Economics

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Decline and Fall

 

One of the features of American politics during the past few decades has been the emphasis on togetherness. Yes I know that sounds absurd, but hear me out. Our political landscape has been carefully segregated into two separate and distinct zones: that of social conflict and that of economic harmony.

The zone of social conflict is where the great cultural war has been fought. It began as a counter-revolution to the advances of the 1960’s and especially to the establishment of civil and women’s rights as central political themes. The conservative elements of society who found both those rights movements repugnant and/or destabilizing gradually regrouped and then emerged with sufficient force to condemn an entire generation to fruitless combat. The entire political landscape became littered with “them or us” issues cast in stark contrast and drained entirely of any semblance of nuance. Either you were “for” something or you were “against” it. There was no room for anything that could resemble compromise.

This phenomenon strangled the entire political class. It sucked the air out of dialog and caused every single issue to be seen through an unreal lens. Nothing is so black and white, yet everything became seen as such. Politics thus was infused with bitterness and rancor that had no hope of being eliminated. Every election ratcheted that stakes higher. And no resolution was ever found.

The media too was sucked into the mire. It began to speak of the world as having two halves. In order to be balanced the media then described both sides as moral equivalents regardless of history or facts. Every time someone said something extreme on one side the media responded by trying to locate someone on the other side who could be shown to be as equally extreme. The media thus lost any ability to provide a moral compass. It simply became a score keeper unable to tell the difference between the moral implications or foundations of any argument. Reporting became an accounting exercise.

This whirl of enmity and radical position-taking ironically resulted in what we all observe as the political gridlock we fault politicians for. So deep were the passions on either side that no movement was possible, no compromise available, and thus no resolution likely. Instead cynicism and disillusionment infected the electorate to the extent that trust in the political process has virtually broken down. Ultimately both sides in the war have become too intransigent and frustrated for progress. We need them simply to fade away. Only a new generation can resolve the battles begun back in the 1960’s, which is, perhaps, what we are now seeing in the attitudes of you’re people in the current selection. They seem to be less apt to fight over social issues, most of which they accept as being settled, instead they are looking at something else.

Which gets me to the second great zone: that of economic harmony.

Here the media and the political elite went in a totally different direction. Instead of the arguments being filled with insurmountable divisions they were deliberately cast as technical squabbles within an over-arching zone of agreement. Here’s how it happened:

During the great counter-revolution of the 1980’s the Democratic party chose to fight only on social issues. It surrendered completely on economic issues. It never attempted to offer the electorate an alternative too the neoliberalism of Reagan. Instead it accepted hook line and sinker the neoliberal meta-themes, and contend itself with tinkering around the edges.

Bill Clinton led the charge in this. His economic program was distinctly right of center, despite being criticized by his opponents as leftish.

Contrary to the bitterness on social issues the economic debates became engulfed in techno-speak. Naturally the economics profession was deeply involved in this descent into jargon. Nor were the two sides so divided: not only did the Democrats become advocates of neoliberalism, but the Republicans have jumped about all over the place on issues such as the Federal deficit. After all it was Dick Cheney who famously told us all that depicts don’t matter, and it was Reagan himself who first plunged the nation into permanent red ink. The Democrats lambasted Republican presidents for fiscal irresponsibility, and the Republicans happily grew the size of government whilst proselytizing the virtues of small government. Nothing was quite as it seemed. The extent of overlap on economic policy was remarkable.

This is what I mean by harmony.

Neither party, then, during the entire period of the cultural wars was being entirely honest with their respective supporters on economic matters. Indeed, the unity was quite the opposite from the divisions being presented to us on the social side.

The media too became part of the illusion. Anyone beginning to discuss an alternative to the idea that “a rising tide floats all boats” was castigated as fostering class war. And nothing is worse, apparently, than fostering class war.

