Why Were Economists as a Group as Useless Over 2010-2014 as Over 1929-1935?(bradford-delong.com)
bradford-delong.com
Why Were Economists as a Group as Useless Over 2010-2014 as Over 1929-1935?
http://www.bradford-delong.com/2017/04/why-were-economists-as-a-group-as-useless-over-2010-2014-as-over-1929-1935.html
115 comments
The problem is that politicians don't give a solitary shit about economics except when it gives them cover for doing what they wanted to do anyway. I hope no one genuinely believe that politicians wanted to enact austerity measures or shrink government because of economics. They do it because huge corporations and billionaires want less taxes and lower regulation so they can accumulate more wealth personally. Whether the economy as a whole or even a a majority of the people benefits is irrelevant to them. See also climate change.
As you probably might also agree, its a bit of both. Politicians don't go into politics thinking they're just going to accept donations and do whatever. They believe the stuff at some level and then get corrupted by the marketing/lobbying. The greater problem is that politicians are lay people, and even if they wanted to listen to economists they would first have to navigate the topology of the topic at large, and then understand the minutia of what each side represents. Now apply that for 10 different varied fields including foreign policy/medicine/science/defense/social issues/etc and you quickly realize that its just impossible for any one person to make accurate decisions across such a wide swath of issues. Maybe the answer is more decentralization, but then you cant do the moonshots where you need to pool in the resources/talents/labor across a large populace. Its all a shitshow to some extent. But then again, the world hasn't gone to shit just yet so at-least somethings working .. :)
If you look now, you will see that this is simple not true. Countries with independent aggressive monetary policy did the best. Countries one the Euro that did Austerity did better then those that increased taxes. Maybe in Krugmans fantasy land you can do neither, but most people live in the real world.
The IMF actually apologized to Britain after attacking it about cuts.
It was Krugman that was horrible wrong on the US for example, anybody remember the "fiscal cliff" in 2013? Krugman and friends went large and issued dire warning, he even called it a "test for market monetarism". Not a single blip in GDP was observed and then Krugman promptly denied everything.
The IMF actually apologized to Britain after attacking it about cuts.
It was Krugman that was horrible wrong on the US for example, anybody remember the "fiscal cliff" in 2013? Krugman and friends went large and issued dire warning, he even called it a "test for market monetarism". Not a single blip in GDP was observed and then Krugman promptly denied everything.
Today's prominent Keynesians certainly still advocate for independent aggressive monetary policy, but they also claim that fiscal policy matters a lot.
In the case of the "fiscal cliff"/sequester, there was indeed fiscal tightening in the federal government, but it was offset by less tightening at the state level. Does that mean it was wrong to warn against cuts at any level of government? Of course not.
Here is Krugman, acknowledging why this situation might be confusing. https://krugman.blogs.nytimes.com/2015/06/22/2013-and-all-th...
In the case of the "fiscal cliff"/sequester, there was indeed fiscal tightening in the federal government, but it was offset by less tightening at the state level. Does that mean it was wrong to warn against cuts at any level of government? Of course not.
Here is Krugman, acknowledging why this situation might be confusing. https://krugman.blogs.nytimes.com/2015/06/22/2013-and-all-th...
Krugman, Krugman, when other people make evasion like that, then he attacks them so aggressively that you would think it was personal. When he does it, it is simply that people did not understand his arguments.
If there was tighting before 2013 already, that makes his story even worse. Why did the economy continue to grow on path when there 4 years of tighting? Taking the 'cyclically adjusted data' to save his point is pretty fishy to me.
Its also not true that Krugman always advocated for more aggressive monetary policy, they all claimed that monetary policy was 'out of ammo' and fiscal expansion was needed. He said that
If there was tighting before 2013 already, that makes his story even worse. Why did the economy continue to grow on path when there 4 years of tighting? Taking the 'cyclically adjusted data' to save his point is pretty fishy to me.
Its also not true that Krugman always advocated for more aggressive monetary policy, they all claimed that monetary policy was 'out of ammo' and fiscal expansion was needed. He said that
> Even after the austerity approach has been shown to be baseless in academia it continues to live in politics. Politicians nearly no ability to evaluate what they hear or read.
Unfortunately, politicians and the general public often inject philosophy and morality into their view of finances and Economics. Beyond austerity, another example is drug testing and work requirements for entitlements. This is particularly problematic if automation permanently reduces the demand for actual human labour.
Unfortunately, politicians and the general public often inject philosophy and morality into their view of finances and Economics. Beyond austerity, another example is drug testing and work requirements for entitlements. This is particularly problematic if automation permanently reduces the demand for actual human labour.
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"Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much." -- Ben Bernanke, 2013
(the quote is from an unexpectedly funny and thoughtful commencement speech)
https://www.youtube.com/watch?v=Ww6guPQsKQo
http://money.cnn.com/2013/06/02/news/economy/bernanke-prince...
(the quote is from an unexpectedly funny and thoughtful commencement speech)
https://www.youtube.com/watch?v=Ww6guPQsKQo
http://money.cnn.com/2013/06/02/news/economy/bernanke-prince...
