Economics

Here’s a link to Paul Krugman’s blog at the New York Times: Op-Ed Columnist – Paul Krugman Blog

He asks a very valid question: why was George Bush’s record on employment so bad? When you look at the month to month job generation that took place over the past eight years you are struck by how weak the numbers are. There were only a few months during which employment growth came close to the monthly average of the Clinton administration, and there were no peaks anywhere close to high points of that era.

The vaunted tax cuts of 2001 and 2003 did not deliver a healthy economy. Economic growth was entirely average subsequently. The entire Bush era pales by comparison with the Clinton era and is not even up to snuff with the average post World War II period. Not just employment fell short. Wages did too.

Bush’s legendary incompetence and his total lack of interest would have left us with a weakened economy even if the disaster brought on by his administration’s inept deregulation hadn’t spun us into our current downturn.

It really takes some doing to create the train wreck that Bush is leaving us with. He surely gets marks for the epic proportions of the disaster he wrought.

We need to be very clear headed about assigning blame. While presidents should not be fully blamed for everything that occurs on their watch … Clinton was lucky as well as astute, while Bush was unlucky as well as stupid … the overall shape of an economy over eight full years is attributable to the policies that a president signs into law. There is no getting away from Bush’s deregulatory bias. More potently: where he didn’t specifically deregulate he undermined. The SEC is an example. He did very little actual deregulation of SEC matters, instead he allowed that agency to atrophy. During a period of immense innovation and expansion in the financial sector he let the number of SEC auditors decline by over a 1,000. It was his neglect of government caused by his extreme anti-government ideology that is a more direct cause of today’s disaster, especially the Madoff scandal.

So while we have to wait for future studies of the Bush era to explain more fully his failure, that he failed is beyond dispute.

Obama has very tiny shoes to fill, but awesome problems to overcome. The employment outlook being high on the list.

In case you missed it this morning the unemployment numbers fro December were extremely disappointing. They showed the sharpest drop for a very long time and brought 2008 to a close as the worst year since 1945 – a year that America was readjusting to peace with millions of recently de-mobbed soldiers flooding the employment lines. Here’s the New York Times story: Unemployment Soars to Highest Level in 16 Years

Even now I read people making apologies for George Bush and his administration. Dick Cheney has said that no one could have foreseen the current malaise.

That is utter nonsense. Plenty of people did indeed forecast this mess. I posted Roubinis’ forecast this morning: he was clear about what he saw coming two or three years ago. And he was not alone. Yours truly predicted a downturn also!

The people now scurrying around to defend Bush are ideologically predisposed to defend market system economics theories. They didn’t foresee today’s events because they didn’t want to foresee them. Take Alan Greenspan as an example. he failed to deflate the housing bubble precisely because he was so driven by free market thinking and his obsession with Ayn Rand that he simply was immobilized even as the extent of the bubble became obvious. Similarly, to argue that deregulation was not at the root of the collapse of the financial system is an extraordinary act of denial. The groupthink that infested our elites made them collectively incapable of seeing the onrushing tsunami. that doesn’t mean that no one foresaw the consequences of the reckless policies that have been implemented since Reagan.

That they can sit around and claim otherwise merely means that they are not qualified to help in the reconstruction. they still don’t get that the current state of the economy is a massive and painful indictment of free market thinking.

The problem is that we are left with very thin ranks of independent thinkers to draw on for help.

Meanwhile that growing line of unemployed workers is a suitable monument both to Bush’s misguided belief in markets and to his deliberate undermining of the competency of government.

That goodness he’s almost gone.

Just for fun, and to ruin your weekend, here’s Nouriel Roubini’s forecast for 2009, hot from the presses at MarketWatch:
Roubini forecasts recession will last 2 years – MarketWatch

Why take notice of Roubini? Well: he was one of the few who forecast the current mess. Sure he grandstands and is trying to make a buck from being partly right. But hey, its better than nothing.

And I happen to agree with what he is predicting.

2009 will be tough to put it mildly.

The comments are beginning to pile up. It seems that an increasing number of commentators are agreeing that the economic stimulus plan being proposed by the incoming Obama administration is nowhere near large enough, and in some cases ineffective. Here’s one such comment from John Judis in The New Republic: Not Doing Enough

Let me repeat my position: the plan being put forward includes too much in tax cuts, which are far less effective in stimulating GDP growth than direct government spending, and is too small overall.

