Why Were Economists as a Group as Useless Over 2010-2014 as Over 1929-1935?
bradford-delong.com
bradford-delong.com
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...
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.
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...
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
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.
(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...
https://rwer.wordpress.com/2013/11/09/the-scientific-illusio...
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.
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 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.
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.
People who criticize what is and is not counted and don't specify which unemployment number are uninformed.
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.
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.
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.
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.
That said, it's generally doable to do serious forecasts for a few months in advance, but the error bars explode after that.
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.
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.
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.
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".
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.
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...
See: climate science.
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.
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.
No, in fact they don't. It's hard to believe, I know.
I've been drawn to question what to do about that quite often, but I havent happened across an acceptable answer as yet.
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.
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.
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.
Are you talking about the Austrians whom try to prove their ideas with praxeology?
"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.
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.
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.
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.
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.
Steve Keen explains how wrong this is.
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
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.
Inflation is less clear cut and comes in many forms, assets, import costs, wages, consumer goods.
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.
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.
> 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.
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.
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.
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.
[1] Unemployment insurance, welfare, state run retirement, pensions, etc.
Randy Wray sets the record straight in 100 seconds: https://www.youtube.com/watch?v=c4sD-JDVwwQ
http://fass.kingston.ac.uk/faculty/staff/cv.php?staffnum=104...
Economists model chaos and use that model to predict the future.
And forecasts in that realm have improved tremendously over the last years.