Macroeconomics and the Entitlement State
It is high time to judge macroeconomics -- the pseudo-economics of "aggregates" -- as a disaster. We must challenge both the premises of the macroeconomists and their "policy" alternatives. Let us recognize them for what they are, namely, public relations consultants for the entitlement state.
From its beginnings, which we can date from 1936 (the publication year of Keynes's General Theory), macroeconomics emphasized (on rather vaguely argued grounds) the importance of the biggest numbers in business statistics -- the so-called aggregates. The macroeconomists, as it were, even named themselves after these politically potent "macro" numbers and laid claim to an expertise precisely in tracking and, well, producing them.
The supposed tie of macroeconomics to reality has always been its "national income and product accounting" -- the vast statistical project that they claim "measures" aggregate production and, even, national economic performance. But the difficulty such accounting could never overcome (and, therefore, ignored) is its inability to do anything more than record aggregates of spending, which could never reveal much more than various unremarkable manifestations of change in money supply and velocity.
In fact, though we are conditioned to believe otherwise, so-called "real GDP" has never given information as to aggregate physical production of goods and services, for it wholly evades the crucial fact that production increments induce spending only on themselves (and on closely-related production) at the expense of spending on other, competing goods. This means that new production cannot be the cause of an increase in aggregate spending, since it deflects, but does not increase, spending.
Also mistaken has been the near-universal belief, taught in macroeconomics, that a rising grand spending aggregate implies improved national economic performance. In a large economy, such an increase is far more likely to signal that a central-bank money-pumping boom is in progress, resulting in malinvestment and, in due course, an inescapable bust. But business activity and employment arising from such artificial booms have little more right to be called improvements in national economic performance than did pyramid-building under the pharaohs. (And there has never been an "unemployment problem" to be solved by a central bank, but rather a government-war-on-employers problem to be solved, if ever, by some future generation of politicians.)
Now, why did the macroeconomists find it expedient to label aggregate spending as the measure of production and aggregate spending as the indicator of "economic performance"? The clue to the answer is that their fundamental policy recommendation is long-term money supply increase, which can reliably alter virtually nothing other than aggregate spending. (Macroeconomics, then, was merely the 20th-century variant of the much older quackery of inflationism.) For the macroeconomists, the fuel for the economy is continual new money injections, their substitute for relying on the price system to guide production and for guaranteeing property rights to assure incentives to production.
To outsiders, macroeconomic "fiscal and monetary policies" have often appeared as reckless increases in government spending and money-pumping, but note that the macroeconomists themselves have always seen such policies as improving the functioning of capitalism. Their view is that a free market becomes lethargic unless government enlivens spending activity from time to time. And, at least until our Great Recession, statisticians only rarely failed to report the aggregate spending increases that the macroeconomists promised and billed as "economic growth." They claimed that this "growth" was clearly valuable both on its own merits and for encouraging tax receipts and facilitating the issuance of government debt that funded politically popular programs. Since most government taxes were collected as a percentage of spending and incomes, the higher the spending and incomes, the better it was for government revenues. Also, the more money that was pumped into the system, the easier it was for everyone -- and certainly for governments, whose tax base continually rose -- to borrow money.
Some protested, or at least scratched their heads, but, in general, Americans bought the premise of macroeconomists being able to conjure an "age of growth." It certainly suited generations of politicians (of both parties) and bureaucrats, who swiftly learned that collecting taxes and borrowing money were less noticed by constituents whose profits, wages, and property values rose in the wake of persistently rising spending aggregates. It is safe to say that attaining our current levels of federal government debt (over $14 trillion) or expenditures (trillions, annually) would have been inconceivable in the absence of the money supply increase achieved in accordance with macroeconomic policy. Consider that, in 1936, the year the General Theory appeared, money supply stood at near $30 billion, but by 2009 it had expanded under the government-guided banking system to near $6,000 billion (in checkable deposits, inclusive of money market funds, plus currency). Is it too cynical to suspect that the remarkable overlap of the interests of governments and the banking systems that they continually "bail out" is founded historically in the development of macroeconomics?
