ZY Editor: How do you get rich? Is it by spending, or borrowing? What about saving and investing? Well, the government does a whole lot of borrowing and spending. Also, money-printing. But none of that comes free, as there is no free lunch; yes, it’s a cliche. But how has such a strange practice–one that goes against the very principles of economics–become so commonly accepted? Read on.
Money moves around the world with a click of a mouse. The previous sentence, while a bit of a cliche, speaks to the truth that what is a cliché is pregnant with a lot of truth. Money is fast. Some call it hot.
Arguably longtime Citibank CEO Walter Wriston explained money much better. He observed decades ago that “Capital goes where it’s welcome and stays where it is well treated.” Money flows represent the flows of market goods, services and human capital, and all three go to where they’ll be utilized best.
That’s why all those billions that Congress has sent to West Virginia over the decades haven’t resulted in economic growth for the Mountain State. If it were a person, West Virginia would be a walking, talking, thoroughly resounding rejection of Keynesian economics and the economics profession more broadly.
Government spending quite simply cannot stimulate economic growth. Wealth redistributed isn’t growth, and it isn’t precisely because “Capital goes where it’s welcome and stays where it is well treated.” More specifically, capital goes to where there are talented people and talented people have for the most part been exiting West Virginia for decades. The Fed could quite literally helicopter tens of billions into West Virginia, its citizens could do what is unlikely whereby they would spend it all there, but the billions would still exit the state.
They would simply because no business expands based on a helicopter drop. That’s why the staging of Super Bowls and Olympic Games never stimulate the economies of the cities they’re in. They’re just variations of helicopter drops. There’s a big surge of spending that excites gullible, consumption-focused economists, but then the event ends. Rare is the business that will invest a fortune for one weekend of frenzied consumption, or three weeks, so the idea that a one-day helicopter drop of billions would change any economy for the better is the triumph of naïve hope within a mystical economics profession over simple common sense. Drop billions into West Virginia, see it spent locally, then see the businesses enjoying the bonanza bank or invest the windfall only for banks and brokerages to direct the funds to where they’ll be treated well. Outside West Virginia.
The basic truth about what powers economic growth came to mind while reading Wall Street Journal Fed watcher Paul Kiernan’s latest on Jerome Powell. The why behind growth seems to have eluded the central banker.
In a report titled “Fed Chief Vows Support for Labor Market,” Kassan indicated that in his latest testimony before the House Committee on Financial Services CBFV +1.1%, Powell “underscored his determination to return the U.S. labor market to full strength.” He can do no such thing. To believe otherwise is to believe a more robust job market in Port-Au-Prince is as simple as The Bank of the Republic of Haiti aggressively buying Haitian government debt in order to lower the cost of borrowing on the way to job creation as far as the eye can see. Lots of luck there. Lots of luck to Chairman Powell.
The Fed, like the government that created it, has no resources. In vainly attempting to centrally plan good times as though the 20th century never happened, it’s not as though the Fed can pull capital from Pluto, or Jupiter, or from vaults at the New York Fed in lower Manhattan. Wealth is created, which means that the Fed can at best redistribute wealth already created in the private sector. Check out West Virginia to see how that’s worked in the past…
If we ignore how the Fed’s size purchases of Treasuries and mortgages are a non sequitur when it comes to economic growth, we can’t ignore how silly is the central bank’s game plan. Indeed, it’s worth repeating what Powell’s intent is as a way of searing in the minds of readers just how fabulist is the Chairman’s vision. Kassan reports that “Underpinning Powell’s plans is a recent shift in the Fed officials’ focus toward maintaining a strong labor market.” Really? How? If the goal is everyone working, why doesn’t Powell testify before Congress in favor of abolishing cars, computers and WiFi? If so, the labor market would be enormously “strong.” No doubt we’d all be destitute, but full employment would be the norm in pursuit of much lower living standards that would spring from exponentially reduced productivity.
Back to reality, a “strong” labor market is a consequence of investment. Of precious wealth being matched with specialized talent. This statement of the obvious speaks volumes about why West Virginia just can’t grow despite all the billions directed its way over the decades. Hint to economists: consumption doesn’t power economic growth. If it did, Baltimore would be booming today, so would East St. Louis, and so would Charleston, WV. Consumption is the easy part, and if it had anything to do with growth, politicians could reach into the pockets of the productive, pull out some spending power, and place it into the pockets of those not-so-productive. Which is what it’s done for decades. Yet all three aforementioned locales are still poor. Keyensianism doesn’t work.
What works is investment, and investment follows people. This blinding glimpse of the obvious has long eluded politicians eager to use redistribution as a growth tool, or eager to ask the Fed to plan it. If it worked, it already would have.
Which is why Powell’s “vows to support the labor market” are Grand Canyon empty. He can do no such thing. Jobs are a consequence of investment, and investment goes where it’s treated best. Powell says “We won’t tighten monetary policy just because of a strong labor market,” but what he misses is that it doesn’t matter what the Fed does. If investors don’t agree with the Fed, they’ll “tighten” with a click of a mouse and there’s nothing the Fed can do about it.
Originally posted on Forbes
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