Except, of course, that the unity between the parties was itself founded on class war. Neoliberalism is a particularly pernicious form of class war because it prides itself on being founded on classical economic principles. Which, as we all have been taught, is “positive” economics drained of all taint of moral overlay and other forms of bias. Positive economics tells us that the economy just is. And economists are simply purveyors of the oft times dismal news: stuff happens in the economy and we can’t get in the way. Least of all should we deploy the government since, by definition, the government is an irritant in the market place and we all know that the market place is always right. So there.

The unity of the parties in the aftermath of the Democratic capitulation coincided with the growing dependence of our political system on cash. Politics became a business. Parties set up great cash raising efforts. Candidates became enthralled by cash givers. Any other part of the world would see this  process as corrupt. Here in America we call it free speech.

But corruption is corruption. With the greatest corruption coming not during but after the elections. This is when Congress is awash with corporate and wealthy donor lobbying.

It is little surprise then that our economy is beholden to those who have lots of cash. It is little surprise that the greater portion of our collective prosperity is captured and enjoyed by those with lots of cash.

There is nothing new in this observation. The harmony between the parties gave cover for the heist. A contentious debate would have exposed the robbery more clearly. It would have been in someone’s interest to break ranks.

Which gets us back to the decline and fall. or, rather, the perception of it.

What sets this election apart from those of the last few decades is that there is a difference. The economic harmony is being challenged. Whether the challenge is enough to break through this year I doubt. But the challenge will not go away. The critique is there for all to see: Hillary Clinton is firmly part of the neoliberal past. Her hands are all over the economy that we now have. If that economy is failing the majority of people, then Hillary Clinton has failed the majority of the people. She cannot claim vast experience and insider advantages without also owning the consequences. Our economy sucks for most people. Therefore, for most people, Hillary Clinton sucks.

The decline and fall is not of America, but of the harmonious fallacy of the elite. The harmony is breaking. Which is good news for most of us.

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Secular Stagnation – A Highly Local View

I lead a local discussion group here in Vermont. The group is small, about 16 members, most retired, 30% women, a good mix of ex-business managers and owners, and all highly interested in politics. Yesterday’s discussion managed to blur two topics. One was secular stagnation. The other was Bernie Sanders win in the New Hampshire primary and what that may mean for the political future.

I have seen other commentators and writers reacting to Robert Gordon’s book about the relative lack of economic growth going forward. I am not sure I agree with Gordon, but his argument is, to say the least, interesting. The general idea being that all the truly “big” innovations are in the past and because of that the great waves of increased prosperity that came from the middle years of the Industrial era will not be matched going forward. We are, according to Gordon, in for much more normal and much slower growth rates in future.

So what did my group make of this? None are economists. None are political scientists.

First: there was a general wariness of the argument. It is very hard for people whose entire lives have been lived in the era of relatively high growth to embrace its end. Skepticism abounds about Gordon’s argument. This is even true when there is an acceptance of the notion that there are no “big” innovations in the works.

Second: people dispute the assertion of a lack of “big” innovations. They look at biotechnology and so on as a new wave that has great promise. They assume, and it is an assumption not an analysis, that somewhere in the current frenzy of what Silicon valley calls innovation there are the seeds of future growth.

Third: the fact of growth being a “good thing” is rarely challenged. However there is some notion that it has to be balanced with quality of life and sustainability issues. There is a general optimism that such a balance can be achieved. No one, of course, knows how that balance will become reality, but they are open to and embrace the need for such a balance. For the record: every single person in the room, on both sides of the political aisle, agree that climate change is a pressing and vital topic to be resolved.

Fourth: when the hypothesis of slower growth is accepted, and when then asked about the consequences, the group swerves into Bernie Sanders territory. It becomes clear that the current socio-economic structure is untenable and that inequality and the provision  of social services in the face of tighter economic conditions become much more valued.

Let me leave the reporting at that.

What I find interesting is that people seem able, quite quickly, to be convinced that the social, political, and economic arrangements of the high growth era are not sustainable in a slower growth era. I infer that they accept the premiss of the arrangements providing high growth as long as they produce that high growth, but once the growth slows those arrangements suddenly become less attractive. Something else, some other arrangement, becomes admissible and open for support.