Hey, there is a great cartoon about that here!
https://rwer.wordpress.com/2013/11/09/the-scientific-illusio...
https://rwer.wordpress.com/2013/11/09/the-scientific-illusio...
Great Depression: industrial production in the United States declined 47 percent and real gross domestic product (GDP) fell 30 percent.
In comparison 2010-2014 was a minor blip, with less than 3% GDP drop, that barely qualifies as a correction. I fear central banks have actually gotten to good at minimizing these issues as we could easily do the same thing in another 10 years, where the great depression created far more systemic change in both organizations and peoples attitude to investing and credit.
PS: People want the post correction economy to match up with the pre-recession economy. However, in the case of irrational behavior the rational economy should have a lower GDP and that's not actually a problem.
In comparison 2010-2014 was a minor blip, with less than 3% GDP drop, that barely qualifies as a correction. I fear central banks have actually gotten to good at minimizing these issues as we could easily do the same thing in another 10 years, where the great depression created far more systemic change in both organizations and peoples attitude to investing and credit.
PS: People want the post correction economy to match up with the pre-recession economy. However, in the case of irrational behavior the rational economy should have a lower GDP and that's not actually a problem.
A minor blip where millions lost their jobs, houses, and businesses...
The hard part about economic analysis is you can never know all the variables in a dynamic system. It's a common error to summarize based on variables convenient to the theme you choose to present only to later realize your analysis should have included some fairly obvious factors.
The hard part about economic analysis is you can never know all the variables in a dynamic system. It's a common error to summarize based on variables convenient to the theme you choose to present only to later realize your analysis should have included some fairly obvious factors.
Yes millions lost their jobs, houses, and business. And yes it was a minor blip. If you think otherwise, you don't grasp how bad the Great Depression was. Think about 35% unemployment for years.
The majority of mainstream economists didn't see it coming. That's a totally valid criticism. But they did a much better job of handling it than in 1929, and the damage, while major, was still nothing like the Great Depression.
The majority of mainstream economists didn't see it coming. That's a totally valid criticism. But they did a much better job of handling it than in 1929, and the damage, while major, was still nothing like the Great Depression.
I think you owe it to yourself to look up how the US defines a job. Most jobs created since 2008 are trmp jobs not actuallu structurally solid jobs so sure there is less unemployment but the employment there is is way more fragile.
The actual criticism is the US not counting people not actively looking for a job as unemployed, thus dismissing those who have given up/gone back to school/retired early/found their calling as a stay-at-home dad.
Still: if you believe today's troubles are in any way comparable to the 20s, you owe it to yourself to read up on that period. Check for "starvation" in the index.
Still: if you believe today's troubles are in any way comparable to the 20s, you owe it to yourself to read up on that period. Check for "starvation" in the index.
U-3 includes discouraged workers and is back to 1997 levels. U-6 includes discouraged workers and even workers unwillingly working part time when they want full. Even that more expansive definition is back at levels from the 90s.
People who criticize what is and is not counted and don't specify which unemployment number are uninformed.
People who criticize what is and is not counted and don't specify which unemployment number are uninformed.
Federal nutritional programs weren't available until 1932. Social Security Act passed in 1935. It's these programs that eliminated the starvation headlines in the US.
I agree it's not comparable -- many billions more people are negatively affected by the Great Recession simply because world population has grown so much since 1929.
I agree it's not comparable -- many billions more people are negatively affected by the Great Recession simply because world population has grown so much since 1929.
We are talking jobs not the consequence of not having jobs. Point is there are a lot more who have jobs which arent actually jobs on any way comparable to back then.
I see your 42 million unemployed people in 1929 and raise you 100 million people not currently looking for work in 2017.
US population has more than tripled since 1929.
are "unemployed people" and "not currently looking for work" comparable measures, or where there man more people "not looking for work" in 1929? (most women, for example?)
https://en.wikipedia.org/wiki/Unemployment_in_the_United_Sta... suggests that many of those 100million are relatively old or not interested in jobs even if jobs were on offer.
are "unemployed people" and "not currently looking for work" comparable measures, or where there man more people "not looking for work" in 1929? (most women, for example?)
https://en.wikipedia.org/wiki/Unemployment_in_the_United_Sta... suggests that many of those 100million are relatively old or not interested in jobs even if jobs were on offer.
A lot of those 100 million are elderly, children, or permanently disabled. There's a reason we count unemployed in a different manner than just "not currently looking for work."
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Don't just regurgitate Trump's tweets: http://www.politifact.com/truth-o-meter/statements/2013/jul/...
Poltifact's description of an environment where all students and retirees don't need to work is not only unlikely but unrealistic.
That's true for correction against irrational exuberance in a static environment. This may explain Japan. But the world is usually dynamic. Technological progress, non-monetary fiscal/regulatory reform, new business innovations (of the non-subprime-mortgage flavor), world events, and population growth are rational factors that can simultaneously push up GDP during or following a correction of previous irrationality.
Which, arguably, shows that economists were not as useless as a group over 2008-2018 as they were over 1929-1935.
Why not? Minimising these impacts it's about finances, not economics. I.E Economics is about predicting these things (which they absolutely didn't), finances is about putting mechanisms in place so that if they happen they will be minimised.
