Commentary

I’m bored with debt defaults. No one seems to worry about them, so I won’t.

How about insider trading? That sounds like fun.

The much heralded Galleon case and the guilty finding against a well respected money manger has confused Wall Street. The boys and girls down there are throwing a hissy fit. How can someone with a little bit of information not be expected to try to make a buck? After all the whole point of getting those special hints, clues, and facts is to end run the market, make a fortune, preen in fancy restaurants, and retire early in order to serve the public as an official in the Treasury Department. Well, maybe not that last bit.

The point is information is the grist that makes the market work. So he, or she, who has information, has a nugget worth a great deal. Since sharing is not a gene found in these folk’s DNA, they naturally like to hoard and then deploy these nuggets to their own advantage.

This game is time honored. It’s the way the world works.

Enter the heavy hand of government and its apparent infinite desire to screw up the happy lives of these hard working people. Some bureaucrat somewhere decided that the boys and girls should share. This is being seen as both ridiculous and an invasion of civil liberties.

The reason I am thinking about this is that today’s FT has a letter from two professors: Robert McGee, a professor of accounting, and Yeomin Yoon, a professor of finance and international business. The letter gives a very spirited defense of insider trading. It is, the professors say, beneficial for markets.

There are four lines of defense for insider trading given in the letter:

1. Insider trading can be beneficial to markets
2. Not all insider trading cases are fraudulent
3. Insider trading can sometimes be seen as a “victimless” crime
4. If it is a crime at all, an argument can be made that the resources deployed to litigate it could be better deployed elsewhere

That’s it.

There is no evidence submitted to bolster these four points, so for our purposes we will call them assertions, not arguments.

Let’s start with assertion number 4.

One obvious so-called better deployment of resources would be in the addition of ethics classes to be taught alongside the good professors own classes in accounting and finance. Evidently the professors don’t see a public need to trust the markets. Or that excessive insider trading and the lack of transparency it implies undermines the workings of a market via the loss of trust between traders. I am not sure how the knowledge that someone could be trading with another on the basis of hidden knowledge helps a market become more efficient, or how it helps the allocation of resources. The notion that a market has an public or social element slips by the professors. They see a market as a sandbox for the boys and girls to play in any way they want. If some poor shareholder is ripped off in the rush for bonus money, then so be it. Tough. There is no obligation to share information that might alter the wealth of millions. Not if some smart trader can get there first. After all that’s why we call them smart. They have no qualms about cheating. Trust is so yesterday.

Take a look at assertion number 3. Insider trading is sometimes “victimless”. Really? How? So some trader makes a quick buck and buys a new Hamptons home. No one was hurt. It’s not like a robbery or anything. Right? This is absurd. Only a person so deeply mired in market ideology can overlook the small point that shareholders are a class of people. If one makes a gain disproportionately on the basis of hidden information, the others were precluded from so doing. They lost by inference. Theirs is a real loss of opportunity. Unless, of course you don’t believe in such things. Then again, if those silly fools over at the pension company weren’t smart enough to play racket ball with Joe from accounting at ABC Inc. why should they get the opportunity? They must be dumb. I love pampered prep school people making the rugged individual argument. It sounds so … well, authentic. No?

On to assertion number 2. Not all insider trading is fraudulent. No. Some is just cheating. Look: the point of getting rid of insider trading is to level the playing field, and thus to give everyone access to the best available information. This means that if a trader gets hold of relevant information that information should be shared as widely as possible. Not hoarded. And not focused exclusively on one small group of individuals for their own benefit. It is the exclusivity that makes insider trading unethical, not the potential for fraud.

