanted to do it congress would disallow it.  But let’s pretend it happens.  Talk about a boon to the masses – you want affordable housing?  Remove the government subsidies that make housing more expensive than it otherwise would be.

Now for the one thing he got right, when asked about the possibility of the Federal Reserve and tapering:

I have been saying for a long time that the Fed is stuck, that it has backed itself into the zero-interest-rate posture and into the holdings that it has of mortgage-backed securities, and there is now a general expectation of low long-term interest rates going into the future. The process of trying to reverse that is going to cause a lot of turmoil and the Federal Reserve doesn’t like turmoil, so it is probably not going to do it. (emphasis added)

The notion that the Federal Reserve can cavalierly change the course that it has been setting for years now I think is problematic and I think they are finding it problematic.

The Fed may try tapering for a while.  Then the economy and the markets will tank, and the Fed will change course – back to inflating the money supply.

As long as inflation as measured by the CPI stays in the low- to mid-single digits, and as long as the masses don’t protest the actual, higher price inflation, the Fed will inflate.  They will avoid the pain of a weakening economy and collapsing markets as long as price inflation is not problematic.

In any case, I suspect this is the last right thing we will hear from the son of John Kenneth for another year.

1 comment:

  1. With rates rising I don't think they will taper at all. Egyptian and or Saudi turmoil may make it moot anyway. taxes