The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

The Economics of Wishful Thinking

Posted on | August 24, 2011 | 18 Comments

The frustrating thing about Ezra Klein is that, just when you think the Boy Genius of the Juicebox Mafia has gotten the scent of a clue, he goes running off on another liberal wild-goose chase:

When the financial markets collapsed [in 2008], household debt was nearly 100 percent of GDP. It’s now down to 90 percent. In 1982, which was the last time we had a big recession, the household-debt-to-GDP ratio was about 45 percent.

So far, so good: Ezra appears to have realized that the current recession reflects an underlying economic reality, rather than being a mere political construct. But then . . .

That means that in this crisis, indebted households can’t spend, which means businesses can’t spend, which means that unless government steps into the breach in a massive way or until households work through their debt burden, we can’t recover.

Sigh. How can we even begin to explain what’s wrong with Klein’s longing for interventionism? He could have been content, after all, to use the household-debt figures as an argument that the recession is not Obama’s fault. Yet his fanatical commitment to Keynesianism leads him inexorably to endorse “massive” intervention. I had hoped Ezra might be making progress a year ago, when he noticed that the stimulus was under-performing in terms of job creation, but now he’s backsliding.

Robert Barro today attacks one aspect of the Keynesian fallacy, the alleged “magic multiplier” of government spending. But make-believe math is evidently all the rage these days, including at the CBO. Ed Morrissey scoffs at their rosy scenario:

The CBO estimates that the US economy will finish this year at a 2.3% GDP growth rate for 2011, a neat trick for an economy that has grown at 0.8% in its first two quarters, and at 2.7% in 2012.  JP Morgan estimates that it will finish at 1.5% this year and 1.3% next year, and the difference is significant in terms of revenues and deficit projections.

What seems to be taking hold is the Economics of Wishful Thinking, where people insert some gigantic absurd hypothetical “if” into their equations — “If the Federal Reserve were to buy $10,000 worth of Powerball tickets next week . . .” — and then present this as a feasible alternative to sound, practical policy. But fiscal rainbows and monetary unicorns won’t fix the problem and these delusional what-ifs serve only as a political distraction from the grim reality.

We have somehow managed to take a round-trip to 1979, the Waterloo of Keynesianism, and yet it is as if liberals learned nothing from that experience. Ezra Klein wasn’t even born then, so he can perhaps be forgiven for not understanding the error that has been repeated. (How’s that hopey-changey stuff workin’ out for ya, Ezra?) But if history is any guide, last year’ historic mid-term Republican landslide was merely the harbinger of an even more savage drubbing of Democrats next year.

BTW, the price of gold fell to $1,757.30 an ounce today, about $150 off its record high Monday, so if you’ve been wishing you’d bought in earlier, this might be a good chance to join the gold rush before it surges past $2,000. If you had bought at $1,200 an ounce in May 2010 and sold at $1,800 earlier this month, you would have cleared a 50% profit in 15 months. But even if you waited and were to buy in at today’s price, then get an opportunity to sell at $2,100 any time in the next six months, that would still be a sweet 20% profit.

Going a bit further into “what if” speculation: On Feb. 17, 2009 — the day Obama signed into law his $787 billion stimulus bill — gold was selling at $970 an ounce. For a mere $600 billion, we could have bought two ounces of gold for every man, woman and child in America, and the value of that investment would today be more than $1 trillion, or $3,514 per capita, a net gain of 81 percent.

Just a hypothetical, but at least it doesn’t involve rainbows and unicorns.

UPDATE: Welcome, Instapundit readers!


  • Mike

    Are we sure Ezra Klein isn’t the bastard son of Paul Krugman? I sure am glad our personal household debt is zero percent of the GDP.

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  • Dianna Deeley

    I’m mildly envious of that status, and good for you!

    Ezra’s parents don’t need that sort of speculation, though!

  • Chuck Coffer

    Stacy, you give the little shit way too much credit. Pissing money away forever isn’t Keynesian. It’s blind, Kamikaze partisanship. If dipshits like Klein and Krugman are Keynesians, then Keynes was not.

  • TC_LeatherPenguin

    Lesser Ezra is a tool. He’s enamored with charts and has never in his life done a thing to earn someone other than him a plug nickel. Back in 1973 he would have been banned from my newspaper-delivery cabal.

  • Anonymous

    Stacy you may be on to something. $10,000 would buy 100,000 five play tickets with the power play. How many partners were in that Australian Cartel that won a big jackpot a decade or so ago?

    As for Keynesians I think they should all be declared Kenyans and deported

  • Adjoran

    You misunderstand Klein’s purpose. 

    His goals aren’t understanding or truth.  His entire focus is how to take the facts and twist the interpretation of them so it fits the Leftist Narrative.

    That was the entire purpose behind Journ-O-List, and is the entire meaning of the little twerp’s life.


    It would always be great to go back and buy low and sell high, no matter what the commodity, wouldn’t it?

    Of course, if you bought gold at $970 and sold it at $1700 through one of those TV ripoffs, you might be looking at a net loss anyway if you picked one of the higher-premium crooks.

  • Maxboot22

    Yes…and if they had bought a mere $2.4 trillion worth of gold they could have sold it this week and paid off the deficit. As Krugman said, “if on the earthquake had of been bigger!”

  • Anonymous

    Which just goes to show, as if further demonstration is needed, that liberals don’t think think Keynesianism is CORRECT (no sane person can look at the facts and conclude that Keynesianism is substantially correct, at least under our circumstances) so much as it is a useful rationalization for their real belief in unrestrained growth of government spending.

  • Haiku Guy

    Speaking of the Powerball…

    If you were to win $100 Million on the Powerball tomorrow…
    And $100 Million on the Mega Millions the day after that…
    And $100 Million on the Irish Sweepstakes the day after that…

    And keep on winning, $100 Million a day, day after day, 365 days a year, after only 402 years you would have won enough money to pay off the National Debt of $14.7 Trillion. 

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  • Pkorman

    The Keynsians confuse consumption for investment, that is clear. A nice pair of shoes, or a suit, is an investment only when it clearly assists you in getting a job or making a sale. Otherwise, it is a rapidly depreciating asset with liitle future value. Give every citizen (and non-citizen) the money and mandate to buy shoes and suits, and shoe and suit producers will do very well for a short time. When that subsidy runs out, the shoe and suit manufacturers will be idle, along with their artificially inflated workforce and fixed asset infrastructure. That is when the industry needs to be rescued by the “public.” In our recent Keynsian adventure, we stimulated shoe and suit producers in China and India. We have some worthless shoes and suits, They have inflation and another $Trillion of our debt.

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  • Dotar Sojat

    Klein, Yglesias, etc., all the Left has are twerps who spent their Jr. High years getting tossed into the hallway in their underwear and cowering in the corner during dodgeball.  Their politics is their revenge.

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  • Anonymous

    He seems to think that, because household debts were high when the collapse occurred, one must have caused the other, but he doesn’t show any connection between the two.    There is a huge housing bubble that the government is vainly trying to keep inflated, rather than letting the market determine values.   This is the main reason why government central planning is so disastrous; it can’t possibly operate as efficiently as markets do. 

    It’s true that there is loss and pain in letting markets function, but not as much as Freddy and Fannie have caused.   In the current situation, I think the developers who overbuilt based on sub prime financing deserve to suffer for their greed.