What’s
Wrong Today:
Happy Halloween! And now for something truly scary:a Guardian news article by Aditya Chakrabortty entitled “Mainstream economics is in denial: The world has changed”. From Chakrabortty:
Cambridge, to discuss the economic crisis, although the quotidian misery of
that topic seemed a world away from the honeyed quads and endowment plush of this place
The
thesis in the original article is that despite the crash, many bold face
economists do not really use a feedback loop of facts to study the big picture. They just
recycle old theories and continue to prop up bad fiscal policy. The money
quote:
economist Victoria
Bateman…demolished her colleagues. They’d been stupidly cocky before the
crash – remember the 2003 boast from Nobel prizewinner Robert Lucas that the
“central problem of depression-prevention has been solved”? – and had
learned no lessons since. Yet they remained the seers of choice for prime
ministers and presidents. She ended: “If you want to hang anyone for the
crisis, hang me – and my fellow economists.”
This
1980’s cartoon crystallizes the problem with economists. It is by Mark Stamaty,
who drew Washingtoon for the WaPo for many years. It is
nice to show it on the day after the World Series has ended. Thanks to Rod
Bingaman for sharing:
Here are a few more bad judgments by really famous economists:
reached what looks like a permanently high plateau.” – Irving Fisher, Professor of Economics, Yale University, 1929
“Many of the new
financial products that have been created, with financial derivatives being the
most notable, contribute economic value by unbundling risks and shifting them
in a highly calibrated manner. Although these instruments cannot reduce the
risk inherent in real assets, they can redistribute it in a way that induces
more investment in real assets and, hence, engenders higher productivity and
standards of living.” Alan Greenspan – March 6, 2000
“We’ve never had a
decline in house prices on a nationwide basis. So, what I think what is more
likely is that house prices will slow, maybe stabilize, might slow consumption
spending a bit. I don’t think it’s gonna drive the economy too far from its
full employment path, though.” Ben Bernanke –
July 2005
Traditional
economics presents an “assumed” model of reality, namely an efficient
market where everyone is perfectly rational and has the same tastes and
preferences. Many then ignore any question of how well this corresponds to the world
we live in, the one that includes 30 years of financialization of various risk
assets. Models and markets can be and are often manipulated.
This is
another way of saying that our economy is a very complex system. It is dynamic
not static, and very difficult to predict or control. It is permeated by interactions
between inputs and outputs. “Common sense” about how small changes
should impact the big picture rarely hold in the real world where global
economic disruption is the order of the day.
Economics
isn’t quackery, but there are certainly quack economists. Also, you didn’t need
a PhD to understand the banking collapse. It was an out-of-control derivatives market,
which fueled an out-of-control mortgage market that brought down our economy.
Too many banks risked too much of their capital in a stretch for profits. All the while, many economists, mainly those who worshiped at the
feet of Alan Greenspan and Wall Street, told us that financial industry
deregulation was OK.
And our
government lacked the political courage to try to prevent the accident that was
about to happen. After all, Greenspan and Bernanke both said all was well.
We have
lived with the outcome of the current orthodoxy in political economy, and it took the
global economy to the brink of catastrophe. Now, both political parties are trying
to balance the books on the backs of working people and poor, adding a raft
of discretionary budget cuts and a creeping dismantling of our social safety
net, our infrastructure and our public services.
All while
using the tax code to build more wealth for the top one-tenth of one percent in
America.
There is
no area of our politics which cries out more for an evidence-based approach
than in the politics of fiscal policy. How it is possible that discredited evidence-free
economic ideologies (like trickle down, austerity and tax cuts for the wealthy)
can get passed as policy decisions that affect the lives of millions? Often in
a nearly fact-free debate?
Here are a
few facts that should be driving our discussion about fiscal policy: The continued
worsening of income disparity in the US, which is caused principally by lowering
of upper-income taxation. That started during the Johnson administration and
ended with Reagan. During that period, top-tier tax levels were lowered from
above 75% to 35% today. The shift in income from the public’s treasury to private
pockets is obvious: The share of total income of the Top 10% of American
households has increased from 31.5% to 48.2% over the past six decades:
1960 –
33.8%
1970 – 31.5%
1980 – 32.9%
1990 – 38.8%
2000 – 43.1%
2012 – 48.2%
According to State of
Working America, the Forbes 400, a thin slice of the wealthiest people in
the United States have (no surprise) been doing very well. From 1982 to 2011,
their average wealth increased
from $1.1 billion to $3.8 billion, and their collective net worth was $1.5
trillion. By comparison, in 2010, the
collective net worth of the entire bottom 60% of the wealth distribution,
over 70 million households, was only $900 billion.
In short, changes in
taxes exacerbated the steep rise in income inequality over this period. Good economics and good fiscal
policy must test itself against outcomes. Is this the outcome our policies
should produce? This is the result of all the sophistry that afflicts our
present-day economic debate, especially from the Right about income
distribution.
For how
much longer do we have to put up with the Ayn-Randian nonsense that claims that
entrepreneurial activity is stifled by the oppression of “government
regulation” or “uncertainty”? What is oppressing is this: 15% of the
American population is below the Poverty Threshold with little chance of
movement into the middle class. That’s about 50 million American men, women and
children.
How long are we
going to put up with certain economists on the Right helping perpetuate such economic
injustice?
How long will we
tolerate politicians who willingly remain economic policy Neanderthals because it helps
their wallets?
If economists on the rights can’t recant austerity and uncertainty, then they have learned nothing.