Today in the Wall Street Journal, distinguished economist, author, and Carnegie Mellon Professor Allan H. Meltzer published an opinion piece entitled "What happened to the 'Depression'?"
In it, he made some excellent points that investors should understand, and which resonate particularly well with assertions we have been making in print on the pages of this blog for many months now.
In it, he points out that many journalists and politicians who are partial to Keynesian theories fall into the trap of believing that government stimulus is helpful -- even necessary -- during periods of recession (a notion we refuted back in January, among other places).
Professor Meltzer demonstrates that the economic recovery that is currently in progress has nothing to do with stimulated consumer spending, but has everything to do with the natural recovery* from what was in fact a panic that was induced by a chain of technical factors, as we have also argued before. He notes that the failure of Lehman Brothers set off a liquidity panic, just as we have been saying since well before the economy and market began to recover (see "It's a panic, not a Great Depression").
Even in the midst of this recovery, Keynesians such as the New York Times' Paul Krugman continue to call for more government stimulus.
Professor Meltzer makes the very important observation that "Keynesian economists always fail to recognize the powerful regenerative forces of the market economy." This is a fact of which investors should be very aware.
He ends his article with the trenchant observation that "The proper response now is to repeal what remains of the misguided stimulus." This advice is exactly what we called for in April's "Four-letter government words," in which we argued that "The remainder of ARRA, TARP, TALF and PPIP are 'four-letter' government activities that, in the words of the late Professor Friedman, could be 'profitably abolished'" -- ARRA being the acronym for the American Recovery and Reinvestment Act, more commonly known as the "stimulus package."
Professor Meltzer, who served in an economic advisory role to both the Reagan and the John F. Kennedy administrations has some authority when he states that the current administration should revise its policy and should begin with "scrapping what remains of the stimulus."
We are gratified to observe such confirmation of our assertions from such a distinguished source.
* We would also add that the recovery from the panic was assisted by emergency doses of liquidity from the Federal Reserve, which did their job but which we have argued should also be removed now.
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For later posts dealing with the same subject, see also:
- "The Consumer" 10/19/2009.
- "What Rube Goldberg could teach us about economics" 12/08/2009.
- "The end of 2009" 12/30/2009.
- "Why can't we all just get along (on economic policy)?" 02/08/2010.
- "Zombie economics" 12/23/2010.
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