Why Mark Zandi’s Economic Proposals Are Hideous

It’s accepted wisdom in certain quarters that we should never believe what we read. With journalists pressed to report on all manner of subjects about which they often lack knowledge, it’s inevitable that their news reporting will be slanted in ways that misinform the reader.

Of course in order to inform their reporting, journalists frequently have go-to sources whose comments are meant to bring outside expertise to subjects about which they know little. When it comes to reporting on economic matters, Moody’s (NYSE:MCO) Mark Zandi is the go-to economist du jour, and on a clear day he’s everywhere; his comments about the economy a living embodiment of the view that what we call “news” is anything but.

Captive to nearly every discredited economic fallacy in the book, Zandi’s musings on the economy misinform the reporters who oddly hang on his every word, along with readers who didn’t get the memo about the difference between reporting and reality. Last week was no exception.

Where does one begin?

Regarding Social Security tax cuts, implicit there is Zandi’s thoroughgoing Keynesian view that “more money in people’s pockets” will drive up consumer spending, with a boost to GDP the end result. What he misses is that temporary tax cuts, far from driving up economic growth, merely reschedule it. Assuming what’s hard to assume, that Americans will fall for a near-term increase in their take home pay, any increased consumption in the present would be matched by a decrease later on when the tax cut is revoked.

Second, production as one would expect takes a back seat in Zandi’s Keynesian model. In truth, taxes are nothing more than a price, so if the desire is to increase economic activity, all governmental tinkering should center on the supply-side whereby the cost of productive economic effort is reduced.  Tax rates should be cut across the board, and most importantly on the “vital few” producers whose innovations invariably drive economic advancement.

That our production is our demand is tautological, so if individual tax cuts are to be considered, they should be permanent and should be targeted on total income. If the cost of work is reduced, productivity will increase, as will consumption by definition.

Keynesians such as Zandi always seem to leave out that with all consumption, production must come first. And if the productive don’t “consume” the fruits of their productivity, it should be stressed that no act of saving ever detracts from demand. Consumption delayed is merely a shift of consumptive ability to other individuals, and even better, money saved is often capital supplied to entrepreneurs and businesses that will use it to expand, and hire new workers.

Considering a tax cut on business investment, it would be hard to find stimulation there either. Probably the opposite. Indeed, one reason corporate tax rates are so high has to do with the myriad deductions (think GE (GE)) that already exist. And as we happily move more and more to a knowledge economy, equipment and physical infrastructure are a certain blast to a less prosperous past when companies such as General Motors (NYSE:GM) mattered.

Today, companies like Google (NASDAQ:GOOG) use equipment solely as a facilitator to enhance the productivity of their true assets: the individuals that show up for work each day. To promote equipment purchases as Zandi proposes is to subsidize past winners at the expense of our best and brightest companies today that increasingly rely on human, as opposed to physical capital. Better to reduce the cost of business success through lower corporate taxes altogether, as opposed to handouts for yesterday’s leading lights.

Secondly, and as mentioned earlier, governments can’t create economic growth as much as they can reschedule it. This lesson has been learned the hard way once again by Washington through temporary measures meant to stimulate housing and automobile purchases. In the near-term the subsidies surely did boost purchasing, though at the expense of future demand; recent limp demand for housing and autos yet another example of the faulty nature of the temporary tax cuts that inexplicably appeal to Zandi.

The extension of unemployment insurance is yet another ill-considered Keynesian solution that fails to factor in production as the driver of all economic activity. As such, it will not work.

To understand why it must be understood that unemployment insurance is merely coerced redistribution of wealth from productive workers to those sidelined. As a result, increased benefits are a disincentive for those working while seeing their wealth redistributed, and for those handed the fruits of the productive efforts of others, they too have reduced incentives to work for their idle status being rewarded.

Second, every dollar that the unemployed are handed for being unemployed tautologically raises the price of luring the unemployed from the sidelines. If benefits work out to $1,000/month, that $1,000 represents the extra cost for employers of getting the able-bodied back to work. Unemployment benefits merely redistribute wealth with no productive end result, and for raising the cost of bringing individuals back into the workplace, they specifically retard economic growth.

Lastly Zandi, like most in the economics profession, sees the devaluation of the dollar as the path to prosperity. That devaluation has never worked doesn’t seem to concern a man who embraces all the fallacious views that continue to discredit the study of human action.

While a cheapened dollar may in the very near-term make U.S. goods more attractive, what Zandi is apparently oblivious to are the numerous effects of such a discredited policy. Specifically, a falling dollar will drive up the cost of goods necessary to manufacture finished goods, it will increase the shipping price of sending those goods overseas, and as American workers will be the recipients of the dollars Zandi wants cheapened, they’ll see their consumptive ability decline in concert with the dollar’s fall.  Soon enough they’ll seek pay increases to make up for the dollar’s dampened value.

Indeed, a falling dollar since 2001 has neatly and predictably coincided with a rise in the price of gasoline. What’s so sad here is that while philosopher kings of Zandi’s ilk seek to “give” with lower Social Security taxes, they take right back through dollar devaluation that raises the cost of everything; prices at the pump most notable in this regard.

As for the businesses that have devaluations foisted on them by economists, far from better off, the value of their earnings is reduced thanks to a dollar that’s been cheapened. This is important because ultimately it is investors who decide what business concepts will receive capital, and the problem with currency devaluations is that they erode the returns of the very investors who make company formation and job creation possible.

If businesses are having trouble selling goods domestically or internationally, they should lower the prices of those goods to market-clearing levels. It’s as simple as that.

But not to Mark Zandi. Filled with a false sense of grandeur for reporters even more clueless than he is hanging on his every false word, Zandi continues to utter hideous economic proposals that misinform the average American, and worse, make the average American exponentially worse off to the extent that an even dimmer political class buys into his wholly discredited notions about why people produce.

John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.

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