With all due respect Mr. Harper, you are wrong. Stimulus spending doesn’t work

From the Fraser Institute Last week on these pages we detailed the findings of our study, Did Government Stimulus Fuel Economic Growth in Canada? Based on the latest economic data from Statistics Canada and using the same methodology for analysing the data as the Bank of Canada, we found the federal government’s deficit-financed $47.2 billion Economic Action Plan had virtually no impact on last year’s economic turnaround. Prime Minister Stephen Harper and Finance Minister Jim Flaherty responded to our report with harsh words. Both criticized the report as being “ideologically” motivated. Minister Flaherty was “disappointed” and remarked that our report was “poorly done” and “shabby.” Prime Minister Harper went further and according to the CBC, said: “Economic theory and history is clear, governments must … make sure [funds] are put to productive use in the economy to create jobs….that is what we have been doing, that has been successful [and] every reputable international study says so.” With all due respect Mr. Prime Minister, that is simply not true. A vast body of academic research casts serious doubt on the ability of government stimulus spending to boost economic activity. Worse still, your government’s estimates of the impact of the Economic Action Planon employment and economic growth are based on discredited assumptions that have no empirical basis. Let’s first review some recent and important independent academic studies on the effects of government stimulus. Last October, internationally renowned fiscal policy expert and Harvard University professor Alberto Alesina and his colleague Silvia Ardagna conducted a comprehensive analysis of stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007. Their studyLarge Changes in Fiscal Policy: Taxes Versus Spending identified 91 instances where governments tried to stimulate the economy and found that unsuccessful stimulus initiatives relied on government spending. Alesina noted that “a one percentage point higher increase in the current [government] spending to GDP ratio is associated with a 0.75 percentage point lower growth.” In plain English, increased government spending reduces, not increases economic growth. Professor Alesina’s study also found that successful stimulus initiatives—those that increase economic growth—focus on tax cuts. However, only 13% of the federal government’s $47.2 billion Economic Action Plan was dedicated to tax relief.  In another 2009 study published in the prestigious American Economic Review, Stanford University professor John Taylor reviewed the evidence over the past decade on fiscal stimulus and concluded “there is little reliable empirical evidence that government spending is a way to end a recession or accelerate a recovery.” A 2008 study, What are the Effects of Fiscal Policy Shocks? by University of London professor Andrew Mountford and University of Chicago professor Harald Uhlig assessed and compared the economic impact of various cases of deficit-financed spending, deficit-financed tax cuts, and tax-financed spending from 1955 to 2000. They found that spending related measures are the weakest ways to stimulate the economy and that both deficit-financed and tax-financed spending have the effect of discouraging private investment. The International Monetary Fund (IMF), which Prime Minister Harper has cited as an authority, recently surveyed fiscal stimulus initiatives in advanced and emerging economies and concluded that the average effect of discretionary fiscal policy “does not provide strong evidence of countercyclical effects.” Simply put, the IMF concluded that fiscal stimulus is generally not an effective way to combat recessions. Unfortunately, the Prime Minister’s Office and Department of Finance are not aware, or worse still, chose to ignore these and dozens of other reputable studies that contradict their rhetoric. Instead, the Conservative government continues to highlight their internally generated estimates of the impact of their Economic Action Plan. These “estimates” assume that an extra dollar of government spending increases economic output (GDP) by $1.50. In econ-speak, the government uses a “multiplier” of 1.5. Put differently, the folks that called our study “ideologically” motivated assume that if the government takes a dollar out of your pocket or borrows it and then spends it on somebody else, it generates an extra $1.50 in economic activity (GDP). How did Minister Flaherty and the Department of Finance derive its 1.5 spending multiplier estimate? Well, it certainly does not come from “reputable” studies, as the Prime Minister has suggested. The estimate is actually from a political document co-authored by Christina Romer, chair of U.S. President Barack Obama’s Council of Economic Advisers. That political document dubiously assumes a government spending multiplier of 1.57. Many internationally renowned economists have directly criticized Romer’s spending multiplier, including Stanford University professor John Cogan and his colleagues, who in a 2010 study, accused Romer of making “highly questionable” assumptions to arrive at a multiplier of 1.57. Under more realistic assumptions, professor Cogan and his co-authors found that the spending multiplier is substantially smaller and that it likely lies between 0.5 and 0.6. In other words, if government spending increases by one dollar, GDP increases by only 50 to 60 cents. It is important to note that the multiplier results apply for a given level of taxes. If the spending is deficit-financed, like the federal government’Economic Action Plan, or tax-financed (increased taxes), the increased spending reduces other parts of GDP such as consumer spending, private sector investment, and net exports. Romer’s multiplier for government spending is also inconsistent with research by Harvard University professor Robert Barro, who has spent most of his academic career estimating fiscal stimulus multipliers. While Barro’s seminal 1981 study calculated a spending multiplier of 0.8, his more recent work suggests that it is even lower. Earlier this year, Professor Barro noted that the spending multiplier is actually negative after accounting for the fact that the government has to balance its budget over time with future tax hikes to finance current day deficit spending. Professor Barro has also criticized Romer and noted that there is no “serious scientific research by Ms. Romer on spending multipliers” and that he “cannot understand her rationale for assuming values well above one.” Professor Cogan and Barro’s work is supported by another 2009 study by professor Eric Leeper of Indiana University. The Leeper study found that stimulus spending multipliers for government investment are negative due to the long delays associated with infrastructure projects and the expectations taxpayers form when the government finances these projects through debt. This should be a concern to Canadians, given that more than 40% of the federal government’s stimulus package was earmarked for infrastructure initiatives, and the stimulus is financed through large deficits. Finally, even the IMF’s survey found much of the same and indicated that, despite some rare outliers, a typical range for spending multipliers is below one. Rather than rely on economic models in which the answer is “built-in” and assumes government spending increases economic growth, our study examined Statistics Canada data on stimulus spending. We found that before the recession, during the recession, and well into economic recovery in 2009, the government’s contribution to GDP growth has been markedly constant. In other words, whether the economy was shrinking, stagnant, or growing, the contributions of government spending and government infrastructure investment to economic growth had little effect on changes in GDP growth (see figure). The unfortunate reality for Canadians is that the federal government’s stimulus package was politically motivated rather than economically motivated. And now, again due to politics, the Conservative government that reluctantly implemented the stimulus package is aggressively defending it and attacking sound, rigorous, independent economic research. Our study, supported by a large body of academic evidence, confirms that the stimulus package didn’t work. It’s time for the government to admit its stimulus mistake and return to prudent fiscal policies.