The gap between the economy’s actual activity and its potential activity is now estimated, by the Congressional Budget Office, to be a vast 8% to 9%. That means we need a stimulus of over $1 trillion, or more than $250 billion more than Obama is proposing.

I am baffled by the tepid performance Obama is putting on so far. he seems more concerned with satisfying GOP Senators than with dealing with the economy’s ills. He needs to recall that he swept into power on the back of national disgruntlement with those self same GOP Senators and there erstwhile leader George Bush. The economy’s decline is a repudiation of all the GOP policies and ideas. So why do we need to pander to a bunch of Senators whose ideas are patently useless? I don’t know. But apparently Obama thinks he needs to do just that.

This does not augur well for the future and such thorny issues as health care.

Straight from the New York Times this morning is Uwe Reinhardt’s brief but excellent comment on the inability of the economics profession to foresee the current crisis: An Economist?¢?‚¬?„¢s Mea Culpa – Economix Blog – NYTimes.com

Those of you who have to listen to me regularly know that I am counted among those who regard standard economic theory with disdain. It is an excellent system of thought for understanding the behavior of automatons or highly predictable animals – ants come to mind – but has virtually nothing to do with actual real live people. So it is no surprise to me that economists totally failed to predict the meltdown of our economy.

Economic theory is developed around several truly absurd assumptions that are taken as axiomatic. It then proceeds to ‘prove’ certain ‘laws’ each of which would crumble without those axioms. And wherever the real world intrudes with awkward problems economists ‘simplify’ conveniently to maintain the integrity of their models. Intelligent outsiders have criticized the inner workings of economics for years. Many of their criticisms, had they been taken seriously, would have helped allow economists to put together theories capable of predicting the current crisis. Instead they were dismissed peremptorily.

For the past three or four decades economics has drifted further and further away from having any empirical content. That is not to say economists don’t work with real world data: they do. What they fail to do is to adapt their theories to what they observed. Instead they rely on the neat trick of calling anything that does not conform with their theories a ‘market failure’. That way they keep their core beliefs pristine and untainted by the dirtiness of human foibles.

So economics has become the study of the properties of economic models. It is not the study of economies. That’s great if the models relate to actual economies. If they don’t, then look out.

While I am sure many, or most, economists will dismiss my comments as an amateur rant, and I will freely admit that I have not studied many of standard theory’s arcane corners, I am clearly not alone. Economics has violated the ancient dictum that guides medicine: ‘first do no harm’. Standard economic theory, especially its fervent advocacy of untrammeled ‘free’ markets is exactly and precisely to blame for our current predicament. The evidence of the theory’s failure is all around us in the form of our economy’s collapse.

Perhaps an analogy will help. Standard theory is to what we need as Ptolemy is to Kepler. It is time to replace standard theory and to stop piling the blame on the real world’s failure to conform to the utopian mechanisms that govern the outmoded and dangerous concepts at its core.

We haven’t just suffered a ‘market failure’ we have suffered a ‘theory failure’.

Economists need to lose their hubris and get back to work. Perhaps they can salvage some of their ideas. One thing we can say with certainty in these highly uncertain times is that neoclassical economics is wrong.

And Reinhardt’s column today suggests that he, at least, knows it.

Note:

A few of you have asked why I get so worked up over this. Here’s why: neoclassical economic theory purports to explain why markets, if left to themselves, are peerless in allocating wealth optimally. Economics is essentially the study of the allocation of wealth rather than the creation of wealth. This excessive advocacy of markets has long been embraced by politicians of the right. Reagan was able to feel justified in his absurd attack on government because he had economists like Milton Friedman providing what appeared to be intellectual support. In other words the right wingers felt not just morally correct, but intellectually correct also. This fed their zeal. Politicians on the left always felt weak by the same token: they had to explain their reliance on government intervention in things like health care in the face of a chorus of howling and near religious scorn coming from the mainstream economics profession. The logical extension of this political reality was that the political elites of the last thirty years have moved uniformly to the right in terms of economic policy. The excessive deregulation of the Bush administration was not some odd peccadillo of a bunch of corporatists, but a strongly held conviction backed by economic theory. They honestly thought they were right.

Economic theory gave them intellectual cover for their ideological quest to engage in class warfare.

So economic theorists have a lot of blood on their hands. It’s time they admitted their culpability.

That’s why this is important.