Dream Turns into a Nightmare

Obama's Dream Act would have been a good one - and something that makes sense economically to provide an incentive for the youngest and smartest of the immigrants to this country to want to remain in this country and aid in its growth.  Instead, Republicans wanted to remain ideologues and politicians as is their norm.

More on Deirdre McCloskey and thinking about economics (without equations)

I've taken to reading her book, "How to be Human *Though an Economist."
It's amazing, and I find myself agreeing with much of her sentiment.  In the book she offers up a letter she wrote to a graduate student that was quickly becoming disillusioned with the profession.   McCloskey's basic answer is to 'buck up and bare it, and then when you graduate, change the profession.'

I've been thinking on this.  Given the economics (mainstream) profession is in complete disarray and destined for futility in its general form, which sadly I think it is, how can we change this - how can we alter its future?


The fact that there might not be an answer scares me.  The fact that there might not be an answer is why I haven't and don't intend to pursue a Phd. in Economics.  McCloskey doesn't have the answer - she has the hope, but not the answer.

Consider:
let's say I, or some disillusioned grad student, make it through Phd dissertations etc. and become a full-time faculty-tenure-track economist.  That is not the answer.  Because now, with few exception, my bosses are 'let's run this equation to fix the world despite not knowing what the world is about'-style economists.   The vast majority of schools around the world, and particularly in the US have this problem.  Coupled with academia's 'boy's club' way of being able to publish research - this does not lend itself to true, useful, meaningful, what McCloskey would call "ethical" scientific analysis.

So, the individual person can't change the profession - the barriers to change are too great.  The institutions themselves are unlikely to change.  Why?  One, again since its all one big boy's club, it's best to not rock the boat.  But more importantly, economics has become largely invaded by ideologues who form opinions first and then conduct analysis regardless of the real world.  Part of that ideology is to 'support' the business class no matter the theory.  It's a simple equation really.  unethical, pandering economic analysis today + money and other non-pecuniary support from the business elite = unethical, pandering economic analysis tomorrow.

So, you may ask if individual students, professors and institutions can't change economics, perhaps the business community can?  But why?  Quid pro quo Clarisse.

Who then, what then, is left?

The government?  Doubtful.  The lay-person?  Hardly.

I fear my friends we are in a catch-22.  I can't see the light.  More importantly, I can't see a WAY to find the light.

I invite your opinions - and if you are of the opinion that the mainstream economics profession is on sound solid ground - then I'm afraid you are delusional.

Amen Deirdre McCloskey

Interview from "National Review"

"In college you got the claim that Greed is Good, and anyway people are Max U sociopaths, regardless of what all the scientific evidence gathered on the point says to the contrary. I would advise them, of course, to read my book How to Be Human*: *Though an Economist, which is advice to young economists about maintaining morale and integrity — and getting the scientific task done while retaining common sense. Beyond that, Educate thyself. Read widely, having acquired somewhere a deep knowledge of an economics of some sort. We have enough amoral idiot savants in the study of the economy. We need some fully educated humans. We need a humanomics, not more freakonomics."

Excess Demand for Money

I've been thinking about this debate (also here).  First, I should point out that I'm somewhat sympathetic to the Austrian idea of mis-allocation (or re-calculation as these guys put it) in business cycles.  I think they overdo their hypothesis, but that discussion is for a different time, because also overdone is the idea that recessions are largely monetary (or due mostly to an excess demand for money).  I don't buy that as the whole story either.

For one thing, the mainstream concept of 'money' has to me always been a rather dubious and near-pointless definition in an age where credit is king.  To be more succinct, we don't have a demand for money problem, we have a demand for credit problem.  It's not that people are demanding too much money relative to production, they are demanding too little credit.  We need only look at the Fed's stats to see this. 
Interest rates didn't rise because people started demanding more money - that's always been an incorrect causal relationship with mainstream theory.  Interest rate spreads started rising due to the financial crisis and uncertainties therein of future profits and sustainability.  Those increasing spreads together with the uncertainty etc. meant that people were demanding lesser and lesser loans on credit.   Demand for money is nothing more than a by-product and a symptom of the need for 'flight to safety.'  Obviously, in a major financial crisis, it makes sense to flock to the dollar and to 'money'.

And, when I say "...too little credit..." I don't want to imply that that is a bad thing.  From a certain perspective, and certainly from an Austrian one, it is necessary for credit to drop in order for this resetting to happen.  In other words, it is the very fact that we had too much credit (an over-indulgence) that was a significant cause of the problem in the first place so it is only natural that the economy tighten credit now to shore up balance sheets, payoff past debts, etc.

Until economists leave their nice conventional notions of 'money demand' behind, we will never really get down to the real causes and fixes for these types of issues.

