Monday, June 16, 2003

More evidence of the amazing stupidity of mainstream economists comes in the form of an op-ed by former Clinton administration functionary Everett Ehrlich in today's Los Angeles Times:
Every so often some economists decide that everything they ever learned was wrong and, from that moment on, everything is going to be completely different.

Twenty years ago it was the idea that cutting taxes radically would pay for itself. Predictably, the nation's largest peacetime deficits resulted. Five years ago it was the idea that the Internet made companies valuable even if they produced no profit and very little product. Unsurprisingly, the stock market nose-dived soon thereafter.

Now, the idea is deflation � that prices are going to fall steadily just as they've risen steadily for all of our lives.
Never mind that the first two were fantasies with no historical data to back them up, while deflation is not simply an historical but a present reality. What a bonehead! It gets worse, though:
if higher productivity led to deflation, prices would have fallen for all of human history. Productivity growth isn't a problem � it's a miracle. If it weren't for productivity growth, we'd all have the standard of living of mule drivers and wood cutters.

A more productive worker earns more in the marketplace and in turn spends more. And spending more keeps prices stable, if not rising.
Wrong! A more production worker does not necessarily earn more in the marketplace, and even if s/he does earn more, the important measure is rise in earnings relative to productivity. Surprising an economist can't figure this out. If productivity rises much faster than real wages, you get trouble. This is exactly what has been happening in the US since the early 1970s, although the gap has gotten truly enormous only since the early 1990s.
the best argument against deflation is that the U.S. economy is about to grow, and, ironically, the deflationists have all but assured that growth.
Yes, the monetarist argument again. But since we know deflation is not primarily a monetary phenomenon, good ol' muddle-headed Mr. Ehrlich is wrong again. Where is mention of the housing bubble, the Japanese experience, the imminent deflation threat in Central Europe, the monster US budget deficit? Apparently when you live in Fantasy Land, you whirl around and around and around inside the Mad Hatter's giant teacups so much that your brain becomes soft. An irony even an economist could love.


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