Getting a degree from the Wharton Business School is like bringing a beautiful, but stale cake to a party. It will get you in the door, and lots of “oohs and aahs,” but later, people will have a bad taste in their mouths.
The Whsrton school has a great reputation, but if the following article is any indication of what they teach there . . . well, I don’t know.
Here are a few excerpts to make my point:
Beware the COVID-19 Debt Hangover
Biden’s proposed stimulus spending might give a modest boost, but in the long run it’ll slow the economy.
J.D. TUCCILLE | 2.19.2021 7:00 AM
After the rush, brace yourself for the hangover.
That’s the warning from experts with the University of Pennsylvania’s Wharton Business School, who caution that plans for massive “stimulus” spending by the Biden administration will administer only a brief boost to the country followed by a nasty and prolonged comedown.
Will someone please tell the “experts,” there is no history of federal deficit spending creating a “nasty and prolonged comedown.”
On the contrary, it is a lack of federal spending that causes nasty recessions, and those recessions are cured by increased federal deficit growth.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
The White House objects to the forecast, but it squares with earlier predictions from the Congressional Budget Office that accumulated debt, worsened by heavy pandemic-related spending, will hobble the economy for years to come
Again, that “hobble the economy for years to come” is a hypothesis that runs counter to actual results.
I get the feeling that someone at Wharton is sitting alone, in a windowless room, with no access to the real world, dreaming up scenarios.
President Joe Biden’s proposed $1.9 trillion relief package would increase economic growth by 0.6 percent in 2021, according to analyses by the Penn Wharton Budget Model (PWBM).
After that, though, it would start to slow the economy, decreasing GDP by 0.2 percent in 2022 and by 0.3 percent as late as 2040, showing lingering negative effects after the initial spending.
“Decreasing GDP,” which never has happened following federal stimulus spending. Where do they get this stuff?
The big problem for the longer-term outlook is “the large amount of additional money that we’re adding to our already very large debt,” according to Efraim Berkovich, PWBM’s director of computational analysis.
“The existence of the debt saps the rest of the economy. When the government is running budget deficits, the money that could have gone to productive investment is redirected.”
There is no mechanism by which adding money to the economy “saps the rest of the economy.”
And what is “the rest” of the economy? Federal deficit spending circulates throughout the economy. Which part of the economy is “the rest,.” that will be sapped?
And consider the statement, “the money that could have gone to productive investment is redirected.” Which money are they talking about?
If the government doesn’t deficit spend, then where does the money come from that could have gone to “productive investment.”
Further, the federal stimulus money is going to workers, consumers, businesses, and schools. What are the more “productive investments” than those?
U.S. government debt is already sky-high, having increased by $7 trillion dollars in the last four years alone to reach 100 percent of GDP at the end of 2020.
That burden threatens to act as a dead weight on economic growth.
Adding money to the economy is “a dead weight on economic growth”??? Huh? Is that what they teach at Wharton?
The formula for economic growth is Gross Domestic Product = Federal Spending + Non-federal Spending + Net Exports.
Do the algebra. How do increases in Federal Spending reduce Gross Domestic Product growth? Is the formula wrong or is Wharton BS simply spreading BS?
This all is a restatement of the “ticking time bomb” fallacy, that by some magical process, adding dollars to the private sector impoverishes the private sector. It’s laughable nonsense.
Finally, the fact that the federal debt (actually the total of deposits into T-security accounts at the Federal Reserve) is 100% of GDP also is 100% meaningless. That ratio is classic apples/oranges comparison.
Federal debt is the total deposits in T-security accounts. GDP is total spending. By what magical thinking does the fact that they are at an equal level, act as a “dead weight”?
Press Secretary Jen Psaki insists the prediction is “way out of step with the majority of studies on this plan.”
In particular, she complains “the analysis concludes that our economy is near capacity, which would be news to the millions of Americans who are out of work or facing reduced hours and reduced paychecks.”
Ms. Psaki is attempting to speak truth to ignorance, something this blog has been laboring to do for more than 20 years. Good luck, Jen.