And assertion number 1. This is just plainly ridiculous. Those professors should be disbarred, or drummed out of school. Here I was thinking that markets work on the basis of perfect information. All that wonderful information flying about the place, free, universal, available to all in a very 1960’s sort of way, this is the very heart and soul of free market theory. Any attempt to disrupt that freedom necessarily throws the entire market haywire. Quite how insider trading improves upon perfection I don’t know. Nor do the professors since they don’t articulate any such reason. They simply assert it as fact. I am not a huge fan of unadulterated markets. I think they fail. In fact I think all markets are destined to fail. But that’s just me. People who want to defend markets as the best places for the socially beneficial allocation of resources shouldn’t go around advocating limiting those markets, ignoring their public aspect, excusing cheating, and above all, calling the introduction of an imperfection helpful. It very odd to listen to a couple of pro-market guys argue that those wonderful markets could benefit from a little backdoor juicing now and again.

It make me want to scream.

Here we are then: two professors of finance or accounting willing to debase the very machinery they advocate in class. Either they don’t understand finance and accounting. Or they are confused. Or they are, perhaps, hypocritical. They certainly disregard the existence of a public interest in the workings of markets.

And that is the bigger message in their letter.

They encapsulate the reason we had the last financial crisis. The ethical basis of trading has collapsed. To the professors, to those they teach, and to the managers who manage the boys and girls of Wall Street, the market has become a game within which anything goes. Reputation means nothing. There is no fiduciary responsibility. Clients are fair game to be tricked out of their money. Information gained in one board room can be used to profit in another. Banks can bet against their own customers on the assumption that everyone is cheating so they should too. The entire point of deregulation appears to have been to open up the chance to cheat. Insider trading is a last vestige of the bulwark we had against massive cheating. The rest has been tossed overboard. And, if these two professors are anything to go by, we are teaching the next generation of traders that the anything goes philosophy is just fine.

How can you teach efficient market theory, and then advocate that inefficiency is sometimes a good thing?

Ugh. Now my head hurts. I think I’ll go back to pondering our debt default mess.

In general I am all in favor of having solid choices. For voters that is. This means that at election time each side of the political spectrum should be able to articulate a clear, or at least fairly clear, idea of its attitude towards the larger issues of the day.

Like Medicare. Like the economy. Like the things we spend our money on.

It looks as if we will fall short of this modest goal in the upcoming 2012 election because the Republicans are all over the lot.

Just this week we discovered that they are hell bent on holding the line on the debt limit – they are adamant they oppose raising it. Yet we also discovered that their very own economic plan requires that limit to be raised.

If they aren’t confused, I certainly am.

Now we hear from John Boehner that he isn’t opposed to limiting Medicare to the wealthy or forcing them to pay more for the service. In other words he will listen to arguments in favor of means testing in health care.

But he is resolutely opposed to raising taxes on those very same folks. He says it’s unfair to ask them to chip in more just because they’re wealthy.

Is it just me, or is this confusing?

Let me see: if I were rich I would be asking why I have to shoulder a larger cost of health care but not taxes. I would be asking Boehner whose side he is on. Then again, were I poor, I would be asking why I should shoulder a larger burden of taxation, but not of health care. I would be asking Boehner whose side he is on.

I think we can get to the root of all this confusion by realizing, or by assuming, that the Republicans are making things up on the fly. There is no coherence in their economic policy because they haven’t sat down and thought it all through. They are advocating contradictory positions and hoping no one notices. They are trying to grab our attention in the headlines without bothering to fill out the details.

This is very much a continuation of the Bush regime. Unfortunately, as we learned to our cost back then, the details actually matter. Numbers have to add up. Things like the budget need to be thought through. Bush presented himself as a fiscal conservative while engaging in wildly radical tax policies that had far reaching and long lasting effects well beyond his term in office. Then again, no one called him on it, so maybe the Republicans think they can continue to position themselves as spending cutters without actually coming up with a plan to cut spending. They can cry that they are holding the line of debt while they quietly raise the debt. They can, as Reagan did, shout that they are cutting the deficit, while they are actually blowing it skyward.

Meanwhile, the Democrats aren’t much better. They are coherent. They are simply weak. Obama consistently takes the number we need to target, and then divides through by some other number he plucks from the air in order to arrive at a third number he then presents as his negotiating starting point, knowing full well that he will, inevitably, retreat to yet a fourth number during those negotiations. Upon arrival at this vastly inadequate end point he then expects us to support him as victorious.