The vast majority of economics is not macroeconomic forecasting. That's somewhat akin to saying that computer science is about making email work.
Sure. But the ones that were about macroeconomic forecasting totally fucked up. That's somewhat akin to saying that the IT department responsible for managing email is about making email work. Not such an unreasonable complaint any more. Particularly galling that we had "crazy" economists claiming that we were in a massive housing bubble which we should expect to burst back in 2006, while at the same time the economists at the Fed were saying, "Look at interest rates! Now is a great time to buy a house!" and coincidentally their mates from college were selling mortgage backed securities. So really its more akin to the IT department responsible for managing the email deliberately sending Nigerian fishing scams to their fellow employees along with the public message of "No, outlook is fine, just click on anything in your inbox!"
Economics is not about predicting, it's about understanding things.
It's basically impossible to do the former at scale for time periods over 6 months, we're slowly getting better at the latter.
One big reason economic forecasting is so hard is that agents in the system you are forecasting are taking your present period forecast into account when acting in future periods.
It's basically impossible to do the former at scale for time periods over 6 months, we're slowly getting better at the latter.
One big reason economic forecasting is so hard is that agents in the system you are forecasting are taking your present period forecast into account when acting in future periods.
> One big reason economic forecasting is so hard is that agents in the system you are forecasting are taking your present period forecast into account when acting in future periods.
Meh, that's not terribly convincing, as far as excuses go. For GDP predictions, for example, there are many competing institutions publishing forecasts for any number of countries, sectors, etc. It'd be impossible to take them all into account, especially when they don't agree.
I'm also not sure if "taking it into account" wouldn't actually lead to the opposite: self-fulfilment of those prophesies. After all, the prevalent reaction to an expectation of high growth would be to invest, thus creating that growth.
Meh, that's not terribly convincing, as far as excuses go. For GDP predictions, for example, there are many competing institutions publishing forecasts for any number of countries, sectors, etc. It'd be impossible to take them all into account, especially when they don't agree.
I'm also not sure if "taking it into account" wouldn't actually lead to the opposite: self-fulfilment of those prophesies. After all, the prevalent reaction to an expectation of high growth would be to invest, thus creating that growth.
Right. What I said is generally true for Central Bank forecasts, because they have an effect on interest rates (which they set). But the expectation of change in interest rates changes lending and borrowing behavior now, etc.
That said, it's generally doable to do serious forecasts for a few months in advance, but the error bars explode after that.
That said, it's generally doable to do serious forecasts for a few months in advance, but the error bars explode after that.
If you cannot predict, you do not really understand.
A coin flip with 50/50 odds is understandable even without predictions.
This is a technicality / edge case of 'pure randomness', rather than a rebuttal.
Furthermore, I can predict the distribution of results for a coin quite accurately over long time timeframes. Indeed being the 'understanding' of a successful gambler means being able to make predictions about what will happen with a random process over time.
Roulette for example is analogous to the coin toss; most casinos seem extremely able to predict what will happen over time quite well.
Or are you hinting at a counterargument that most of the world is a truly random process analogous to a coin throw?
In which case, your experience with reality must be terrifying. Will the sun come up today? Who knows? Will gravity work in a minute? And so on.
Furthermore, I can predict the distribution of results for a coin quite accurately over long time timeframes. Indeed being the 'understanding' of a successful gambler means being able to make predictions about what will happen with a random process over time.
Roulette for example is analogous to the coin toss; most casinos seem extremely able to predict what will happen over time quite well.
Or are you hinting at a counterargument that most of the world is a truly random process analogous to a coin throw?
In which case, your experience with reality must be terrifying. Will the sun come up today? Who knows? Will gravity work in a minute? And so on.
You can model a coin flip you can't predict it. Next year the US GDP with be the same +/- 50%. That's been true for the last 200+ years, further there is positive bias so it's more likely to be + than -, but the down tail is thicker so it's more likely to be down 9% than up 9%.
Similarly casinos will sometimes lose lot's of money on Roulette when someone makes a big bet. But, the their long term average is positive money maker. Further, they don't pick specific returns just a range with some probability aka more than X not 10,203,556$.
What you want is a prediction for next year, not a model for next year.
Similarly casinos will sometimes lose lot's of money on Roulette when someone makes a big bet. But, the their long term average is positive money maker. Further, they don't pick specific returns just a range with some probability aka more than X not 10,203,556$.
What you want is a prediction for next year, not a model for next year.
Plenty of people I know were predicting the crash of 2008 at least a year out - sometimes more.
Fortunately, none of them were qualified economists.
Macro is actually pretty straightforward to do.
But economics is politics by other means. It is not a science - it's a branch of rhetoric and persuasion (i.e. propaganda) and is used to disguise and rationalise purely political decisions that would otherwise be impossible to justify.
Fortunately, none of them were qualified economists.
Macro is actually pretty straightforward to do.
But economics is politics by other means. It is not a science - it's a branch of rhetoric and persuasion (i.e. propaganda) and is used to disguise and rationalise purely political decisions that would otherwise be impossible to justify.
