A one-two punch to Obama’s ig-Nobel spending

The 2011 Nobel Prize in Economics was awarded to two American economists, Thomas Sargent and Christopher Sims citing their “empirical research on cause and effect in the macroeconomy.” Their development of analytical tools for macroeconomic analysis have driven yet another nail in the coffin of Keynesian economics. To date, that’s eight Nobel Prizes to free-market skeptics of Keynesianism and zero to its supporters… unless you count Barak Obama. The Obama Administration’s Council of Economic Advisors includes Lawrence Summers and Christina Romer, both all-star Keynesians who provided the calculations used to justify trillions of dollars in “stimulus” and bail outs.

I know what you’re thinking. What the hell is Keynesian economics? This sounds like inside baseball unless you’re into economics, but I’ll try to keep it simple. Keynesianism is a school of macroeconomics based on the theories of John Maynard Keynes first published in 1936. He argued that individuals making private economic decisions lead to inefficient macroeconomic outcomes so the state must manipulate monetary police, fiscal policy and interest rates to stabilize the business cycle. As you might expect, an economic theory that could be used to justify top-down centralized control of the economy has been widely popular among those decision makers at the top. The Keynesian model was essentially the only economic model guiding public policy until the 1970s and the appearance of “stagflation.”

Stagflation is when an economy experiences high inflation and high unemployment at the same time. In the Keynesian model this shouldn’t be possible because inflation and unemployment supposedly trade off. So their only answer is stimulus spending. They dump new money into the economy, which causes inflation but supposedly also jumpstarts spending and leads to recovery. It’s a cattle prod strategy. The economy occasionally slows down and you just have to zap it back into motion. But it’s not working anymore, and the failure of the Obama administration’s stimulus spending to achieve its stated goals is now undeniable.

So what the hell is going on?

Opponents of the Keynesian model say stimulus is more like binge drinking. You can get drunk on stimulus and enjoy a night of reckless spending, but the result is a stagflation hangover. Then you have a choice of either suffering through it or drinking more. But eventually your liver will fail because the stimulus causes the stagnation it’s supposed to remedy, which is about where we’re at now.

Thomas Sargent and Christopher Sims have both offered harsh criticism of the Obama administrations economic strategy, but they’ve also provided an explanation for the diminishing utility of Keynesianism and the empirical analysis to prove it. You see Keynesianism is not based on evidence. It’s all theory. Sargent and Sims are leaders of what’s being called “the rational expectations revolution” which argues that there is no predictable way for the government to manipulate the economy because people learn to anticipate future government intervention which changes the outcome of any policy. If workers and businesses anticipate the long term effect of monetary and fiscal policy they will not change their short term economic behavior. For example, if the government prints a bunch of money and gives me some they’re hoping that I’m going to turn around and spend that money to stimulate the economy. But I know that increasing the money supply causes inflation, so I’m more likely to exchange it for something stable, like a gold coin, and wait out the storm. This is why banks don’t lend. This why corporations don’t hire. This is why Wallstreet won’t trade. They anticipate the long term consequences of magical economic thinking.

In short, the Keynesians view economics as raw numbers managed by top-down “back of the envelope” calculations, and people as predictable robotic decision makers. But the free-market economists who win Nobel Prizes view economics as unpredictable, bottom-up and too complex to centrally plan without devastating unintended consequences. They view people as organic, sophisticated and able to make complex economic decisions based on all available and relevant information.

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