No thank you.

We survived the recession by the skin of our teeth. We could have emerged in much better condition, but we were hobbled throughout by our depressingly weak leadership and the ability of the rich and powerful to protect themselves at our cost.

Behind the scenes there was a much greater consistency in policy making. Those with influence threw back attempts to use the crisis as a rallying point for lasting reform. They watered down both the bank and health care reform efforts such that neither appear to have achieved their aims. This is especially true of bank reform.

It is in this setting that the Republican confusion makes sense.

They don’t need a coherent policy because they are simply trying to defend privilege. They are not trying to roll back the social programs that their more avid supporters hate so much. Yes, they shout about such an effort, but in the background that fuss is simply a means to gain sufficient power to maintain the status quo. They are not the radicals that their zealot base wants. They are afraid of the political backlash they would face were they to be honest about undoing those social programs. So they shout and brag. But they produce plans that make little change.

And when they accidentally produce a radical plan? They run away from it. Exhibit A: the Ryan Medicare plan. It is astonishing how quickly that “epic and bold” – their words, not mine – plan was consigned to the trash heap once the Republicans got wind of voter reactions.

Bold? Not so much.

Confusing? Definitely.

Entertaining? Absolutely.

Edifying? Not at all.

And that’s the problem.

After three long decades of Republicans saying one thing and doing another – they are fiscally irresponsible and yet like to appear so conservative – I was hoping we had arrived at a point where they felt empowered to come out of the closet with their anti-social agenda. The country could then have debated how we want to divide our wealth and to what extent we want to redistribute it. Do we want to be more or less unequal? Do we want to help or abandon our elderly, poor and young? Do we want save or spend? These are among the questions that a more coherent Republican platform could have pushed into the limelight.

Instead we have evasion, muddle, self-contradiction, and confusion.

I would have welcomed a strong argument over priorities. I still do. But for such an argument to take place we need two sides capable of articulating an argument without flip-flopping all over the place.

At the moment we don’t have that. Which is why I am not looking forward to this next election. And it is also the reason why there is an almost historical lack of support for any of the Republican candidates. All the better ones are running for cover.

Maybe they’re as confused as I am.

The central issue of our contemporary economy is the enormous skew in the distribution of wealth and incomes towards those who run the place. Our economic system has been shifted to favor the elite group who wield the power. It is always thus of course. But periodically societies have the opportunity to take stock and make adjustments. Now is one of those times. Or it should be.

I am upset that we appear to be missing the opportunity.

One of the hopes I had two years ago when the Democrats took power was that the egregious bias towards the top echelon of our society would be redressed and a new balance put in place in order to re-open up the flow of wealth to a larger percentage of society. This hasn’t happened. Indeed every effort appears to have been made to preserve the status quo, with the possible exception of health care reform the success of which still hangs by a thread. Our leadership just didn’t see the need to enter into a public discussion about redistribution. It should have.

Why?

Because there is not such thing as neutrality in the distribution of wealth. It is always the outcome of an active process. Right now the dominant process is one that favors those who can distort markets and obtain extraordinary incomes. They have also been able to protect their various privileges in the tax code to ensure that they pay a smaller percentage of this extra income as tax. Whether it be rich individuals, hedge fund operators, large corporate CEO’s, or the entire army of professionals attending to their needs, this group has suborned a greater percentage of our wealth than at any other recent time. And they are clinging to it with an unmatched zeal.

I don’t blame them. To the winner goes the spoils. And they won the debate over ideology. We adopted their preferred approach to economic policy way back in the 1980’s. The consequences of which are now apparent. The top tier won. The masses lost. We have redistributed upwards relentlessly. They didn’t just earn it. They took it. The share of productivity gains taken as profit rather than as wages is sufficient to illustrate the shift in power. Last year was the best year since 1950 for profits. Wages are stagnant. And before you go crying about this not being a zero sum game: I agree. Productivity improvement should be a positive sum game. Why has it not been? I am not arguing that profits should not go up. I am arguing about the way we divvy up the gains. All profit and no wage is not sustainable in the long term. Greed is a short term strategy. It defeats itself eventually by sowing the seeds of its own destruction. A wiser elite shares. We do not have a wise elite.

