Oil prices and Anatole Kaletsky’s absurd Keynesian fallacies

Gerard Jackson
BrookesNews.Com
Monday 24 July 2006

I have to admit that Anatole Kaletsky’s absurd Keynesian fallacies, the kind that should even embarrasses modern Keynesians, get to me, probably because so many people take him seriously. Let me remind readers that Kaletsky — who mindlessly walks in Keynes’ shadow— stated that it was his belief that mass bombings stimulate investment and employment (it certainly raises the demand for gravediggers, surgeons, nurses, etc.,) by destroying masses of capital. In the same article (Digging beneath the gloom, first published in the Times and then The Australian, 29 November 2000) he gave us economic fallacies of fiscal expansion, excess demand, values and interest rates.

Like all Keynesians — vulgar or otherwise — he associates recessions with demand deficiency, i.e., lack of consumer purchasing power. (Even Marx savaged this one). Hence economic slowdowns require loose monetary and expansionary fiscal polices, which are always brought about by lowering interest rates. This, according to Kaletsky, will generate economic growth

But there is no such thing as fiscal expansion. Let me put this very simply. If a government cuts taxes then it spends less. If a government raise taxes, then those who pay them spend less. It’s obvious that total spending remains unchanged. (I’m not suggesting, by the way, that taxes do not affect saving and investment, they do). And this obviously still holds even if the government resorts to borrowing from the public.

So-called fiscal expansion is code for monetary expansion. Governments can run deficits by ‘printing’ money and the likes of Kaletsky will call this fiscal expansion, the rest of us call it fraud. So on closer inspection, and it really doesn’t have to be that close, fiscal expansion is a deceitful policy that is used to hide the inflationary policy of monetary expansion.

By artificially lowering interest rates central banks expand the money supply. This frequently sparks off a boom that stimulates the capital goods industries, increases the demand for labour, brings about balance-of-payments problems and drives prices upwards. At this point someone like Kaletsky will write that the economy is “coming under a strain from excess demand.” That the problem lies with the money supply never seems to get a look in. For the true Keynesian believer money really doesn’t matter.

What also happens is that the growth in money, meaning credit expansion, distorts the pattern of production, laying the foundations of another recession by creating malinvestments that will have to be liquidated if the economy is to recover. Moreover, during the process of creating malinvestments wild speculative excesses will emerge as the excessive credit starts fuelling a stock market boom and unsound mergers. None of which will be laid at the doors of the central banks by Kaletsky and his Keynesian ilk.

Most economists, let alone Kaletsky, haven’t grasped that inflation generates long run changes in the pattern and volume of foreign trade while changing the industrial structure (what Austrian economists call the production structure). This is because inflation misdirects demand and creates price discrepancies in foreign trade. Once inflation slows or is halted readjustments to the capital structuretake place.

As I have said more than once, his economics is really bad stuff. He told his readers at the time that lower rates by central banks would lower bond yields and so help maintain “property prices and housing investment in both America and Europe.” It evidently didn’t occur to him that monetary expansion would greatly inflate property values, which it did, in which case trying to maintain property prices by manipulating interest rates can only generate more inflation. The only real remedy is to allow the market to determine property values and not central bankers.

Kaletsky welcomed the weakness of the Euro against the dollar by claiming it would stimulate growth in Europe by, wait for it, by directing employment from America to Europe. He didn’t realise that this process only works by effectively cutting the real wages of European workers. (At least in one candid moment, Keynes admitted that his was a policy of using inflation to cut real wage rates). But as I just stressed, this policy distorts the pattern of production and creates unsustainable investments. A fact that the astute Samuel Brittan, who used to write for the Financial Times, laid out in his book. (The Price of Economic Freedom: A Guide to Flexible Rates, London MacMillan and Co., 1970, p. 18).

His then views on the economic effects of a rise in oil prices is a real gem. He stated that the effects of any oil shock would be offset by increased spending by oil-producing countries on American, European and Japanese goods. This is so bad it’s almost funny.

In simple English, oil-producing countries raise the price of oil. This means they acquire more dollars, pounds, yen, francs, etc., for each barrel of oil, leaving consumers in oil consuming countries with less spending money. Oil-producing countries then use these foreign moneys to buy foreign goods and services. Meaning that consumption, i.e., living standards in these countries would tend to fall. What this amounts to is a wealth transfer from developed countries to oil-producing countries.

I’m told that Kaletsky is very influential among the so-called shakers and movers in American and European stock markets. If true, God help us.

Gerard Jackson is Brookes’ economics editor