Monday, May 14, 2012

Economics...not a science, not even a dismal science...just dismal

I've been doing TV for a long time and I can tell you that sometimes the best conversations occur during the commercial breaks.

Last Friday I was on "Rewind" on Bloomberg TV. My co-host was Joe Brusuelas, Bloomberg LLP's Chief Economist. He says he has a PhD in economics, but it's not posted after his name, nor does anyone over there call him "Doctor." Anyway, it doesn't really matter because as we all know Warren Mosler only has a Bachelor's degree in Economics, but he's the most brilliant economist I've even met and he can run circles around these PhD's. Even Keynes didn't have a formal degree in economics.

Anyway, during the break we got into a discussion about the economy and what could be done to get growth up. We were talking about the "fiscal cliff" looming out there next year and I said that I thought it was a big problem if not addressed and he said something was going to be done, but it wasn't going to be on the fiscal side. He specifically said that fiscal was off the table yet he didn't give a reason why, however, I sensed it was not because of political reasons, but more a question of "means," at least in his mind. Then he laid it out to me and said, "The Fed will do it."

I said, "The Fed? How?"

He said, "monetary policy."

"Monetary policy?" I asked, incredulously. Then added, "That's worked well." Of course I was being deeply sarcastic.

I followed quickly with, "There is no direct channel from monetary policy to demand."

He says, "Of course there is. There's at least six."

(So this guy is saying to me that there are six channels to demand from monetary policy.)

"Name one," I say.

He said, "interest rates."

(Me, laughing), "That's it? That's what you got? Interest rates? That's worked well, too," I repeated, making sure I said it in my most sarcastic voice, while laughing.

I could tell he was getting peeved. He must have been thinking, who was this no-name economist, former Fox News Contributor talking to me about economics? After all, he was the Chief Economist of hoity toity Bloomberg. Who was I? John Thomas who?

I pressed, again (I love doing this as you can see), saying, "QE, doesn't do anything for demand."

Then he said (get this), "That's because house prices have not risen."

House prices have not risen???? That was his PhD response. In other words, his channel to demand was blowing up an asset bubble and hoping that it would cause people to go out and buy things. Ridiculous. Didn't we see this before? It didn't work the last time and it's not working now, for different reasons. Demand is demand. It's the direct purchase of goods and services. And that can only be done by, well, directly purchasing goods and services. By someone.

Then I hit him with the "pushing on a string" metaphor. Surely as a PhD economist he knew about pushing on a string? That's where the central bank lower rates, but nothing happens to demand. In other words, you push on one end of a string and the other end does not move, thus the metaphor. He seemed to be getting really annoyed at this point. Before I knew it the break was over and we back to the show. At that point we watched a clip of an interview that took place earlier in the day between some econommist whose name I forget and Bloomberg anchor, Tom Keen.

I sat and listened as the guy Keen was interviewing painted a gloomy picture of the economy. Then Keen asked him if there was anything that could be done, policy-wise, to add 100 basis points to GDP. Well, 100 basis points is not a lot. It would put GDP at 3.2% from the current, 2.2% growth rate. It could be done quite easily via fiscal policy, i.e. tax cuts, more spending, etc. But this economist guy would have none of it. He was taken aback by the very question. Then he blurts out, "Hey, don't try to make me into a Paul Krugman."

I couldn't believe what I was hearing. To this guy a simple question alluding to some form of intervention in the economy turns him into Krugman? And intimating that he would look at the problem like Krugman just made him the victim of the most vicious type of slander. To all of these guys, Krugman is, of course, Keynes. And if Krugman is Keynes then he is the most hated figure according to the neoliberal, economic mainstream.

So after reacting as if he was just handed some poison he recovered and said the thing to do with the economy was to do nothing. That's right, there is nothing we can do. Just step back and let it all play out, unencumbered by the hand of any economist, and surely don't do anything as horrid as "artificially" supporting demand.

In both his reply and attitude was a complete and utter admission of how dismal, arrogant and failed mainstream economics has become. It is no longer the dismal science, it's just dismal, period. That the only thing the discipline can offer from its most highly paid, lauded and professional elite is to say there's nothing we can do is reason enough to euthanize the whole creed. They are useless and reprehensible.

