What's wrong with the economists?

[Michael]

The Economist (of which I'm a longtime fan) has a series of articles devoted to the state of economics (and economic theory in particular).

I'll just supply the links because the articles are too loaded with information for just a paragraph exerpt for either one of them.

The Economist: What went wrong? (http://www.economist.com/printedition/displayStory.cfm?Story_ID=14031376)

The Economist: The State of Economics (http://www.economist.com/displaystory.cfm?story_id=14030288)

The Economist: Financial Economics (http://www.economist.com/displaystory.cfm?story_id=14030296)

I think that the general conclusion here is a good one. The damage to academic economics, neoclassical economic theory and macroeconomics in particular have been so devastating (due to recent events) that it is only now that such errors can be addressed. That is to say, it takes monumental failure to enable a rebuilding of economics. Previous failures of theory have been swept under the rug. This is not possible now.

As always, it is not the theories themselves that failed - it was the over-enthusiastic misrepresentation of those theories that caused most of the damage. But that's just semantics in the final analysis. If economic theories are being misrepresented, that is the fault of economics for fostering that.

[partofme]

I think of economic theories in the same way I think of ideologies in that they can make quite a bit of sense much of the time but not all of the time. In other words they may seem to explain some things really well but others not at all. I think the problem is when people take a theory to it's logical conclusion and treat it like religious dogma that must always be obeyed.

[The Drunk Guy]

I think of economic theories in the same way I think of ideologies in that they can make quite a bit of sense much of the time but not all of the time. In other words they may seem to explain some things really well but others not at all. I think the problem is when people take a theory to it's logical conclusion and treat it like religious dogma that must always be obeyed.
Are you advocating the mixing of ideologies? Let me just get my lynching stick...

[partofme]

Are you advocating the mixing of ideologies? Let me just get my lynching stick...

More like advocating finding the best solution for each particular problem rather than letting an ideology dictate things despite the facts on the ground.

[The Drunk Guy]

More like advocating finding the best solution for each particular problem rather than letting an ideology dictate things despite the facts on the ground.
That's it! You lost my vote. Fuck you and your crazy problem solving!

[Michael]

...I think the problem is when people take a theory to it's logical conclusion and treat it like religious dogma that must always be obeyed.
I think that's exactly it.

The 'theory' of rational markets is just that - a theory. It may be a true theory, or it might not be true.

But Alan Greenspan (for example) ran the Federal Reserve on the basis that the theory was an absolute and unquestionable fact.

[Michael]

Here's another [excellent] entry into the debate from Krugman. Longish article but well worth reading. Here's the conclusion...

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.

How did economists get it so wrong? (http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=2&pagewanted=1)

It would appear that Krugman and I are mostly on the same page here. I've always been opposed to 'rational market theory' and I do generally support Keynesian theory and always have. I just object to the idea that "any" spending is worth while - I think stimulus spending needs to be meaningful and targetted or it just deadweight debt added to the pile. My quibble with Keynesianism is with the practicioners of government spending sprees, not Keynesian theory of demand.

[Lily]

I am not well schooled in economic theories, but it seems to me the economy is like a 300-ft. freighter, heavy and slow to respond to the helm. Americans, on the other hand, have a jet ski mentality. They want an economy that will respond immediately and when that doesn't happen, they're chumming politicians into the water and waiting for the sharks to circle.

[Michael]

I am not well schooled in economic theories, but it seems to me the economy is like a 300-ft. freighter, heavy and slow to respond to the helm. Americans, on the other hand, have a jet ski mentality. They want an economy that will respond immediately and when that doesn't happen, they're chumming politicians into the water and waiting for the sharks to circle.
I don't like your analogy. It is way too normal. The US economy is nothing like a big 300' freighter, slow and heavy to respond to the helm. If the US economy was anything like that, half the problems with the US economy wouldn't exist.

The US economy is much more like a giant ponzi scheme, built on bubbles, credit, debt, accounting tricks, financial games, crony capitalism, government monopolies, government favors and massive and endless government deficits.

The problem is that humpty-dumpty has fallen off the wall and all the kings men can't put humpty-dumpty back together again.