Author(s):

Niels Veldhuis Charles Lammam

Stephen King: Staring at a new age of austerity

At this stage, we can't be sure we haven't been looking at a phantom recovery

As I glanced through the weekend press, I detected a growing sense of envy. The UK economy is still struggling to pull its way out of its recession while the US economy, apparently, is back to its bouncing best. Certainly, the numbers from the final quarter of last year seem to support this view. The UK economy expanded at a meagre 0.3 per cent rate, after a small upward revision, but the US economy managed to spurt ahead at a 5.9 per cent rate. What do US policymakers know that our own domestic policymakers have yet to discover?

In truth, they don't know very much more. The US numbers are "annualised". They express the quarterly growth rate as if it were to be repeated through a year as a whole. The actual percentage change on the previous quarter, consistent with the UK data, was 1.4 per cent. Admittedly, this is still a whole lot better than the UK managed, but the gap when properly measured isn't quite as big as the headline numbers suggest.

Delving into the details of the two releases, one big similarity is consumer spending where, in both nations, households remain lethargic. True, they are beginning to spend their money again but the pace is muted, reflecting what might be described as a new-found sobriety. Another similarity is inventories. Companies in both nations were either stocking less or, in some cases, rebuilding stocks, the sort of thing that always happens in the first couple of quarters of any nascent recovery, no matter what its eventual strength proves to be. Inventories often amplify the true underlying trend, at least for a quarter or two.