Think about what the world would be like if we embraced that attitude in other areas of human endeavor. What if Orville and Wilbur Wright said, "If God intended man to fly he'd have given him wings." Or if Jonas Salk said, polio is good, because it will end up cleaning out the weak of the human race. We don't need a vaccine." Or if Churchill, rather than saying, "we will never, ever, give up," said, "Let's just surrender to the Nazis."

These economists are the weak, arrogant, cynical losers running our world today. These are our "great economic minds." What a joke. What a complete and utter joke. Economics...not a science, not even a dismal science. Just plain dismal.

22 comments:

Dan Kervick said...

The code of "not interfering" and "not picking winners", etc. seems to be a deeply ingrained result of economic training these days. There is some sort of profound, unthinking terror there, which makes these guys scramble around looking for more non-action actions and non-policy policies. The very idea that democracies might legislatively decide to create certain aspects of the economy their citizens want to live in rather than allow business people and private finance to create that economy for us sends a chill down the spine of the mainstream economist.

Of course, a cynical interpretation would be that all of these economists are paid servants who work, directly or indirectly, for people who are desperate to hang onto their stuff and make sure the broader society never gets their hands on any of it.

SchittReport said...

dan, the phenomenon you are referring to impacts the economics industry the most, as it does other 'specialized knowledge' industries such as management consulting, private equity, some aspects of banking etc.

in these industries, we used to have an "up or out" or "mentor / peer" system of "picking winners" and weeding out those who were unqualified. you really had to go through the hoops to earn your laurels. today, it is all "management by the mean" which has resulted in severe deterioration of quality talent and work (i won't get into the causalities as it would entail writing a very long dissertation).

i have had the privilege of watching this first hand across all of these industries. i can say with conviction that most of the cream of the crop have left to do their own things, leaving behind the "mainstream" practitioners within the system.

Tom Hickey said...

@SR

Right. Gresham's law is more universal than just money. The bad drives out the good over time under rules that don't distinguish between them.

The present institutional arrangements and culture are fubar.

SchittReport said...

as an addendum to my previous posts, "management by the mean" usually implies the development of control and performance management systems which in turn drive the behavior of the people w/in system to focus on "gaming" the system instead of their work, product, ideas etc.

to give you an example: many years ago, i was a partner w/in a 50 person firm which was acquired by one of the largest management consultancies in the world. the KSFs in this firm were simple: 1) get yourself as the lead partner in as many industry / geographic matrices as possible so that all the clients / revenue booked accrues to you 2) manage your personal revenue performance by understating targets to the board and then exceeding them 3) squeeze out more profits by screwing over staff via utilization rates e.g. tell the staff on your projects they need to eat their own OT etc. 4) politics and more politics

work quality, client satisfaction(unless they don't pay), intellectual capital development, staff development, integrity - largely irrelevant footnotes in your performance appraisal form.

SchittReport said...

tom, yes sir.

it is quite sad really as the older i become, the more cynical i am - having witnessed this sort of deterioration first hand.

Anonymous said...

yeah, there's an econ grad student who blogs called Noah Smyth. He recently admitted he has absolutely no intuition for how economies work - and he's about to be an econ prof. Fair dos to him for admitting that but it highlights how the grad education these guys receive gives them no clue about how the world works. You read the blogs of dorks like Williamson and Andolfatto and you are left stunned by their thought processes. Just depressing.

Carl said...

Nobody seems to be worried about picking winners and losers when it comes to defense spending, and it certainly qualifies as fiscal stimulus. It sure worked for Germany in the 30's. Maybe the "terror" is overcome with the right politics.

I'llHaveADouble said...

Macro sucks - others parts have done a bit of interesting work.

Something the Fed could do - please, give me feedback: target the whole fucking yield curve really low. Make the ten year 0.5%, and other maturities correspondingly low.

This has to do something and it requires no poorly informed elected representatives voting (just poorly informed FOMC members). QE maybe be pushing on a string because it's quantity targeting, but what about price targeting with the rates?