Others, at this point, would happily advocate some variant of Marx. I would not. Capitalism is not going to disappear because of its tight association with a more liberal concept of the individual. Marxism has to overcome that concept by eliminating politics and assuming, heroically, that the social and individual aspirations we all have conveniently coincide in a post-capitalist world. Nowhere has such a coincidence been in evidence. Not in the capitalist era, and not prior to it. It is a device of value only to enable a theoretical closure to the Marxist historical progression. It is not an aspect of reality.

I have an aversion to utopian theories that make heroic assumptions which is why I reject neoclassical economics and Marxism with an equal degree of distaste. We have to deal with people inner economic theories, whether we like to or not.

But, clearly, a slower growth future reduces our social agrees of freedom and enforces a restriction on our choices. Pure capitalism then comes into a more open confrontation with democracy. That tension has always existed, but it becomes greater when growth alone is not available to vent the conflict away.

Which gets us back to Bernie Sanders.

His popularity rests, I suspect, on the ability and willingness of voters to understand that the balance between capitalism and democracy has to change – particularly when resources are more scarce. Capitalists cannot keep scarfing up egregious percentages of our collective gain in prosperity when that leaves an ever decreasing portion for everyone else. And if the future is more constrained than the immediate past then the urgency to re-adjust the balance between capitalism and democracy becomes more urgent.

As we all know recent decades have been characterized by massively rising inequality, which, apparently, was tolerable by the majority of voters as long as there was the prospect of growth. Such circumstances may no longer pertain. And, in any case, inequality has now reached an intolerable level. Combine those twin pressures and Sanders suddenly becomes, not an outsider, but a representative of a new mainstream. A mainstream that leads to a more democratic distribution of wealth and income, but not, necessarily to the elimination of capitalism.

Call it what you will, but I think that’s where we are headed.

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GDP and Other Complex Numbers

When investment advisors want to justify their expensive and ineffective advice they look for red herrings to batter their clients with. One such example surfaced in, of all places, Pieria last week. It was an article sourced from Schroders about how misleading GDP is  as a measure of economic wellbeing. The article is one of three dedicated to telling investors that they ought to ignore GDP as an indicator worthy of informing their investing. Instead, presumably, they ought to pay Schroders lots of money for its ‘value-investing’ based advice.

Well, I happen to agree that GDP is a bit of a farce. It ignores all sorts of useful stuff and includes all sorts of silly stuff. It totally ignores domestic work as if it didn’t exist, and puts the consequences of socially negative events – the reconstruction after an earthquake – on an equal footing with activity generated by socially positive events.

The problem, at heart, with GDP is that it includes only things that are easy to measure. Easy, that is, being described as having a market price or a convenient cost that the economists and accountants compiling the numbers can identify.

Since the economy is vast and complicated getting hold of even this kind of information can take months. This means that GDP figures are pretty much always revised. The so-called first release is never where the final numbers end up, so no one ought get too excited over it.

But people do.

We live in a short term society, where numbers of various kinds flood our attention, and where we are inured to using them as the basis for conversation, argument, and even policy action.

But they are invariably inaccurate.

This is what the Pieria article bases its argument on. The economy is too complex to be banged into one number. The number always shifts about providing no bedrock on which to stand, and, besides, who can trust numbers that consume and army of technicians to compile?

And tinker with: clearly the author gets upset over technical ideas like ‘chain weighted’ indices and ‘hedonic pricing’. I get that. They are a tad complicated and are easily attacked. But they are also useful. They help add to the numbers. They make things a little more consistent. And consistency is the great goal of all number crunchers.

Being written by someone steeped in the private sector, in finance and investing no less, the article – actually all three in the series – smells a bit of anti-government sentiment. Those GDP numbers cannot be trusted because the economy’s complexity eludes the government simpletons, all thousands of them, trying to distill it into GDP releases.