Indeed. Take Brexit. Government economists stated as fact that there would be 400,000 job losses following a vote to leave (note: the vote, not actually leaving itself). Absolute bloodbath. Reality: the economy grew.
Everyone knows economists say what they're paid to say, which is why they're so often ignored. Oddly, the people who tend to understand that best are often the ones derided as the "uneducated" voters and the people who continue to cling to their faith in economic modelling despite all the evidence it's worthless are often the "educated".
Everyone knows economists say what they're paid to say, which is why they're so often ignored. Oddly, the people who tend to understand that best are often the ones derided as the "uneducated" voters and the people who continue to cling to their faith in economic modelling despite all the evidence it's worthless are often the "educated".
If you want to find an economist to support some statement that's easy, but does not mean that it's actually what most economists actually believe.
It's like saying 4/5 Dentists recommend X by asking them if it's better to brush with crest or not brush at all. Or pay some group of 5 dentists that work for you and ask a more neutral question.
It's like saying 4/5 Dentists recommend X by asking them if it's better to brush with crest or not brush at all. Or pay some group of 5 dentists that work for you and ask a more neutral question.
Yeah, well, hold on to your hat.
Japan style stagnation seems like the most likely outcome to me, what's your prediction?
Not the parent, but if I had to guess, the current administration is creating the context for a massive wealth transfer using deregulation following a financial collapse of similar magnitude to Russia in the 90s. The end aim is to create a economically and politically entrenched kleptocrat class and a corresponding "managed democracy." Funnily enough, Abe Shinzo and his political allies have suggested doing this explicitly through constitutional reform, Japan being so steeped in corruption at this point that such talk is par for the course [0].
I'm not sure what will be the trigger, they seem to be pushing at several angles - war, knock-on effects from environmental collapse, another financial implosion. Because of the systemic corruption of the Democratic Party, the collapse could emerge organically. Obama really only papered over the root causes of the financial crises (not to mention paying off the culprits).
But it's a unlikely you're going to see Japanese style stagnation. Their economic circumstances are a result of the U.S. propping up their economy through an export regime for the sake of regional national security, as well as an economic approach that (generally) pursues a more stable state than dramatic rises and falls. The U.S has neither of those preconditions. Contemporary Russia is probably more instructive generally, with perhaps Central American style inequality being exemplary for the coastal regions.
[0] https://www.google.com/amp/s/amp.ft.com/content/06d6bf9e-fab...
I'm not sure what will be the trigger, they seem to be pushing at several angles - war, knock-on effects from environmental collapse, another financial implosion. Because of the systemic corruption of the Democratic Party, the collapse could emerge organically. Obama really only papered over the root causes of the financial crises (not to mention paying off the culprits).
But it's a unlikely you're going to see Japanese style stagnation. Their economic circumstances are a result of the U.S. propping up their economy through an export regime for the sake of regional national security, as well as an economic approach that (generally) pursues a more stable state than dramatic rises and falls. The U.S has neither of those preconditions. Contemporary Russia is probably more instructive generally, with perhaps Central American style inequality being exemplary for the coastal regions.
[0] https://www.google.com/amp/s/amp.ft.com/content/06d6bf9e-fab...
Did Japan elect a lunatic that wanted to roll back all the institutions put in place in the last sixty years?
If economists did come to a broad consensus, many politicians would still ignore that consensus if it didn't happen to fit their worldview or the interests of their major donors.
See: climate science.
See: climate science.
As it turns out, Republicans and Democrats agree with each other much more than they agree with economists.
https://cclark.gcsu.edu/Survey%20of%20Republicans,%20Democra...
> Republicans and Democrats show identical distributions of responses for 18 propositions (41 percent) while economists and Democrats show identical distributions for 7 propositions (16 percent) and economists and Republicans share identical response distributions for 9 propositions (20 percent). These results suggest a gap between the economic views of the political parties and economists’ views.
https://cclark.gcsu.edu/Survey%20of%20Republicans,%20Democra...
> Republicans and Democrats show identical distributions of responses for 18 propositions (41 percent) while economists and Democrats show identical distributions for 7 propositions (16 percent) and economists and Republicans share identical response distributions for 9 propositions (20 percent). These results suggest a gap between the economic views of the political parties and economists’ views.
One could scarcely call the field of Economics a science though.
Since politicians don't observe the consensus in a more rigorous science (climate), there's even less reason to think they'll observe it in economics.
My point exactly. Although I think UBI is a highly imperfect solution to the threat automation poses towards the livelihoods of those replaced, there isn't anything better on the table. I fear that our government won't take this seriously and reject UBI simply on moral grounds even if all the research and evidence pointed towards it being the best policy option.
Politicians don't like evidence. Look what happened to David Nutt in the UK.
Why? They formulate theories and test them against data to understand how the world works. Is that not the definition of science?
All economic systems are to some degree adaptive and nonlinear, because people are adaptive and nonlinear. Economists generally create static linear models of these systems. Additionally, economists tend to assume Gaussian errors with diagonal covariance matrices because the math tends to blow up otherwise. Non-gaussian errors are fairly common unless your data set is a bunch of means (thus the ubiquity of "outliers"). Beyond that, economists assume "rational" agents that maximize utility, but this is a fairly poor model of human behavior.