No one is even remotely interested in addressing the 'ponzi' scheme that is the US economy since it produces massive short term profits (that can't be sustained) and people (and the media and the government) all seem to be addicted to that. Absolutely no one is interested in fixing the problems of of a bubble inflated economy. The US economy has been bubble inflated for thirty years now. No end in sight.

The only tools the Federal Reserve is using right now are bandaids and air-pumps.

[Lily]

A ponzi scheme, huh? Well, then we should have given Bernie Madoff a ticker tape parade down Madison Ave. What happened? Did he pull the curtain and expose the game?

You're right of course, but average Americans don't see it that way. There is a disconnect between their own spending habits and the spending habits of the US government. It's okay for an American family to be way over their heads in debt and be living beyond their means, but they take exception to the government doing the same. It's only when the individual's economic overreach comes crashing down does he start screaming for the government to fix everything.

[Michael]

A ponzi scheme, huh? Well, then we should have given Bernie Madoff a ticker tape parade down Madison Ave. What happened? Did he pull the curtain and expose the game?

You're right of course, but average Americans don't see it that way. There is a disconnect between their own spending habits and the spending habits of the US government. It's okay for an American family to be way over their heads in debt and be living beyond their means, but they take exception to the government doing the same. It's only when the individual's economic overreach comes crashing down does he start screaming for the government to fix everything.

Perhaps my "ponzi scheme" description of the US economy is a bit harsh. Rather, 85% of the US economy is quite normal (like the 300' frieghter in Lily's original example). The ponzi-bubbble economy is just the extra 15% that Washington and Wall Street are addicted to.

This extra frothy part of the US economy has never been sustainable and keeps crashing (and getting bailed out by the taxpayer). The people creating these bubbles aren't going to stop because they are very profitable in the short term and the taxpayer bailouts end up being a big fat bonus.

The game began under Reagan (remember the Savings & Loan deregulation debacle - that was the funding for the 1980s economic boom). The game is still going strong - the Obama administration is approaching the financial crisis with the working assumption that Wall Street providing 40% of all aggregate profits in the US economy is "normal" and "desireable" (and a goal to be restored). I consider that to be evidence of a dysfunctional economy based on creating financial bubbles.

[Michael]

I don't know about anyone else, but if Krugman doesn't stop playing the "deficits don't matter" argument, I'm going to lose all respect for him and all of his opinions.

Self-serving apologists for endlessly massive deficit spending are a dime a dozen and have no credibility at all.

Looks to me like Krugman's Nobel Prize is his "Peter Principle' moment. He has perhaps achieved the level of his own incompetence now.

US aggregate demand has been based on bubble spending and when the bubble popped, aggregate demand has dropped. Using government borrowed money to make up for this fall in aggregate demand is insane and entirely bubble-supporting. US economy needs to structuraly adapt to a higher level of consumer savings and a lower level of consumer spending. That means lower aggregate demand. Previous trends showing high levels of consumer spending were entirely unsustainable (based on using their houses as ATM's and adding debt). Using government spending to make up for the fall in demand just seeks to avoid/delay reality.

One must also keep in mind the morality of forcing one's grandchildren to pay for today's wasteful policies. I think that kind of morality is sick and demented.

Deficit spending is inherently immoral.

[Americano]

Servicing the US national debt is now the third largest outlay of government funds and expected to double by 2015. Anyone who says deficits that don't produce infrastructure don't matter needs a shot of reality.

[wphelan]

Speaking of Krugman and deficits, here's an article on exactly that. He seems to have changed his tune since 2003 when he was railing against deficits. Now they're ok? :shrug:

I don't have any respect for this guy as an economist. My bias is surely showing through, but I don't care. I can find common ground with him in 2003, and a lot of what he said then makes sense, but I simply disagree with him on almost everything he says now. What happened?

http://mises.org/story/3691

[Michael]

Speaking of Krugman and deficits, here's an article on exactly that. He seems to have changed his tune since 2003 when he was railing against deficits. Now they're ok? :shrug:

I don't have any respect for this guy as an economist. My bias is surely showing through, but I don't care. I can find common ground with him in 2003, and a lot of what he said then makes sense, but I simply disagree with him on almost everything he says now. What happened?

http://mises.org/story/3691

Yes, Krugman's views are starting to look like those of a partisan politician - changing as the wind blows.