Economic illiteracy

This article in today's Toronto Star by business columnist David Olive is worth reading, as a shining example of how NOT to report complex economic issues to the public.  Quite simply, Olive doesn't seem to have any idea what he's talking about. 

Olive's topic is the G20 finance ministers' meeting that took place in Moscow earlier this week, and his contention is that it represents another missed opportunity to fix the world economy's real problems.  Which are what, exactly?  Well, in his very first sentence, Olive tells us that "the chief reason for our global economic malaise (is) the fact that there simply isn’t enough money in the system".   What???  Central banks -- the Fed, the Bank of England, the Bank of Japan -- have been printing money in an unprecedented fashion for several years.  Whatever the global economy's problems may be, a lack of fiat money surely isn't one of them.  

Actually, that's not what Olive means, even though it's what he wrote.  Still in that first sentence of the article, he tells us what he means by "not enough money in the system".  It is, he says,   "what economists call a demand or growth deficit".   Can't say I'm familiar with the term "growth deficit",  but an aggregate demand deficit is right out of the Keynesian phrasebook, and it's a good descriptor for what's going on now. Unfortunately for Olive, it has almost nothing to do with the amount of money in the system.  If money -- liquidity -- were the key to aggregate demand, there never would have been a financial crisis and recession in the first place.  

Anyway, it looks as if Olive actually wants to talk about fiscal policy, rather than monetary policy, and needless to say, he thinks it's too restrictive.  He's not necessarily wrong there, but the examples he cites simply don't support his case.  It's ridiculous to suggest that "a G.O.P. Congress put an end to U.S. President Barack Obama’s successful stimulus policies":  it might like to, but it hasn't managed to do it, and the US is continuing to rack up trillion dollar annual deficits. 

Olive is on equally shaky ground when he turns his attention to the UK.   Citing the US economist Adam Posen, who worked at the Bank of England from 2009 until last year, Olive rants that:

"Posen was seconded from 2009 to 2012 as an advisor at the Bank of England (BOE). He watched with mounting despair as the newly elected PM David Cameron and his finance minister, George Osborne, indiscriminately slashed state spending. That bone-headed policy has inflated British jobless rolls, which in turn has worsened the demand deficit as household incomes evaporated, condemning Britain to GDP growth that has been anaemic at best."

There's so much wrong with that paragraph that it's almost easier to say what's right about it: I believe the dates cited for Posen's service at the BoE may be accurate.  Apart from that, well, as I have pointed out in this blog many times before, Osborne's efforts to cut the deficit have foundered at least in part because the government has outright failed to cut spending,  let alone to "slash" it indiscriminately.  Osborne has achieved the worst possible outcome,  damaging confidence by prattling on about the fiscal situation, but not actually doing anything about it.  It's a wrong headed and unsuccessful policy all right, but not in the way that Olive portrays it.  He is also grossly exaggerating the impact of Osbornomics on UK employment, which has in fact held up much better than most forecasters predicted.  Here's a useful update on both borrowing and employment. 

This brings me to my favourite part of the article, and what may be the most inane sentence I've read since my old pal Kaletsky quit his column at The Times.  Referring to US economist Jared Bernstein, Olive writes:  "In an illuminating recent post on his blog, All About Economics, Bernstein reminds us that America was able to eradicate its federal deficit as recently the 1990s, simply by boosting GDP growth".  

Don't you just love that "simply"?  It's sad to think that the developed world has been condemned to three years of sub-par growth,  with more of the same in store , because policymakers were blind to this "simple" solution to the problem.  Strange that it takes a guy who doesn't know the difference between fiscal policy and monetary policy to point it out to us.