Economists aren't uncovering an underlying truth, they're basically building toy models. These toy models might approximate economic systems in a narrow range of controlled circumstances, but things rapidly deteriorate outside that range. The problem is that people assume the models reflect reality, and make bets based on that assumption.
It would be nice if economists focused on fully Bayesian models with Gaussian process priors and long tailed (ideally Levy alpha-stable with a low alpha bias) likelihood functions. At least then the uncertainty of their models would be absolutely clear, and black swan type events would be partially factored in.
Economists aren't uncovering an underlying truth, they're basically building toy models. These toy models might approximate economic systems in a narrow range of controlled circumstances, but things rapidly deteriorate outside that range. The problem is that people assume the models reflect reality, and make bets based on that assumption.
It would be nice if economists focused on fully Bayesian models with Gaussian process priors and long tailed (ideally Levy alpha-stable with a low alpha bias) likelihood functions. At least then the uncertainty of their models would be absolutely clear, and black swan type events would be partially factored in.
[...] and test them against data
No, in fact they don't. It's hard to believe, I know.
No, in fact they don't. It's hard to believe, I know.
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Science is subject to interpretation on a spectrum of levels. How accurately can biology predict when a cell will split? Perhaps economic supply and demand is statistically predictable in the same fashion.
My Gosh, that is an extremely salient and DEEPLY DEPRESSING point.
I've been drawn to question what to do about that quite often, but I havent happened across an acceptable answer as yet.
I've been drawn to question what to do about that quite often, but I havent happened across an acceptable answer as yet.
My hope would be that the problem isn't "major donors" but rather uneducated and misrepresented citizens. The question about donors or deep states or any other conspiracy type scheme is both how they might affect the purpose of the education system and the integrity of the democratic machinery. These should be questioned, but fixing them might be more achievable than eliminating "major donors" which is certainly tied to income inequality in general, some level of which is most likely desirable.
Major donors have better access to the media than me. I can't educate them if the major donors are spinning opinions. My HN post will reach a negligible proportion of the voters; their prime time ad will reach a huge number.
From what it looks in these comments, almost no one read this article nor know who Bradford Delong is. He's a New Keynesian, arguing no one listened to Keynesians...
Because economics has always been utterly useless in any practical sense. It makes no testable predictions and is no more scientific than any theology. Only because it clothes its dogmas in symbolic notation is it accorded even the slightest bit of respect. The sooner we jettison it from our epistenic frames, the more quickly we will return to something that at least partially resembles sanity.
> It makes no testable predictions
That's not true. There are, for example, GDP growth forecasts published by almost all central banks and many other institutions. They are pretty wrong, most of the time. But they are made, and falsifying them has been pretty easy in the past.
There are many more theories in economics that are, in principle, testable and falsifiable. The problem is that it's difficult to run controlled "experiments" on interventions. You never have a control group in the strict sense, and everything is connected to everything else.
That's not true. There are, for example, GDP growth forecasts published by almost all central banks and many other institutions. They are pretty wrong, most of the time. But they are made, and falsifying them has been pretty easy in the past.
There are many more theories in economics that are, in principle, testable and falsifiable. The problem is that it's difficult to run controlled "experiments" on interventions. You never have a control group in the strict sense, and everything is connected to everything else.
There's accidental wrongness and then there's politically motivated "useful" wrongness:
https://pbs.twimg.com/media/A8rBinMCcAEO59f.jpg
https://pbs.twimg.com/media/A8rBinMCcAEO59f.jpg
I believe that Economics should be a subset of Psychology. It mystifies me how Psych or Sociology classes arent required for a major. One would think that practitioners of a field essentially about human behavior would have insight into actual human behavior. And you would be wrong. Humans are replace by the mythical rational agent
You are correct though. Economists are so proud of their elegant equations that they won't let questions like "Does this model accurately measure reality" stop them.
You are correct though. Economists are so proud of their elegant equations that they won't let questions like "Does this model accurately measure reality" stop them.
Psychology students aren't required to study physics, despite most psychologists believing that psychology is basically just physics at an abstraction
A deeper knowledge of physics wouldn't offer much new insight into psychology.
A deeper knowledge of psychology and/or sociology can help you predict someone's behavior. Instead of assuming utility maximizing "rational" agents, you may be able to more accurately model human behavior.
A deeper knowledge of psychology and/or sociology can help you predict someone's behavior. Instead of assuming utility maximizing "rational" agents, you may be able to more accurately model human behavior.
> it clothes its dogmas in symbolic notation
Are you talking about the Austrians whom try to prove their ideas with praxeology?
Are you talking about the Austrians whom try to prove their ideas with praxeology?
There was another article on academic incentives today that referenced a wonderful quote:
"When a measure is used as a target, it ceases to be a good measure."
My impression is that economics as a whole does not understand this. When you target GDP for example, GDP ceases to be a good measure of anything. The trouble with economics as a science is that its results are used to guide the economy. This creates a feedback loop, making it essentially a self-invalidating discipline.
"When a measure is used as a target, it ceases to be a good measure."