In effect, macroeconomics was a two-step public relations strategy for those seeking to finance the entitlement state. Step 1 was to define the goal as aggregate spending increase (which, of course, you always refer to as "economic growth"). Step 2 was to have the central bank engineer a long-term expansion of the money supply. And (as a footnote to Step 2): Never forget that money supply expansion is the sine qua non in achieving increases in aggregates (i.e., "growth") and that by it you will achieve your key (non-public) goals as well, namely, enhancing tax receipts and facilitating government borrowing.
The subtext of the macroeconomic message was that one can hardly build the entitlement state -- in America, at least -- without deficit spending, Americans being exceptionally sensitive to outright taxation. Moreover, successful execution of the marketing strategy provides an invaluable, bipartisan, political bonus: the ability of successive administrations and Congresses to plead that their policies are all about "helping" the economy to achieve "growth."
The essential role of macroeconomics is to provide rationales to politicians, who want to spend more money, and to their central bankers, who earn esteem insofar as they create more money over the long term. This is why macroeconomists advocate central banking, a fiat currency and every legislative effort to free money growth from being in any way restricted by the supply of precious metals. This is why they sanction the 1913 government restructuring of our money and banking system, the 1933 confiscation of gold from American citizens, and the 1971 denial to foreign central banks of dollar-to-gold convertibility. Macroeconomists approve each of these events because they were required for the development of the late 20th century "growth" machine in support of the entitlement state. (To be sure, macroeconomists can, and sometimes do, advise governments to engage in so-called stimulus spending, another avenue of entitlement state expansion. But the bread and butter issue for macroeconomic policy is invariable: long-term monetary expansion as orchestrated by the central bank.)
The macroeconomists characterize the pre-Fed money and banking system as an intolerable burden on the economy of the late 19th and early 20th century (the period during which America -- surprisingly -- became a world economic superpower). By the 1960s, they had fashioned the Federal Reserve System into a sophisticated fiat money creator for the late 20th century (the period during which America transformed itself into the sclerotic entitlement state now -- surprisingly -- in hock to the People's Republic of China).
In the U.S. and around much of the world today there exists the probability of cuts in entitlements. This is historically unprecedented and shows the macroeconomic project to be on the verge of collapse. For Europe, Japan, and the United States, the evidence for this is the de facto insolvency of their banking systems (which are burdened with unacknowledged collapses in prices of both real estate and sovereign loans), the desperate, ineffectual central bank "quantitative easing" (read: bank propping-up) programs, and continuing bailouts of governments and their banking systems at taxpayer expense.
Today's economic conditions should make clear the difference between "economic progress" and "macroeconomic growth." Progress was what occurred when an un-subverted price system (last seen in the decades before World War I), along with its prerequisites, economic liberty and hard money, guided spending in a non-macroeconomic world, i.e., a world of relatively stable spending aggregates. "Growth" was merely the offspring of continual pumping of the money supply, which caused ever higher spending aggregates but effectively disenfranchised the price system even as it enabled increases in government spending and indebtedness.
In all this there is a lesson for would-be opponents of the entitlement state: it is a mistake to join the macroeconomist's cult of "growth" as indicator of economic progress, as savior of entitlement state programs, or as solution to the problem of government indebtedness. The economic progress we make (if any) is only what remains after deducting the cost of the entitlement state from macroeconomic "growth."
When the U.S. took substantial steps toward the entitlement state during the hard times of the 1930s, objections as to its affordability had considerable force, and many then still looked upon the palliative of "easy money" as immoral on its face. Owing to such quaint attitudes and the old-fashioned dicta of some pre-Keynesian economists, the entitlement state program was in jeopardy in its infancy. It faced what promised to be an endless public relations problem. To survive, it needed an effective rationale.
Cue the macroeconomists, who reassured opinion leaders that the entitlement state was not only affordable but that growth of government and even deficit spending was downright advisable from the economic point of view. In Nazi Germany or the Soviet Union, a ministry of propaganda would have handled this sort of thing. In the U.S., the propaganda war against gold, small and balanced budgets, and a banking system free of government domination was merely outsourced to the macroeconomists, who became the financial advisors to the entitlement state, the economy's chief enemy.
Mikiel de Bary is a securities industry professional in New York City. His email address is email@example.com.