The big differences lie in investment and exports. Equipment and software investment has begun to pick up in the US, as have exports. Investment continues to decline in the UK, and exports, although growing, are rising at only about half the pace of those coming out of the US. This is puzzling. Sterling's collapse through 2008 should have given UK companies a big competitive boost yet exports are making only limited headway. One obvious explanation is the geographical mix of the UK's export markets. A lot of US exports go to dynamic parts of Asia and Latin America, but the UK's exporters tend to depend much more on continental Europe. Sadly for the UK, watching Europe grow is akin to watching paint dry. Being competitive is not just a story about exchange rate depreciation. You also need to export the right products to the most dynamic markets.

But before, I conclude that the US is doing a lot better than the UK, the data under discussion is all for the final quarter of last year. For the US, the new year has not been so encouraging. Two areas have suddenly looked decidedly wobbly. The first is housing, where both new and existing home sales have suddenly slumped, partly reflecting the distorting effects of the homebuyer tax credit, which helped to boost housing demand – temporarily, it now seems – in the second half of last year. The second is consumer confidence where, on the latest reading, consumers have suddenly become a lot more cautious. Even though there have been signs of improvement in the US labour mart, it's increasingly clear that US consumers continue to worry about their job prospects.

The early stages of any economic recovery are uncertain but, at present, the uncertainty is unusually high. Many of the fiscal policies introduced last year – housing tax credits, cash for clunkers and so on – have merely distorted the timing of household expenditures. Those who, in any case, would have bought homes or cars in 2010 brought forward their purchases into 2009, thereby flattering last year's economic numbers at the expense of demand in 2010. This applies not just in the US but *many parts of Europe. France succeeded in boosting car sales in the second half of 2009 only to discover that sales collapsed in January. At this stage, we can't be sure we haven't been staring at a phantom recovery.

For policymakers, these are awkward times. Often, people talk about recessions and recoveries, as if these were the only two separate economic states of nature. The world is much more interesting than that. We can have depressions, recessions, stagnation, weak growth, strong growth, productivity-led growth, deflation, inflation and all the variations under the sun. Thus we have Mervyn King, the Governor of the Bank of England, talking about the UK economy bumping along the bottom, seemingly suggesting that interest rates can remain on hold for a long time while, Paul Tucker, the Deputy Governor, warns of growing "supply-side" bottlenecks which might allow inflation to rise even in the absence of a decent recovery in demand.

It's worth going back to the 1930s debate between John Maynard Keynes and the Austrians. For Keynes, economies could settle at different levels of activity, from full employment through to the deficient demand associated with recessions and depressions. The losses associated with these periods of deficient demand could be corrected via government intervention designed to lift animal spirits, thereby bringing markets back to their senses and allowing full employment to be regained.

This story is central to those who believe that the world economy is on a sustained recovery path. Seen through Keynesian eyes, the recession was a failure of market forces associated with a collapse of animal spirits. All that's happened over the past 12 months is that, slowly but surely, those animal spirits have been revived.

For the Austrians, led by Friedrich Hayek, government (and central bank) intervention often made matters worse. Indeed, an Austrian take on the crisis would argue that the damage was done not during the crisis itself through a failure of animal spirits but during the earlier boom, a period during which central banks left interest rates too low, thereby distorting the cost of capital and promoting excessive investment in real estate. This "wasted" investment now means that the capital stock is less effective than it should be, lowering the economy's long-term growth rate on a permanent basis.

For a musical rendition of the disagreements between Keynes and Hayek, visit this Youtube site, www.youtube.com/watch?v=d0nERTFo-Sk . For a less musical version, it's possible to argue that, in a simple sense, both economic greats have something useful to say about the present crisis.

The Keynesian solution prevented a deep recession from turning into a hideous depression. Yet, from now on, the western world is likely to suffer a Hayekian constraint. We have, collectively, invested in the wrong areas of economic endeavour and wasted huge amounts of money. Whether the resulting debts reside with banks, households, the government or future taxpayers, the consequence is the same: even with signs of recovery, it will feel for a long time as though we are bumping along the bottom. Like it or not, we are heading into a new age of Austrian austerity. Keynes didn't have all the answers.

stephen.king@hsbcib.com

Foolishness of Government Spending

From the great team at Daily Reckoning Australia:

And now over to Bill Bonner in Baltimore, Maryland: 

It's true that there are some signs of "stabilization." The unemployment rate is not getting badder as fast as it was a few months ago. And house prices seem to have stopped falling - for the moment.