This is very Hayekian. The essence of Hayek’s extreme position was that the economy is essentially inscrutable. It is unknowable. It is so vast and difficult that it lays beyond our ability to comprehend, calculate, and thus manage. Central planning, under such circumstances, is thus a fool’s errand. At best it has no effect, at worst it makes things a lot worse. It is, therefore, better to leave the economy to itself and the so-called self-adjusting capabilities of the marketplace. If you believe in such magic of course.

To anyone who has striven away in the bowels of big business this exact same notion will sound familiar. The accounts of a large bank are only loosely related to the actual economic position that the bank occupies. Likewise any business. The accounts are simply an indication of what’s going on, their relevance is useful only in the context of skillful interpretation. They are no more or less ‘real’ than any of the numbers we see for the national economy. All such accounting, even with the best intentions, is a vague representation of reality. And, as such reality will always elude us. It isn’t measurable. Besides we can’t even agree on what to count.

So if a Schroders customer cannot trust GDP, and ought not invest on the basis of the numbers, then they ought not trust any other number compiled by armies of technicians. Such as corporate balance sheets and income statements. That means we would be left with nothing but the guesswork of ‘experts’.

And chicken entrails perhaps? That’s an interesting twist on ‘value investing’.

 

 

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Lamppost Afterthoughts

Notes from the cutting room floor:

Lest anyone be mistaken I am aware that we live in a world of models. Everything we do can be described at some level of abstraction as a model. Our entire ability to live is based upon modeling. Our various systems and bodily functions are models. That is these things are solutions to problems, and those solutions are encoded some way so as to allow that code to cause behavior that, within our environment, is efficacious,

Models are simply a way of testing and examining a specific solution to a problem. Sometimes they begin life in a rather ad hoc fashion, as guesswork, or heuristic. Other times they are the result of prior thought, in which case they represent a point along a line of modeling stretching back a long time. Perhaps so far back that their origins are forgotten. Or perhaps only so far back as the last test of an older model.

In any case models are small packages of our ideas spliced together towards some end. That end being a solution. A problem solved.

Evolution, of course, is the greatest problem solver of all, so the processes of evolution give us insight into modeling. We create models. We test them. We select, as successful, those that survive when let loose into our environment.

That environment might be the economy. That model might be some theory of how the economy behaves.

When you and I enter the marketplace to participate in exchange we expect certain things to be there and that certain things will occur. Those expectations exist because we have a model of the economy in mind. For most of us that model is opaque. It is hidden from our conscious expression of what will happen. All economists have done is to explore such models and eliminate the opaqueness. In so doing they have convinced themselves that they understand, at least partially, how an economy works.

My criticism of the use of models in economics is then not one of a denial of the value of models. It is directed at the selection of them. More to the point it is directed at the severity of the exclusion of zones of our experience that fall outside of our theoretical study because those zones are less tractable to our modeling technique. We have become monotheistic in our beliefs. Polytheism is frowned upon.

This is despite one of the great lessons of evolution: that diversity of approach gives the greatest chance of the location of solution. Economists have limited their options by reducing their subject to that set of issues most easily modeled according to the discipline’s self-referential code of modeling. And, further, they describe the problems they set out to solve in such a way as to produce results from their tests that conform to a prior code of acceptability.

So the code of modeling limits the usable technique, and the code of acceptability limits the range of problem. This duality then combines to define the discipline. Economics thus becomes defined as the subject that theorizes about problems tractable to the preferred technique.

Since the preference for techniques has moved through time, becoming steadily more formal as it goes, the subject itself has shifted about a bit. Nowadays it is easily mistaken for being applied mathematics or the mathematics of maximization. In order to arrive at this point a great deal of what was economics has had to be jettisoned or left to one side as being no longer of interest. Other topics have simply been ignored because they didn’t fit easily within the technical purview of economics thus described.

Interestingly economists have become so enamored of their maximization techniques and their mathematical mastery of things such as efficiency that they have begun to describe a whole host of topics as being capable of economical modeling. They have thus muddled themselves up. Instead of arguing that applied mathematics may shed light on some problems, they have come to believe that economics has something to say about those problems. Economists themselves have conflated subject and technique.

By so doing they have spread their error far and wide.