I think we'd all agree that, overall, raising the overnight rate would probably be a bad idea. So, for the same reason, wouldn't lowering the long term rates do some darn good?

Tom Hickey said...

 I'llHaveADouble said... "wouldn't lowering the long term rates do some darn good?"

Why? Seems that all lower rates do is drive up assets price and commodities are now an asset class.

The thinking of monetarists is that low rates spur firm investment, but business investment responds to demand rather than rates, as we've already seen adequately demonstrated.

I'llHaveADouble said...

But surely, there are some projects that are unprofitable at an X percentage rate loan, but which are likely profitable at an X-1 percentage rate loan. Businesses respond to demand for investment, but surely interest rates matter too - mustn't they?

Adam1 said...

@Anon:

"...projects that are unprofitable at an X percentage rate loan, but which are likely profitable at an X-1 percentage rate loan."

All other things being equal. We just removed 8 million consumers from the economy - even those business cases don't look so good anymore.

Additionally, A reduction in long term interest rates will further reduce interest income lowering aggregate demand and likely raise commodity prices - a likely cost input to someone's marginal business case potentially negating the positive effects of the lower rates.

Anonymous said...

"Seems that all lower rates do is drive up assets price and commodities are now an asset class"

I don't see how this analysis is compatible with the MMT policy of zero interest rates. Are you saying MMTers want asset bubbles and commodity price inflation?

Please clarify, thanks.

Adam1 said...

"I don't see how this analysis is compatible with the MMT policy of zero interest rates."

Did you forget the policy proposal of re-regulating the industry to prevent speculative and ponzi investing by banks?

Tom Hickey said...

I'llHaveADouble said..."surely interest rates matter too - mustn't they?"

This is the monetarist fallacy, Depends on conditions and timing. Right now firms are sitting on 2T in corp savings. IF they saw investment ops they can fund out of retained earnings, but they don't see anything in the US sufficient to get them to spring the idle funds. This is the problem. Without demand, they won't invest, and even with low rates, people won't borrow to purchase that are tapped out or uncertain about their future.

I'llHaveADouble said...

Tom,

True. But killing the yield on longer term securities must make alternative uses of cash more attractive - rather than buying 30-years (holy shit, we're sub-3%) they'll do something else with it. Short term yields are at nothing - this is just another way of telling corporations and other institutions, "No, regardless of how long you wait, you can't get something for nothing."

It's not preferable to further fiscal measures by any means, or the Fed buying new bridges or whatever, but it might be useful.

Deeply appreciate your previous response. It's great to talk about these things with people who know what they're talking about.

Tom Hickey said...

@I'llHaveADouble

Look at the yield curve. We are at historical lows and investment and loan demand are in the tank. No reason to think that a few more pips lower will spark a change in liquidity preference.

On the other hand, look at asset prices in relation to economic fundamentals. The global economy is barely growing and yet commodities remain rather dear, especially since becoming an asset class. Lower rates mean lower cost for leverage. i.e., purchasing on margin.

I'llHaveADouble said...

The global economy is barely growing and yet commodities remain rather dear, especially since becoming an asset class. Lower rates mean lower cost for leverage. i.e., purchasing on margin.

Yep. Lower cost for leverage, and also just moving into other assets because bonds aren't yielding shit. But the same should go for all forms of investment besides fixed income. And I think that's true if we look at the numbers: using historical figures correlating fixed capital investment and unemployment, FCI is higher than it "should" be right now. And further lowering yields should further that - bond holders feel richer, stock holders feel richer, idiots who own gold feel richer, and institutions that can choose between financial assets, fixed capital investment and sitting on cash are less likely to choose from column A, because we made those assets more expensive. It's B or C, boys, and the economy's growing.

Commodities...they confuse me. It seems like the same rules apply there that apply to gold, except that the other commodities' value is actually based industrial applications. Oil's good if you expect the economy to move like gang busters, but then so is fixed capital investment in that environment. Damn speculators.

But yeah. If flattening the yield curve would do anything, it probably wouldn't be much. And we're looking at House Republicans trying to drive us over a fiscal cliff, rather than further stimulus, again...did we slip into bizarro world at some point, Tom, or is this really what we have to deal with? : /

I'llHaveADouble said...