My impression is that economics as a whole does not understand this. When you target GDP for example, GDP ceases to be a good measure of anything. The trouble with economics as a science is that its results are used to guide the economy. This creates a feedback loop, making it essentially a self-invalidating discipline.
That's true if what you measure is only a proxy for some other reality that you actually want to affect, but that is harder to measure. Cholesterol, for example, has long been targeted because it had shown a high correlation to cardiovascular health and life expectancy. The result was a long series of medications that successfully lowered cholesterol, with occasional death as a side effect.
GDP is pretty close to what you actually want to change. There are some other measures, such as social mobility, Gini, or poverty–but rising GDP has almost always been good for people.
GDP is pretty close to what you actually want to change. There are some other measures, such as social mobility, Gini, or poverty–but rising GDP has almost always been good for people.
I'm not convinced GDP is what we want per se. It's a secondary indicator of what we want, but it's also possible to boost GDP by inflating asset, debt, and investment bubbles, and otherwise moving money around un-productively or even counter-productively. This is particularly true in the short term.
What we want is productivity, development, and innovation. Those are primary things that like "good science" in the academic case are not easily distilled into simple measures that can be set as targets.
What we want is productivity, development, and innovation. Those are primary things that like "good science" in the academic case are not easily distilled into simple measures that can be set as targets.
Economists are mostly to be considered historians and even as historians they have very little actual data about the things that make an economy.
This is most visible in the fact that they treat technology as an externality even though its probably the most important factor in understanding our current economy. These economists with their models still assume production as primarily an output of labour are advicing our politicians. Its going to be seen as an era of great ignorance to the factors that really matter to an economy today.
This is most visible in the fact that they treat technology as an externality even though its probably the most important factor in understanding our current economy. These economists with their models still assume production as primarily an output of labour are advicing our politicians. Its going to be seen as an era of great ignorance to the factors that really matter to an economy today.
It is hard to characterize as diverse a field as economics. However, there are some influential sectors of the field of economics that 1) avoids rigorous empirical research, and/or 2) identifies economic policies that benefit their benefactors, and then produce economic theory that support those policies. Which is backwards, or at least distorted.
There is also a troubling cult of personality that plagues the field, where Nobel Prize winners and other luminaries' research is accepted as truth without peer review. Example: Greenspan
Its interesting how DeLong who got so many things wrong is so convinced he is totally correct. He talks about Skidelsky, who is a convicted old Keynesian who somehow survived the 70s to hunt economics.
Many monetarist (and others) have correctly point to these the drop-off in demand in 2008/2009 and said if it continued it would be bad.
The large error that happened, was actually the professions believe in the liquidity trap. Those like Krugman and DeLong who wrongly believed that 'the central bank was out of ammo' and the central bankers who ran around like headless chickens when their New Keynesian models failed at the ZLB. It took smart central bankers like those in Switzerland and others (and eventually the US) to overcome that and simply go back to what is now called 'unconventional monetary policy'. It is of course only called that because New Keynesian labeled it that (its not in their models so it can't possibly be a normal thing to do).
The Fed for example was so convinced that they needed to control the interest rate (because of New Keynesian thinking), they sterilized (selling bonds to prevent the balance sheet from growing) all their bad asset purchases and once they were unable to sustain that and started growing the balance sheet (labeled QE1 after the fact), they switched to paying interest on reserves with the express purpose to not allow the new money to 'get out'. At the same time they are doing this, NGDP is falling of a cliff. Its economic madness and the reason is a false believe in New Keynesian models and specifically the liquidity trap. It is insane to use a model that practically fails when the crisis hits.
Many monetarist (and others) have correctly point to these the drop-off in demand in 2008/2009 and said if it continued it would be bad.
The large error that happened, was actually the professions believe in the liquidity trap. Those like Krugman and DeLong who wrongly believed that 'the central bank was out of ammo' and the central bankers who ran around like headless chickens when their New Keynesian models failed at the ZLB. It took smart central bankers like those in Switzerland and others (and eventually the US) to overcome that and simply go back to what is now called 'unconventional monetary policy'. It is of course only called that because New Keynesian labeled it that (its not in their models so it can't possibly be a normal thing to do).
The Fed for example was so convinced that they needed to control the interest rate (because of New Keynesian thinking), they sterilized (selling bonds to prevent the balance sheet from growing) all their bad asset purchases and once they were unable to sustain that and started growing the balance sheet (labeled QE1 after the fact), they switched to paying interest on reserves with the express purpose to not allow the new money to 'get out'. At the same time they are doing this, NGDP is falling of a cliff. Its economic madness and the reason is a false believe in New Keynesian models and specifically the liquidity trap. It is insane to use a model that practically fails when the crisis hits.
A lot of economics aside from the first year undergrad basics are being contested, I've discussed this issue with several economics professors and their consensus is to use the basics but ignore the more senior stuff.
It's great there isn't a "consensus" between economists, otherwise if that consensus was wrong we would never be able to leave it, like what happens in other sciences.
Because they don't take debt, in particular private debt, seriously, including Krugman and Delong.
Steve Keen explains how wrong this is.