This is skew not an accidental outcome of some primeval force we cannot tinker with. It was the outcome of a deliberate policy.

Again I don’t blame them.

I blame us.

We tolerated it it. We abetted it. We went along with it. In election after election we fell for the allure of lower taxes and the steady defunding of the programs that shift wealth our way. We have now arrived at the denouement where we are being told we can no longer afford the central planks of our social safety nets. Without those the collapse of the middle class will accelerate and the split in society will yawn ever wider.

The democratic process is our protection against exploitation. It is within our power to say no. We simply have to realize what is going on. Unfettered capitalism always channels incomes upwards. Democracy channels it towards the masses. A healthy balance is hard to find and arguments are always going on about where to pitch the separating point. That’s normal. What is not normal, in post war America, is the total domination of the elite and its ability to scoop up the gains almost exclusively.

We have had thirty years of redistribution upwards. We should be debating whether we want that to continue. But we are not.

It is time we did.

Not really.

They don’t seem to add much value.

This will not shock many of you, but it should cause some reflection amongst economists. The basis for my reflection on this is the comment Brad DeLong made recently that the solution to the economic and financial crisis could be found in ideas developed in the 1930’s, and in some cases in the 1890’s. So, to the naive eye, it is worth asking what have all those economists been doing since?

Not much apparently.

Well, one thing they’ve been doing a lot of is arguing. Take, for instance, the current spat between Paul Krugman and John Taylor. Both extremely well educated and intelligent economists who have very different interpretations of the recent increase in government spending.

One the one side, Taylor suggests that there has been an enormous increase in the government. As you know such an increase is a red flag to right wingers like Taylor, for whom the magic of the market is sacrosanct. To him the absorption of so much activity into the inefficient realm of “big” government is a dangerous sign of imminent demise for us all.

On the other side Krugman responds by pointing out that, while the increases are real, they can be explained not by resort to criticism of Obama and his supposed “big government” agenda, but by simple arithmetic. Since the private sector has shrunk, as it does during a recession, and government safety net spending has risen, as it does also during a recession, the apparent increase in government as a percentage of the economy is ephemeral. It is a manifestation of the private sector’s implosion, not the public sector’s explosion.

Ah, says, Taylor: that’s fine in the short term, but why is government still growing out in the future, let’s say in 2020, after the effects of the cyclical shift are presumably corrected?

Krugman answers that one with ease as well: demographics. Lots of demographics. Without one single policy added by Obama government spending will rise into the foreseeable future as the baby boomers all retire and start becoming part of the Medicare and Social Security world.

Phew.

Two grown up and highly educate economists adding very little to anything except to display their respective ideological views. Both right in their own way. Both wrong in others.

Then there is the inestimable Robert Lucas, whom as you all know I blame for the current irrelevance of economics to economies. Yes I know I am being unfair, so I apologize, but I feel I am allowed to be. Why? because Lucas, on one hand argues that economics should stay clear of practical policy making since it is simply the study of utopian systems – his words not mine – and is thus only precariously tied into reality where policy must be made. Then on the other he thinks nothing of appending his name, and thus his prestige, to letters to Congress urging draconian cuts in government spending. That’s called trying to have it both ways. Or hypocrisy. Depending on how harsh you want to be.

The point is this: economics is a giant mess. Economists know this. They excuse themselves by saying that it has always been this way, and that scholarly disagreements are the stuff of academic progress. From this hurly-burly springs forth new ideas and thus a greater contribution to society. So they say.

Except.

As DeLong points out, this argument is going nowhere. Indeed it seems to be preventing progress. It has simply devolved into an ideological spat. And is making economists appear useless. There is an economist to defend any hair-brained policy proposal. Anything a politician cares to suggest can be given a well argued, and reasonable defense by a well respected and tenured professor from somewhere.

