November 13, 2010

Everything Looks Like A Hammer!

Shannon Love at Chicago Boyz almost but not quite notices Tully's Corollary in action:
The Keynesian idea of stimulus has no empirical basis, but the only active tool the government has in a time of economic downturn is its ability to borrow and spend. Surprise, surprise: during the Great Depression, governments fell all over themselves to embrace Keynes’s idea of borrowing and spending to “stimulate” the economy. They did so not because it was proven to work (then or since) but because it justified the one action that would make the government larger and more powerful and the political class larger and more powerful as well.

The Fed is now doing the same thing with inflation “Quantitative Easing”. There is no particular reason to believe that inflating the money supply will produce more real economic activity, indeed the history of the 20th century proves exactly the opposite. However, it is all the Fed can do right now so it is going to grab a convenient theory to justify inflating the currency.

The nail is growth-driven employment. Tully's Corollary applies because their first tool didn't work despite enthusiastic application, so they've moved on to another tool. First they tried using the drill press of borrow-and-spend, now it's the blowtorch of quantitative easing.

One hopes they find that hammer soon, but in the meantime they've screwed up both the nail and the receiving surface with the drill press and the blowtorch.

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