It's also true that the economy managed to register positive 'growth' in the last quarter... mostly thanks to government spending and inventory restocking.

The trouble is, all of these things are consistent with a depression - especially a depression that the feds are fighting every inch of the way. In the 1930s, there were several years of growth... and there were great years for the stock market too. Then, things fell apart again. The nation ended the '30s not one penny richer than it had been when it began them.

And Japan has seen some good years and some bad years, too, since its depression began in 1990. Oddly, Japan's population is falling... so in per capita terms, Japan's downturn hasn't really been so bad. Per person, the Japanese got richer over the last 10 years.

It's also true that here at The Daily Reckoning, we use the term 'depression' a bit differently than most economists. Most economists believe GDP growth represents increasing prosperity. They think a depression is merely a recession, with negative GDP growth, that lasts longer and goes more deeply than normal.

Our definitions are better:

A recession is a pause during a period of growth. A depression marks the end of the period of growth... giving the economy a chance to make adjustments so that a new period of growth may begin.

GDP growth alone is a fraud. The gross number just doesn't tell you anything worth knowing. It doesn't really matter how fast an economy is growing. What counts is how fast it is growing per person... and whether that 'growth' is real or phony. Growth is not the same as prosperity... Someday, we promise you, modern economists will be ranked below doctors who bled their patients to death and jungle tribes who threw maidens into volcanoes. They are quacks.

These imposter economists think they can fix a recession and prevent a depression. When the private sector stops spending they urge the public sector to step in and replace the missing private spending. That, in a nutshell, is Keynes' theory. A nutshell is the appropriate container. Because there's a world of difference between private spending and government spending. Private spending is voluntary; people choose to spend their money on things they really want. When the government spends, on the other hand, it is merely squandering stolen property. It may look like private spending. But it's not at all the same thing. You can hand out checks to people; it's not the same as when people earn money. You can build bridges and airports too... but they are only valuable to the extent that they are used efficiently. And you can hire all the government employees you want; they don't necessarily add to the sum of human happiness or wealth (most likely they subtract from it!).

Just look at societies that put everyone to work. There was no unemployment in Cambodia under the Khmer Rouge! Or in the Soviet Union. North Korea is another good example today. They all show that putting people to work for the government doesn't make them rich... it makes them poor.

Yet, these modern economists - Martin Wolf at The Financial Times, Paul Krugman at The New York Times, Bernanke, Summers and Geithner in Washington - believe that they can control and cure a depression. All they have to do is to keep the GDP expanding... and keep unemployment from rising. How? Just spend money! The GDP calculators can't tell a phony expense from a real one. Whether the government spends money to do something that is not worth doing... or hire someone who is not worth hiring... or just gives away money to someone who is not worth giving money to... the GDP quants don't know the difference. They think one dollar spent is as good as any other... even if it is a dollar that didn't exist! (Don't get us started on that one... )

And who knows if a job is worth doing? Only the person who pays for it. That's the trouble with government employment; the people who pay the bills don't make the hiring decisions. Modern economists don't even bother to think about it. All they care about is the unemployment rate... not about whether the job is actually useful or efficient. Want to boost the job rate? Easy. Just hire people. Does this make people better off? Of course not.

The Financial Times had a full page in its Wednesday edition devoted to China's empty towns. Bloomberg has been on the story too. It is the story of what actually happens when government meddles in an economy. Last year, China ordered its banks to lend money to infrastructure programs in order to offset the worldwide financial meltdown. The banks responded, doubling their lending. Observers in the West were stunned... and envious. If only we could 'get things done' like that, they lamented. If only our governments had more authority and control over the economy!

