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More of the Same From the Keynesians in 2014

Mises Daily: Thursday, January 23, 2014 by

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The first rule I teach my economics students is that when the economy fails, it’s usually safe to blame the government. To paraphrase Winston Smith in 1984: If we accept that the state is the source of economic misery, “all else follows.”

As a science, economics is really not that difficult because it encompasses decisions we make every day that impact our well-being and the well-being of those around us.

This system of natural law that we refer to as economic law governs economic activity, and much like the laws of physics that govern the world and universe in which we live, these laws are absolute and can only be manipulated at great risk. They cannot be negated.

In economics, legislation and regulations cannot fundamentally change the reality of economic law. If we bend them, reality snaps back with a vengeance, and the corrections will often be unpleasant.

Speaking in the 1920s, Ludwig von Mises said that any “correction” following an artificial boom period must be equal to or greater than the expansion that created it in order to fully liquidate the asset distortions amassed during the boom period. At the end of the 1920s he was proven correct.

In the 1930s, the Temple of Macroeconomics was built in honor of the new Zeus, John Maynard Keynes, and economic law was mostly cast aside. Washington, D.C. became the final word in even the smallest transactions in the economy.

Since then, unfortunately, Keynesian economics has become deeply entrenched in our collective thinking. Too many Americans trust the pronouncements of elitist Keynesians explaining why jobs and higher wages are scarce, or why prices rise or fluctuate unexpectedly. We then wait hopefully as the high priests of Keynesianism decree the solution to these vexing problems. The catechism has been established that only they can exorcise the maladies of a bad economy.

Their solution? Paper over the problem with more money creation or boost GDP through more government spending; understate inflation and report that the economy grew by “X” percent, and start throwing the confetti.

Looking forward to 2014, we can see that the Keynesians will be working their craft once again as this new year unfolds.

Msn.com recently posted two “list” articles: one on eight things that will cost more this year and one on eight things that will cost less.

The expectation for 2014 is that wages will increase by an average of 3 percent. But price inflation is also expected to rise by about the same amount (according to the official understated rate).

GDP is also expected to increase modestly in 2014 as consumer confidence grows. Yet GDP is a grossly simplistic calculation that makes generating misleading statistics easier. One of the components of GDP is government spending. So, if GDP growth is falling short of predictions, all government needs to do is ramp up spending and the economy “grows.”

Also this year, the cost of lending is expected to increase once the Fed reduces its purchases of government bonds. If that does happen, artificial inflation of the stock market stops, followed by much whining on Wall Street.

Housing costs are expected to rise this year, which is not surprising given that The Fed has been trying to re-inflate a housing bubble since 2008.

According to the list, food is going up, too. And the real impact will never be fully acknowledged by the government because the government doesn’t include the cost of food in its “official” inflation calculations because the price of food is allegedly too volatile.

Thanks to Obamacare employer-provided healthcare costs will increase well beyond what can be expected due to yearly government-caused inflation.

Taxes are also expected to increase, but only for the “rich” (assuming you don’t count Obamacare penalties as taxes) so that will be okay for most voters.

Three of the items on the things-to-cost-less list, tablets, smartphones, and 3D printers, are coming down because what little remains of the market has been driving those prices down year after year. Given the increasing costs for so many essentials, however, it seems less than satisfying to celebrate what common sense, and a basic non-Keynesian understanding of economics, would predict anyway.

These economic maladies we will face in 2014 are the result of Keynesian economic policy, which is as revered in Washington as ever. The inflation we’re facing stems from the Fed and its money-printing/bond-buying scheme, and the latest distortions will be borne out this coming year, piling on top of those distortions already crippling any recovery we might see. As the recovery falters, the Keynesians will point to government as the solution. As in the past, they will continue to make the economy worse and real recovery impossible.

It’s as predictable as 2 +2 equaling 4. At least Winston Smith gets it.