In response, the Wharton analysts point to ongoing recovery in many sectors. They also point out that continuing lockdowns prevent some production and employment that would otherwise occur.
What does this have to do with the false notion that the federal government is spending too much?
“[R]ecovery in the affected sectors is limited by pandemic-related shutdowns and individual behavior,” they wrote. “There is no mechanism by which additional household spending will stimulate those sectors until pandemic-related restrictions ease.”
They alluded to the mechanism, which is: “Ongoing recovery in many sectors.” When people have money to spend, the businesses that receive that spending do well. Consider all the online and delivery services, for instance. Consider the businesses that have had to lay off employees because their customers aren’t spending.
The vast majority of America’s businesses are open and running, with their biggest problem being that their customers are unemployed and don’t have money to spend.
Look at these statistics supplied by Wharton BS.
Unemployment claims unexpectedly increased last week to 861,000. The official unemployment rate of 6.3 percent remains above its pre-pandemic/pre-lockdown rate of 3.5 percent (just one year ago!). But that’s a steep drop from the April peak of 14.8 percent.
Industrial production, too, at 75.6 percent of capacity in January, remains about 4 percent lower than it was a year ago. But it’s higher than it was just a few years ago and steadily rising.
“At 107.2 percent of its 2012 average, total industrial production in January was 1.8 percent lower than its year-earlier level,” according to a February 17 Federal Reserve update.
So, while the economy isn’t entirely back, it’s moving in the right direction—a process that could be interrupted by massive government spending.
There is no known process by which “massive government spending” (remember the formula for GDP) can “interrupt” economic growth.
So, wait a second! Unemployment is up. Production is 4% lower than last year. How does that square with the claim that “our economy is near capacity” and simultaneously growing?
And now comes the real ignorance:
“[E]ffectively, what we’re doing is taking money from [some] people and giving it to other people for consumption purposes,” notes Berkovich of stimulus schemes.
“That has value for social safety nets and redistributive benefits, but longer-term, you’re taking away from the capital that we need to grow our economy in the future.”
Clearly, Wharton BS school does not understand the differences between Monetary Sovereignty and monetary non-sovereignty. They actually believe that federal taxes fund federal spending. OMG!
[Note to Wharton professors: Federal taxes, unlike state/local taxes, are destroyed upon receipt. The federal government has no use for tax dollars. It creates new dollars each time it pays a creditor. That is a fundamental of Monetary Sovereignty. It is the reason why no one can answer the question, “How much money does the federal government have?”]
While state and local (monetarily non-sovereign) taxes do fund state and local spending, federal spending is funded by ad hoc money creation. While state and local governments can and do run short of dollars, the federal government never does.
The federal government has spent trillions of additional stimulus dollars in just the past year, yet taxes have not been raised. How is that possible? Answer: The federal government does not spend tax dollars.
Stimulus spending also has the potential to delay the inevitable shakeout as businesses and workers scramble to adapt to a changing environment.
Both the McKinsey Global Institute and the Bureau of Labor Statistics recently published studies predicting that remote work is here to stay for many people.
What is the “shakeout” that Wharton BS does not want delayed? Bankruptcies? Impoverishment? Recession and depression? And if remote work is here to stay, why is this a bad thing, especially if people receive money from the federal government?
“In the moderate impact scenario, increased telework is the primary force of economic change and has both direct and spillover effects,” notes the BLS report. “With more employees teleworking, the need for office space will decline, and so will nonresidential construction.”
That’s going to necessitate a lot of adjustment in sectors including restaurants, travel, and commercial real estate; government checks just delay the day of reckoning.
That is like saying we all are going to die, and modern medicine will “just delay the day of reckoning.”
Increased telework is not the result of federal spending. It is the result of technology. It will have bad effects (for instance, the aforementioned “decline in nonresidential construction”) and it will have good effects (for instance less auto use of fossil fuels and pollution).
