16 Jul 2009

Believing Is Seeing, Economics History Edition

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Tom Woods defends his honor against what was apparently a hit piece in Liberty magazine. Bruce Ramsey was reviewing Woods’ book Meltdown, as well as a book by two other authors, and wrote: “You immerse yourself in the facts, see what the connections are, and let the story itself tell you what the explanation is. This is what Muolo and Padilla try to do. It is what many libertarians ought to learn how to do.” Ramsey’s point was that Woods–an ideological libertarian–came on the scene already knowing “the government did it” and just found the facts that suited his preconceptions.

Tom does a good job rebutting that charge, as you can see if you click the link. Part of the response involves a point that we learned from Mises: you can’t look at history and let the facts speak for themselves. (As I said in an earlier article, if you try that, your biases will end up doing the talking.) The very act of choosing the facts to inspect is guided by your theories of the subject in question. To give a silly but perfect example: If we want to explain the housing boom, why not pore over NASA records regarding Neptune’s orbit from 2002-2006? Those are facts of that period. I sure hope you don’t walk into this project already “knowing” that Neptune had nothing to do with it, crank!

Anyway, on Brad DeLong’s blog today I spotted a good example of this. He links to this FT article on China’s economic growth, and Brad excerpts the following:

China’s economy accelerated significantly in the second quarter, with gross domestic product expanding by 7.9 per cent, ahead of analysts’ consensus estimates. Li Xiaochao, a spokesman for the National Bureau of Statistics, said the economy “had stabilised with increasing positive changes”, as the new data were announced on Thursday. The surge in growth was driven by the government’s aggressively loose fiscal and monetary policies, introduced late last year, with most of the funding coming from record lending by state banks.

The economy grew by 6.1 per cent in the first quarter, leading many China economists to believe that the government would not be able to meet its year-long growth target of 8 per cent. But the government’s pump-priming has turned the economy around, prompting rapid revisions by many investment bank economists, and the World Bank, to upgrade China’s outlook. Mr Li said that fixed asset investment rose strongly, up 33.5 per cent in the first half of the year compared to the same period in 2008.

Inflation, the Chinese government’s biggest policy headache until the middle of last year, remained under control, with the consumer price index falling by 1.1 per cent in the first half of the year and 1.7 per cent in June alone. Many local economists believe that the central government will not begin to rein in the stimulus programme until inflation begins to pick up, or at least turns positive…

Now just look at that last paragraph again. Doesn’t that strike you as a bit odd? I thought the very very worst thing in the world, was to get caught in a deflationary spiral. The Chinese CPI reportedly fell 1.7 percent in June alone, and it’s down 1.1 percent over the first two quarters of 2009. Haven’t we had it beaten into our heads that Asians and deflation don’t mix? And yet, real GDP reportedly grew at a 7.9% rate in the 2nd quarter. (Note that I keep saying “reportedly” because I have no idea how much credence to give these numbers. I don’t trust the BLS figures for the US, so I am extremely skeptical about what nominally communist ministries tell us.)

So does DeLong come up with some convoluted story as to why deflation isn’t such a big deal after all? Nope, he ignores that part of the story completely. He offers no commentary except the headline: “China’s Larger Stimulus Program Appears to Be Working”

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