Wednesday, October 5, 2016
Noah Smith — Breaking the Spell That Grips Economics
Where there are no facts, there is no evidence. Macro is based on stylized facts, which boils down to restrictive assumptions that make models tractable. No real facts in and so no real facts out. So evidence is sparse, limited to broad outcomes whose causal factors are disputable or "difficult to determine." The catch-all is "external shock" that no one could see coming because it was "exogenous."
In short, magical thinking based on ideology. So there is left-wing macro and right-wing macro.
Bloomberg View
Breaking the Spell That Grips Economics
Noah Smith
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3 comments:
Noah had a recent piece about private debt that just made me shake my head. He has had some good stuff and for the most part he is one of the good guys but his characterization of the worlds private debt problem was................THE problem. I say "the" because his view is shared by most within the econ profession.
He talked about how those decrying the rise in private debt and predicting problems in the near future from these levels are forgetting that private debt "nets out". He says this and then tells a story about him owing 100$ to Susan, and Susan owing 100$ to Bob and Bob owing 100$ to blah blah blah .... He then goes on to say that the debts are never paid down in aggregate so that we never have to worry about crashes in private debt levels. This totally ignores the fact that private debt levels are not analogous to people owing money to each other within a chain but instead are people owing money to banks, who are outside the chain. His analogy assumes that when I borrow from a bank Im borrowing someone elses savings, which is flat out wrong, yet this is still the dominant view among many notable economists.
How the past 8 years of macro discussion has not disabused economists of this overly simplistic and demonstrably WRONG view of private debt is baffling.
Thats the "spell" that needs to be broken
It's even worse than that.
It isn't the debt that breaks the system. It's the flow load of the interest and repayments. Regular service is the machine gun that collapses the debt bubble.
Regular service is the machine gun that collapses the debt bubble.
In the US there is Chapter 11 bankruptcy for the big guys, which means restructuring the debt, and Chapter 7 for the little guys, which amounts to forfeiture of assets.
So "strategic default" makes sense in the case of the former. But when home owners mailed in the keys on no-recourse mortgages it was condemned as a "moral failure."
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