And when economists are hopelessly wrong? Are they fired? Are they pilloried and thrown out of their tenured positions to suffer the voluntary unemployment lines they condemn others to? Dean Baker has recently thrown a hissy fit over this. Of course not. Failed economists are a dime a dozen in our best schools. They are still teaching whatever they first thought. No amount of empirical data threatens their prestige. Why? Here’s the great scam: because economics is a self-contained, self-referential pursuit disconnected, very deliberately and carefully, from the dangers of having to be useful. It is thus immune from disproof. All that Popperian conjectures and refutations mumbo-jumbo is not applicable to economics. Economists have constructed their world so as not to have to be practical. Instead they are quasi-philosphers, quasi-mathemeticians, quasi-physicists, quasi-psychologists, and quasi-sociologists. By so being they can dodge between the bullets of practical questioning and never have to improve their art. Being quasi-everything is a great defense. You can confuse all the specialists and answer to no one. Except yourself.

Think about this for a moment.

No one doubts that the study of economies is a very serious and potentially socially valuable pursuit. Most of its great advances have been at times when there were big political and social upheavals and dangers that required insight into the way in which an economy works. A real one. Not a made up one. Early economists were intrigued and influenced by the processes and challenges of industrialization. Prior to that they had been embroiled in arguments over taxation and trade, both of which were contentious and relevant topics to the newly emerging nation states of the 1600 and 1700’s.

Then along came Marx, who thundered away at the disruptive issues of early capitalism and its satanic mills. His critique was sufficient to demand a right wing response, which came in the form of marginalism and Walrasian systemic thinking. Those advances were an attempt to make economics scientific and thus immune to the implied Marxist charge that the early theories were simply justifications for capitalist favoring policies.

That attempt to shift economics from being politically motivated towards being scientific, and thus cleansed of political taint, gathered momentum and led to even greater discord in the 1930’s and later. One part of economics wandered off into the supposed safety of the self referential community I mentioned above, content to manipulate ever more abstract models until it ended up with people like Lucas openly calling his analysis utopian. The other channel was filled with people trying to engage a more “realistic” set of theories that recognized the vagaries and complexities of the world. But because those vagaries are intractable, or have been, to the tools economists inherited from their political economy origins, and because much of the subject’s key topics are still framed in 1800’s terminologies these realists have made less of an impression. They don’t appear as scientific. Their models are kluge-like and not filled with impressive mathematics. So the so-called scientists won. They invented “positive” economics, where theoretical discussions disdained empirical proof, and where math wizardry counted for more than connection with practical policy.

Which is why a recent poll of economics post-graduate students showed a belief that being good in math is more important to being a good economist, than knowing anything about the economy. Abstraction for abstraction’s sake is the watchword of modern mainstream economics.

This, in turn, is why DeLong is correct: our crisis could be solved using old ideas. Thus, I wonder whether we need economists. Especially those who don’t study real things.

I know. I know. This is all old stuff. But it continues to irritate me. Especially when we see supposedly big name economists wading into politics and advocating policies that will have a huge impact on the lives and futures of millions of their fellow citizens.

You’d think that, at the very least, they would stress test their advice. That they would check their theories against some evidence of their efficacy. That they would have the ethical decency to do no harm. Before, that is, and not after, they urge policies whose consequences, both intended and unintended, we all have to live through.

Is that too much to ask?

And if not, why do we need economists?

If we are to salvage economics from its current cul-de-sac, and I for one hope we can because of its enormous social consequences, we need to acknowledge the failure of its positive tradition. All economics begins with ideological content. It cannot avoid its attachment to politics simply because it is seeking answer questions that society asks, and which society will benefit from. And such a process is carried on within a political framework.

So there are as many forms of economics as there are political positions. And economics is an archipelago not a continent.

There’s nothing wrong with that. It’s called being realistic.

We should just make sure we teach it that way, and not as a monolith.

But that’s another question.