In finance, for example, much of modern financial theory traces its roots back to standard microeconomics. The problem is that the conditions needed to make microeconomics work the way standard theorists would like it to work aren’t very sensible in the closer-to-reality world of finance. In fact they rarely apply at all. Which means much of modern finance is little better than guesswork. Much like much of modern microeconomics.

In any case I don’t mean to go on too much. I am simply saying that I am aware of the universal presence of models. As Karl Popper once said: “All life is problem solving”. So economics is hardly unique. Where economics fails is in the conflation of subject and technique I noted above and in its monotheism. It thus commits a grave sin in the eyes of evolution. It has committed so much to its method and its beliefs that further movement in the economy, new problems or new topics of interest, are more likely to sit outside its self-selected purview than within. It is always tempted, therefore, to bang such problems into bizarre shapes in order to attempt to redefine them for analysis, hence the blind spots and contortions over the recent crisis and over inequality.

It has become too specialized. Like the dinosaurs.

And just for reference: I sit on the side of disequilibrium. The cultural, social, economic, and political worlds are complex. Why ignore that when we model?

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Lamppost Economics?

Paul Krugman came remarkably close to giving economics a big negative review in his New York Times blog last week. To sum up his argument: economics is very good at talking about, although not resolving, issues that are tractable to formal modeling — anything else not so much. You see there’s this gigantic blind spot in modern economics. If a topic cannot be modeled then it doesn’t attract too much attention. At least in the bright lights of the mainstream version of the subject. Which, of course, begs the question: what is economics missing?

Krugman’ attention was brought to this blight by an article by Justin Fox who bemoans the early lack of interest in inequality displayed by a profession whose core focus seems to encompass such a vital topic.

Here’s what Krugman said:

“I’m a few days late on this characteristically lucid Justin Fox column on why it took so long for economists to focus on income inequality. But as one of the economists who did write about inequality — especially the rise of the one percent — pretty early, I think Fox has missed one important aspect: it’s a hard issue to model.”

Well, that’s pretty straightforward.

I may be misreading this, but what I think Krugman is telling us that only subjects that can be scrunched into models are suitable material for economic. Subjects that are unsuitable are game for analysis by lesser sorts or are just not ‘economic’.

Now I am lot more sympathetic towards Krugman than many of you are, I have a soft spot for his thinking because he is willing to lead the liberal charge, but this annoys me.

What has become of economics that it cannot deal with palpably economic topics unless they can be modeled? Why can’t we analyze them using other methods? Or are those other methods inadequate, inappropriate, of otherwise beneath us?

Has economics become so myopic and small that, like the proverbial drunk looking for his car keys, it only searches under the lamppost?

Apparently, though, times are changing. The thrust of Fox’s article is that this year’s American Economics Association meeting is inundated with papers on inequality. There are seventy of them. Feast or famine in economics, and none too soon.

Economists are unwilling to make statements about issues that they don’t have scads of data about that they can them smash through their formal method. If the data is sparse, anecdotal, or tainted by some similar insufficiency then they remain mute. Even if they all acknowledge privately that the issue might be intriguing.

Then again, many more of them are mute because they can’t see the issue to begin with. Their myopia is set in concrete by the self-referential loop of economic method being part of the section criteria by which a topic becomes ‘economic’.

I give Krugman credit for being one of the mainstream economists who did mention inequality before it became fashionable. I criticize him for being so lame about this ‘it can’t be modeled’ excuse. It undermines the discipline’s credibility when what appears to be a big and highly relevant topic can so easily be sidelined because it didn’t fit the analytical pigeonhole. Isn’t this about-face? Can’t we develop tools to take a look at topics that are untidy or messy?

Which leads me to be sympathetic to Fox’s concluding paragraph:

“Still, as I wander from presentation to presentation at this week’s economics meetings in San Francisco, I can’t help but wonder what important knowledge the economists are inadvertently suppressing today.”

Yes, indeed: just what is economics suppressing today? Worse: is that suppression ‘inadvertent’ or deliberate?

 

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