Steve Keen explains how wrong this is.
Nobody thinks national debt doesn't matter. They think the long term costs of endemic poverty or economic stagnation outweigh the long term costs of carrying a deficit.
We have this big problem. We'll just patch over it with this other problem and call that a reasonable strategy.
I think what he's suggesting is that paying down debt through austerity can be more costly than growth, since austerity hurts growth.
The trick is, where does growth come from?
The mistake there is thinking printing money brings you growth. Where has this worked?
Where has deficit spending brought growth?
WW2 would be a good example: http://neweconomicperspectives.org/2013/08/mobilization-and-...
And just imagine if we did the same thing, except instead of building weapons, we invested in healthcare, education, renewable energy, etc.
Once you understand the money system, you understand that we are drastically under performing compared to our potential because our citizens and politicians have a backwards understanding of our money. reminds me of a great little clip by Alan Watts: https://www.youtube.com/watch?v=g-JMHiaYIiU
WW2 would be a good example: http://neweconomicperspectives.org/2013/08/mobilization-and-...
And just imagine if we did the same thing, except instead of building weapons, we invested in healthcare, education, renewable energy, etc.
Once you understand the money system, you understand that we are drastically under performing compared to our potential because our citizens and politicians have a backwards understanding of our money. reminds me of a great little clip by Alan Watts: https://www.youtube.com/watch?v=g-JMHiaYIiU
Firstly there are two ways that money is printed.
1) Government/central bank spend more than they take in taxes.
2) Private banks make loans to private sector (biz or individuals).
Money is destroyed by government running a surplus or by loans being repaid.
Note also that for the government to run a surplus the private sector must run a deficit (decrease savings or increase borrowing) in most circumstances.
The question is where money should be created and how it should be managed and controlled.
1) Government/central bank spend more than they take in taxes.
2) Private banks make loans to private sector (biz or individuals).
Money is destroyed by government running a surplus or by loans being repaid.
Note also that for the government to run a surplus the private sector must run a deficit (decrease savings or increase borrowing) in most circumstances.
The question is where money should be created and how it should be managed and controlled.
Money-Debt also expires via bankruptcy and gets eaten away via inflation.
Bankruptcy is actually the way to reduce debt without destroying the matching money (but may have knock on effects on further lending and related money creation).
Inflation is less clear cut and comes in many forms, assets, import costs, wages, consumer goods.
Inflation is less clear cut and comes in many forms, assets, import costs, wages, consumer goods.
Yes, that's all true. I'm just balking at the idea that "austerity hurts growth". I think the alternative hurts growth even more.
Firstly, empirical evidence suggests otherwise. Political instability and inequality, both consequences of austerity, significantly hamper long-term growth and innovation. No country ever went from poor to rich by neglecting to invest in its people and infrastructure. Lots of countries have gone from rich to poor that way though.
Secondly, even if this were true what does it matter? Many people don't care about how fast the economy is growing overall if their personal fortunes are dwindling. That's just robbing Peter to pay Paul, except in this case Paul is already filthy rich.
Secondly, even if this were true what does it matter? Many people don't care about how fast the economy is growing overall if their personal fortunes are dwindling. That's just robbing Peter to pay Paul, except in this case Paul is already filthy rich.
Why does money need to be managed and controlled?
Real money inherently has a limited supply, so there is no need for it to be managed or controlled; the market does that on its own. However, the fiat currencies that are used by central banks around the world are not real money. The arrogance of central banks thinking they can manage and control the economic interactions of millions of people in a country is what leads to these great depressions and recessions.
Real money inherently has a limited supply, so there is no need for it to be managed or controlled; the market does that on its own. However, the fiat currencies that are used by central banks around the world are not real money. The arrogance of central banks thinking they can manage and control the economic interactions of millions of people in a country is what leads to these great depressions and recessions.
Economic crises today are nowhere near the disasters they were in the past. It's pretty obvious that the system's stability has increased–in the past, depression could mean starvation.
> The arrogance of central banks thinking they can manage and control the economic interactions of millions of people in a country...
The arrogance of physicians thinking they can manage and control the biological interactions of billions of cells...
Just because something has a lot of moving parts doesn't make it intractable. "Complex" is just latin for "put together", and we can always try to take it apart, learn about individual parts, and work our way up.
In any case, not doing anything is also a decision. It's a completely arbitrary idea–as if monetary policy were some sort of intrusion into the "natural law" of the economy.
> The arrogance of central banks thinking they can manage and control the economic interactions of millions of people in a country...
The arrogance of physicians thinking they can manage and control the biological interactions of billions of cells...
Just because something has a lot of moving parts doesn't make it intractable. "Complex" is just latin for "put together", and we can always try to take it apart, learn about individual parts, and work our way up.
In any case, not doing anything is also a decision. It's a completely arbitrary idea–as if monetary policy were some sort of intrusion into the "natural law" of the economy.
I don't think that the rarity of starvation in modern times is due to central banks, but instead due to advances in farming that allows a very small percentage of people to produce enough food for everyone.