But let us go back a year and put ourselves in the shoes of the bankers. They must have had loan requests. Some of them they must have judged worthy of funding, others not. But how was it possible that the number of project deemed creditworthy doubled in the space of a few months? Well, it didn't happen. Instead, the Chinese government merely changed the rules of the game. The banks, under pressure to loan out money, reacted by lending it out... to marginal projects. Now, we're beginning to read about them in the paper - mostly towns without any people. Just wait until China blows up. Then, we'll read about banks without money. Stores without customers. And businesses without a prayer.

China is either going to blow up... or slow down.

Keynesian Deathbed

The deathbed of Keynesian economics

MATTHEW LYNN

February 23, 2010 - 12:47PM

Comments 31

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www.asigp.com.au

The UK has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.

So it may be fitting that the UK will also become the deathbed of Keynesian economics.

Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalised almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

The public debate about the state of the British economy was enlivened last week by a brawl between economists.

On February 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit.

If it didn’t, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.

Keynesian backlash

That brought a stinging response from the Keynesians, who are urging the UK to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a “a sharp shock” now “would be positively dangerous”.

So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere.

The UK has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.

Budget blowout

And just as the Keynesians were wrong three decades ago, they are wrong now.

The UK has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 per cent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening.

Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 per cent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable.

Retail sales excluding gasoline in January fell 1.2 per cent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on UK government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 per cent.

Triple whammy

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.

The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.

It is the argument quacks always push: if the medicine isn’t working, increase the dosage.

And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.

Stimulating the economy isn’t working.

In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the UK imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

Recipe for recovery

What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment.

And yet the real lesson of the UK in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more.

In the country of its birth, Keynesian economics is being tested. If the economy isn’t growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone.

Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.

Bloomberg

Hayek versus Keynes rap video

This is both cool and unusual...



The words...

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro

The man you need when the economy’s off track, [whoa]

Depression, recession now your question’s in session

Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash

We didn’t bounce back—economy’s in the trash

Persistent unemployment, the result of sticky wages

Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand

The advice, real simple—boost aggregate demand!

C, I, G, all together gets to Y

Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching

Circular flow, the dough is everything

So if that flow is getting low, doesn’t matter the reason

We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head

Like I said, in the long run—we’re all dead

Savings is destruction, that’s the paradox of thrift

Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits

The bull and the bear, and there’s reason to fear its

Effects on capital investment, income and growth

That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct

Public works, digging ditches, war has the same effect

Even a broken window helps the glass man have some wealth

The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks

A liquidity trap, that new money’s stuck in the banks!

Deficits could be the cure, you been looking for

Let the spending soar, now that you know the score

My General Theory’s made quite an impression

[a revolution] I transformed the econ profession

You know me, modesty, still I’m taking a bow

Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Keynes] I made my case, Freddie H

Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes

His theory conceals the mechanics of change,

That simple equation, too much aggregation

Ignores human action and motivation

And yet it continues as a justification

For bailouts and payoffs by pols with machinations

You provide them with cover to sell us a free lunch

Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog

Don’t look for cure from the hair of the dog

Real savings come first if you want to invest

The market coordinates time with interest

Your focus on spending is pushing on thread

In the long run, my friend, it’s your theory that’s dead

So sorry there, buddy, if that sounds like invective

Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust

It’s the boom that should make you feel leery, that’s the thrust

Of my theory, the capital structure is key.

Malinvestments wreck the economy

The boom gets started with an expansion of credit

The Fed sets rates low, are you starting to get it?

That new money is confused for real loanable funds

But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction

The boom plants the seeds for its future destruction

The savings aren’t real, consumption’s up too

And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise

With the costs of production, price signals were lies

The boom was a binge that’s a matter of fact

Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five

Booming bad investments, seems like they’d thrive

You must save to invest, don’t use the printing press

Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse

It’s just more of the same, more incentives perversed

And that credit crunch ain’t a liquidity trap

Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century

[Keynes] I want to steer markets,

[Hayek] I want them set free

There’s a boom and bust cycle and good reason to fear it

[Hayek] Blame low interest rates.

[Keynes] No it’s the animal spirits

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

John Maynard Keynes

The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

F A Hayek

The Fatal Conceit