Also, I haven't read post on MMT and commodity prices above yet. I'll get right on that.

Tom Hickey said...

"did we slip into bizarro world at some point, Tom, or is this really what we have to deal with?"

I think we can blame W for the turn of events in the GOP that have resulted in a return to traditional fiscal conservatism and the resurgence of Libertarian-Austrianism. It's a harsh reaction to W's "compassionate conservatism" and Lafferism — Cheney's "Reagan proved that deficits don't matter." Fiscal conservatives feel that W sold them out, and then did the unforgivable in signing on to the bailouts. The reaction was mighty and it's still going on, which is in a large measure why the base hates Romney, who they see as another W.

Moreover, social conservatives got tired of the lip service and wanted a real seat at the table. So the GOP moved way right both fiscally and socially. The social position is putting them in a dead end demographically, and the fiscal stance is lead to depression. Unfortunately, the Dems are too capture or too stupid to take advantage of this opportunity. Leverage is unfortunately likely to be correct. Only a breakdown will lead to a breakthrough. I have been calling it the swan song of neoliberalism, which has not yet played itself out.

I'llHaveADouble said...

Moreover, social conservatives got tired of the lip service and wanted a real seat at the table.

Ah yes, whenever this comes up, I like to compare the anti-abortion crowd to the abolitionists - not in terms of morality (although I'm sympathetic philosophically - I'm not religious), but in effectiveness.

The abolitionists declared war on the greatest economic resource the US had - an immoral resource, but incredibly profitable and important. Within forty or so years, and without overwhelming support in congress, and with a president elected with a minority, they had destroyed it utterly and forever. They won a total victory, although you could say Jim Crow sort of shat on their mighty achievement.

The pro-lifers have been at it for forty years, devoted untold time and money to the cause, threw in all their chips with a party that has controlled all three arms of government at once, and achieved basically nothing. They're the least effective lobby in the history of the country. I mean, we love beer, and the prohibitionists even managed to win for a while. The pro-lifers have been taken for a ride and then seem to just barely be starting to understand this.

Only a breakdown will lead to a breakthrough. I have been calling it the swan song of neoliberalism, which has not yet played itself out.

Here's little rant about recent events I wrote to share with friends sort of touching on "breakdown":



http://research.stlouisfed.org/fredgraph.png?g=7fa
http://www.federalreserve.gov/releases/z1/current/z1r-3.pdf

US households? Still basically deleveraging - one quarter of borrowing, but weak. Q4 houshold borrowing seriously down from a year before - and households saved less than the year before. If serious cuts go through congress like the Republicans say they want, any continued deleveraging becomes much harder, corporate borrowing will falter, and we have a new recession - GDP declines, unemployment rises, the employment to population radio falls even further.

http://research.stlouisfed.org/fredgraph.png?g=7fa
http://www.federalreserve.gov/releases/z1/current/z1r-3.pdf

If Europe continues its concerted attempt to recreate the Great Depression, we could have a *seriously* bad recession.

If China slows to a more reasonable, less "let's-have-the-biggest-bubble-ever" growth rate, it could be a landmark change in the global economy along with an epic contraction in the production of goods and services. It'd be as if all the real engines of global growth have stopped running at once.

On the other hand, I'm really liking Spotify, so you take the good with the bad.


So maybe we will see a sea change as the global economy takes a giant !@#$.

And I close with a piece of unsolicited flattery: I love what you and Mike do here. Keep speaking truth to power - or, at least, truth to ignorance with some power. The blessings of Baal and Mammon be upon you.

I'llHaveADouble said...

Whoops, didn't mean post the links twice.

Unknown said...

It reminds me of the last days of the Soviet Union. The problems were obvious. The solutions were obvious. Stating the obvious was a sure trip to the gulag, or at least to career derailment. So, no one in the media ever mentioned the shortages or the other economic failures except in passing as part of a human interest story. Meanwhile, everyone, except perhaps a few die hard cold warriors in the west, knew that the SU was on its last legs and would need to establish a market economy of some sort and devalue its currency and a host of other obvious things.

We're doing no better.