Political Economics

Like everything in America the economics profession is deeply politicized. The chasm that divides the two sides of the cultural war is mirrored exactly by two sides equally entrenched in economics. This means that nothing an economist says can be taken at face value. The entire profession is now bogged down, failing to move forward, and has lost all pretense of being scientific.

The latest examples of this are the various attempts by right wing economists to provide support for the Romney/Ryan tax plan, and their attack on Obama’s handling of the economy since 2009.

As you know Romney has made a big deal out of his tax plan. It will, he says, solve all our economic woes. It will unleash capitalists from the fetters of overburdening taxes, eliminate the federal deficit, spur growth, create 12 million jobs, and generally leap tall buildings with amazing agility and grace. It is, in short, magical.

The only problem is that he never actually says what it is. He offers hints. Like the 20% reduction in taxes will be offset by getting rid of loopholes. Sometimes he argues it will be revenue neutral. Other times he claims it will close the deficit, presumably by being anything but revenue neutral. It appears to be the economic policy equivalent of a Swiss Army knife. Whenever challenged to explain how a massive tax cut can possibly be neutral without raising taxes revenue at the same time – that’s what closing loopholes is supposed to do – he simply says that there are six studies proving him correct.

Except those six studies aren’t studies.

Three are right wing blog articles, one of whose authors has distanced himself from the Romney claim; two are from the same right wing think tank and use fantasy assumptions about supply side trickle down effects; and the sixth is from a Harvard professor who has worked for various Republican administrations and whose study uses radically different definitions of things like the middle class in order to stretch – and I mean stretch – the Romney plan towards its target. None are objective or credible.

The basic conundrum Romney faces is that in order to deliver his 20% tax cut and not blow the budget to kingdom come, he has to get rid of a swathe of tax deductions. And these deductions are relied upon most by the middle class. So the most likely result of his proposal is a massive tax cut for the wealthy partially offset by a tax increase for the middle class. That’s even with those vaunted lower tax rates. Faced with this unmovable accounting obstacle Romney is reduced to obfuscation, evasion, and occasional lying. Actually his lying is becoming persistent and not occasional as various critics finally wake up to the snake oil he is peddling.

The sad part of all this is that Martin Feldstein, the Harvard professor defending Romney, is making a fool of himself by so doing. He is simply churning out Reagan era supply side thinking, tweaking the numbers to ensure the ‘right’ result, and providing no clear headed analysis at all. He is a shill. Presumably he is interviewing for a job. A political job. Any notion that he is deploying objective economic reasoning is a farce.

The second recent example of political economists is the story of John Taylor. He of the ‘Taylor Rule’. He has now come out and written that it is wrong to argue post-financial crisis recoveries are slower and more fragile than ordinary recoveries.

The only reason for saying this is, of course, to debunk the idea that Obama was facing an uphill fight and that his policies must, therefore, be all wrong. So Taylor has waded deeply into politics.

This has upset practically everyone who has actually studied post-financial crisis economic recoveries, including Reinhart and Rogoff who wrote a big thick book about such situations based upon massive, deep, and lengthy research. Their conclusion, now backed by all subsequent research, is that recoveries following financial crises are indeed more difficult and protracted. Taylor is clearly and unequivocally wrong.

So why did he say what he said?

Well.

The clues are in an article written by Bruce Bartlett in the Financial Times. In this article Bartlett makes the claim that the Republicans, including Romney, are desperate to get rid of the Fed’s quantitative easing policies. We have already seen the huge tensions inside the Fed bubble to the surface in unprecedented ways, and the hawks who dominate GOP thinking on monetary matters won’t settle until they’ve reversed the Fed’s course. You see they are obsessed over the hyperinflation that all that easing will bring. Here’s the key paragraph from Bartlett’s article:

Republicans in Congress have been highly critical of Fed policy, especially the episodes of “quantitative easing” that took place in 2009, 2010 and again this year. Despite the continuing lack of inflation in the price data, Republicans believe that quantitative easing is highly inflationary and should be reversed as soon as possible.

Read it again.

It says: “Despite the continuing lack of inflation in the price data.”

Yes that’s right. Damn the evidence. Ignore the facts. Republicans just know that easing will cause inflation. Even if there is no sign of it. Maybe it’s hiding somewhere. Probably in John Taylor’s closet.

Anyway. Despite the lack of any inflation Bartlett goes on to say that Romney wants to reverse the Fed’s policy and tighten money supply. He’s a tough ‘hard’ money guy. Which means he wants higher interest rates. Presumably so he can repatriate all his foreign based investments. So, who’s name does Bartlett float as Romney’s pick to replace Bernanke – it is taken as given that Bernanke must go. Go on guess. John Taylor.

Aaah. I hear you say. So it makes great sense for John Taylor to make a total ass of himself in order to ingratiate himself and get that plum job.

By so doing Taylor has become, like Feldstein, a politician. There’s nothing wrong with that of course. Except that his platform is economics and he purports to be a theorist of some note. Especially when it comes to finance, banking, and monetary policy. Which makes his argument about post-financial crisis recoveries even more outrageous.

The question this all raises is this: is all economics political? If so does it even exist as a separate subject? Or are all economists simply providing intellectual cover for their chosen ideological worldview? And how do we tease apart useful objective knowledge that economists might have from the political dross?

Beats me.

Then again I have always thought of economics as political. That’s why they used to call it political economy. The entire pretense at being scientific is a modern veil draped over what is, at heart, a social science deeply entwined with politics and sociology. Why it was ever broken apart into three subjects I don’t know. Jobs for the boys and girls? Probably. The great classical economists Smith, Ricardo, Marx, and John Stuart Mill all recognized the reality of the political impact of economics. It’s only since the great march into the desert sparked by Walras that economics left reality behind. All the work done since about the 1870’s has been to embellish the market magic model rather than to study actual economies. The exception being Keynes, but we aren’t supposed to mention him are we?

Actually, now I think about it, all that work in the Walras tradition has produced one great piece of economic knowledge: markets don’t work very well or very often without lots of institutional, government, legal, and sundry other support.

Just don’t tell that to Feldstein or Taylor. They’re too busy auditioning for jobs with Romney.