That is already a problem in Europe, where economists and business owners worry that subsidies prop up “zombie” companies that would otherwise disappear and clear the way for healthier enterprises.
Get the double-talk? “Already a problem — because economists and business owners “worry” about a possible future.
If money is given to consumers, how does this “prop up zombie businesses that prevent “healthier” enterprises from existing? What are these “zombie” companies that are benefiting from federal deficit spending, and what are these “healthier” companies that are being prevented from doing business?
“These zombie companies…run their business for a couple of months below costs,” Alexander Alban, managing partner at German mechanical parts manufacturer Walter Schimmel GmbH told the Wall Street Journal.
“They ruin the market. Afterwards, it’s very hard to get this business back. Usually it’s good if the market is cleaned.”
Apparently, Alban is talking about every new company that originally runs at a loss, until it succeeds or fails — like Amazon, ESPN, Tesla, Square, FedEx, Turner Broadcasting, et al. In short, Alban is complaining about how startups normally are built.
The result is a poorer and less-productive economy than would have existed in the absence of government spending sprees. That’s in addition to the depressing effects of deficits and debt.
In analyses predating the latest stimulus proposals, the Congressional Budget Office (CBO) voiced concerns similar to those of the Wharton Business School about debt-fueled spending.
Get it? When the government pumps money into the economy, as it has been doing for 80 years, that magically has made the economy poorer and less productive. Except that is exactly the opposite of what has happened in the real world.
You see, despite everything you know, GDP has gone down, because uh, well, uh, GDP = Federal and Non-federal spending + Net Exports. So pay no attention to 6th-grade algebra.
And of course, the dependably wrong CBO agrees.
“CBO estimates that the legislation will boost the level of real (inflation-adjusted) gross domestic product (GDP) by 4.7 percent in 2020 and 3.1 percent in 2021,” according to a September 2020 report forecasting the impact of pandemic-related federal spending.
“From fiscal year 2020 through 2023, for every dollar that it adds to the deficit, the legislation is projected to increase GDP by about 58 cents.
That’s the straight line for the joke. Now here comes the punch line:
In the longer term, the legislation will reduce the level of real GDP, CBO estimates.”
That is, the CBO predicted two years of benefit, followed by each dollar spent producing far less than its value in return. The ultimate result is a smaller economy than would have existed without the addition of trillions to the national debt.
And what is the mechanism for this “smaller economy” that has more real money than a bigger economy? By what strange alchemy does adding dollars to the economy reduce real economic growth.
And what is the evidence that this alchemy exists anywhere but in the fevered dreams of the Penn Wharton Budget Model?
“The legislation will increase federal debt as a percentage of GDP, and in the longer term, CBO expects that increase to raise borrowing costs, lower economic output, and reduce the income of U.S. households and businesses,” adds the CBO.
Nice theory, but for two small details:
- The meaningless Debt/GDP ratio has been going up for 80 years and what is the result? Borrowing costs are at historic lows, economic output is at historic highs, as is the income of households and businesses.
- The Fed has absolute control over interest rates, and by this control has intentionally decided to keep rates low.
But hey, Wharton BS, you have a great reputation, so you don’t really need to let historical fact get in the way of your hypotheses. Just keep spouting nonsense and your followers will nod dumbly and spread the gospel.
You folks remind me of the preacher who tells his flock the world is about to end. So they give away all their belongings and climb to the top of a mountain to away doomsday.
The next morning, when the sun rises as usual, the acolytes, having learned nothing, come down from the mountain, and continue to believe every word of the preacher’s next sermon.
With the House of Representatives poised to consider the stimulus package as early as next week, we may soon have an opportunity to find out just how bad the hangover will be.
If only that would help you “find out” anything. Sadly, history says you will learn nothing. And the great Wharton BS will continue to spout BS.
Hey wait, didn’t Donald Trump attend Wharton? Ah, that explains it.
Rodger Malcolm Mitchell
Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all or a reverse income tax
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- Increase federal spending on the myriad initiatives that benefit America’s 99.9%
The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.