Physicians don't think they can manage and control the billions of cells in our bodies; we still don't understand how all of our cells even work. Physicians apply tested practices to individual people and hope that it addresses whatever medical problem is being observed. They understand that treatments are not one-size-fits-all and that mistakes can kill people. They also understand that our bodies self regulate and they are only trying to address a specific imbalance in their specific patient, not something that applies to an entire population.
Central banks think they can turn a couple of knobs (currency supply and interest rates) and control an entire economy made up of millions of people. Using the physician example, that's like thinking that the only two treatments needed for any medical condition are adjustments to our blood level and body temperature.
Monetary policy is a newer invention in the history of human civilization and even then, it wasn't always applied so universally. Monetary policy can only exist with central banks.
Physicians don't think they can manage and control the billions of cells in our bodies; we still don't understand how all of our cells even work. Physicians apply tested practices to individual people and hope that it addresses whatever medical problem is being observed. They understand that treatments are not one-size-fits-all and that mistakes can kill people. They also understand that our bodies self regulate and they are only trying to address a specific imbalance in their specific patient, not something that applies to an entire population.
Central banks think they can turn a couple of knobs (currency supply and interest rates) and control an entire economy made up of millions of people. Using the physician example, that's like thinking that the only two treatments needed for any medical condition are adjustments to our blood level and body temperature.
Monetary policy is a newer invention in the history of human civilization and even then, it wasn't always applied so universally. Monetary policy can only exist with central banks.
what is "real money" to you?
Fiat currency is real money to me. It's the only thing I can pay my taxes with.
I don't know who defined this originally, but the six characteristics that money needs to have are durability, divisibility, portability, acceptability, limited supply, and uniformity. Additionally, money needs to serve as a store of value, a unit of account, and as a medium of exchange.
Fiat currencies do not have a limited supply and are therefore not a store of value (i.e., inflation constantly lowers the value of fiat currencies). The main reason that fiat currencies are still used as a medium of exchange is for the exact reason you mentioned: governments mandate their usage to pay taxes.
As an example, gold and silver have been used as money for 1000s of years because they meet all of those requirements.
Fiat currencies do not have a limited supply and are therefore not a store of value (i.e., inflation constantly lowers the value of fiat currencies). The main reason that fiat currencies are still used as a medium of exchange is for the exact reason you mentioned: governments mandate their usage to pay taxes.
As an example, gold and silver have been used as money for 1000s of years because they meet all of those requirements.
The idea is that there are certain investments that give good returns. Governments can currently borrow at rates pretty close to 0%–even negative rates have popped up here and there. And you would actually have to subtract inflation from that as well.
So if some investment, say a new airport or funding for the National Science Foundation increases future growth even just slightly, it's perfectly fine to finance it with debt.
So if some investment, say a new airport or funding for the National Science Foundation increases future growth even just slightly, it's perfectly fine to finance it with debt.
In all western societies, looking at the great lifestyle differences between the 1970s and now.
Is that growth, or does that fall under "eating the seed corn"? I agree the money supply has to expand when the economy expands, but that's not the same thing as printing a bunch of money and spending it during a recession.
In theory in a properly managed recovery from a recession bad debt is eliminated via loan restructuring and new more productive debt is created to replace it. And income insurance programs[1] are used to support demand. Austerity during a recession works poorly because instead of replacing unproductive debt with new more productive debt, austerity attempts to subsidize the owners of bad debt by taxing demand.
[1] Unemployment insurance, welfare, state run retirement, pensions, etc.
[1] Unemployment insurance, welfare, state run retirement, pensions, etc.
The elephant in the room is we don't have enough inflation to re-balance the ratio of income to debt. As a result the ratio of debt to income keeps growing.
Most people don't understand what the "national debt" is. It's the savings of the private sector.
Randy Wray sets the record straight in 100 seconds: https://www.youtube.com/watch?v=c4sD-JDVwwQ
Randy Wray sets the record straight in 100 seconds: https://www.youtube.com/watch?v=c4sD-JDVwwQ
Nobody takes Steve Keen seriously. He doesn't even have a university job anymore.
Are you sure about that?
http://fass.kingston.ac.uk/faculty/staff/cv.php?staffnum=104...
http://fass.kingston.ac.uk/faculty/staff/cv.php?staffnum=104...
Check his patreon.
Because due to random luck they happened to be vaguely accurate over 1936-2009?
Economics went down a rathole in the 1960's. Happens to a lot of fields.
Two things in our universe that are impossible: Modeling chaos and knowing the future.
Economists model chaos and use that model to predict the future.
Economists model chaos and use that model to predict the future.
The weather forecast is pretty close–it's where chaos theory originated after all, and it's got "forecast" in its name.
And forecasts in that realm have improved tremendously over the last years.
And forecasts in that realm have improved tremendously over the last years.
Basic macroeconomics did fine. Austerity side Alesina/Ardagna/Reinhart/Rogoff camp was utterly wrong. Spreadsheet errors in their studies that became basis for political action etc. Even after the austerity approach has been shown to be baseless in academia it continues to live in politics. Politicians have little or no ability to evaluate what they hear or read.
Backgrounder:
How the Case for Austerity Has Crumbled http://www.nybooks.com/articles/2013/06/06/how-case-austerit...