On Inquality and economic growth - relationship

Most mainstream econ texts try to draw clear lines between what it purports economics should be about - economic growth, and what economics should not be about - equality/inequality.  They pretend inequality should be and can be analyzed separately as if either it is not important (or as important as efficiency and growth), or not objective enough for a science so grounded in logic and mathematics to study.

Prof. Mankiw (and his lines of textbooks) claims no different.  
...All this except the fact that numerous recent studies show that while too much inequality can lead to low economic growth, too much economic growth can lead to unsustainable (or unpalatable inequality).

So long as mainstream economics continues down this path of trying to separate efficiency from equity; so long as economics refuses to see the inter-relationships between political and social economy and 'economics',  it will continue to leave mainstream economics in its present state -  a neutered science with limited applicability to reality.

On overconsumption

Karl Smith of "Modeled behavior" opines that the theory of 'overconsumption' doesn't make sense.

This 'theory' (I am reluctant to say this is a very formal theory) says that  a society that has a period of high spending relative to saving and/or production falters will often have to 'pay' for their habits by a succeeding period of low employment and economic well-being.

I might agree with Karl at least by saying that this so-called theory is an over-simplification.  But, I disagree with him that the idea in general has no basis in logic, or even economics.  

Basic mainstream economics teaches that there are tradeoffs.  Specifically, in the macro sense, there is a tradeoff between consumption today or consumption tomorrow, or stated another way, consumption today and saving/investment today.  That of course is by itself an over-simplification but none-the-less has basis in truth.   For a given level of resources, the more you use in consumption today - especially that financed by expectations of future production as opposed to actual real wealth, the worse off you may be tomorrow. 

From a pluralist / heterodox perspective, the fact is we spent the better part of a decade (or more) borrowing on credit (from banks and from foreigners) in order to spend beyond our level of sustainable production.   This, in conjunction with the Fed's accommodation of this, inevitably and logically, led to a bust and recession.   Smith makes it seem like people have the choice to work more today in order to make up for their over-consumption of the past.  But that is the absurd logical fallacy.  If employees had that choice, we wouldn't be in the situation we are in.  The point is that recessions aren't about present choices, they are about paying for past choices.   We'd like to work but we can't because our employers and their financial supporters are in debt and in a climate of uncertainty and can't afford to hire us.  We can't afford this unemployment because we ourselves are in debt from our luxurious expenses on credit.  Where does Mr. Smith think that debt came from? 

Wage Freezes for All?

Today Obama announced a largely symbolic gesture to freeze federal employee pay for 2 years.  That's all fine and good, but I've been thinking about this as a potential broader policy too, particularly in relation to some post-Keyensian economists who are calling for dramatic 'employment' tool(s).  They are in favor of a tool that basically negates the need to try and effect unemployment indirectly with interest rates and spending, and replacing it with a tool whereby the government would hire droves of people during recessions (kind of like a 'New Deal' instrument).  I've mentioned before I'm not in favor of such an idea in large part because it sounds needlessly bureaucratic, full of moral hazard, and could theoretically permanently increase the size of government to a dramatic and largely inefficient level.

However, what if the instrument were not employment levels but the actual wage levels - private wages - the government could control temporarily.   It wouldn't be bureaucratic since the government could pronounce say that, until such time X, Y, Z (sufficient employment/GDP growth has been attained), job-earned wages (including bonuses) are to be kept frozen across the board for EVERYONE.   This in effect would be a way around the New-Keynesian 'sticky wage / sticky price' problem.   According to classical theory if wages were allowed to freely adjust in recessions, employment would not fall as hard.   Economists point out that wages often don't fall downward (or even stagnate - many keep growing) due to union contracts, social pressure/norms, maintaining a sense of morale, etc.   But what if the government had all the power to set wages during extreme downturns?  That would take the stigma off of private employers.

It wouldn't be without issues: timing would still be important.  Rules vs. discretion would be as well.  I would imagine such a program wouldn't work (politically or otherwise) if it was left to discretion, but if certain rules were enacted as law, it might stand a chance.   What the rule is is best left to economists more mathematically inclined that myself.  I suspect tying it positively to some level of inflation would be useful such that the real wage keeps a level of stability.  Unions wouldn't be particularly happy about governments temporarily over-riding their contracts, etc.  But, I think some of them would come around when they saw that the alternative was significant unemployment.   Perhaps the biggest issue is the same big issue with all forms of fiscal/government-mandated stimulus - it all starts with politics, not economics.  That is to say, economics cannot be separated from its political cousin in the real world.  Devising a program rule that would withstand changes in political climate or parties should be paramount - but how one would go about doing that is a bit beyond me at this point....

At best, it could ease unemployment in recessions - create a more direct target for unemployment.  At worst, it could provide evidence for or against the very underpinnings of New Keynesian economics.