The State of TLRB

Hey, we got an email worth sharing:

Subject: Miss Your Posts

Hi

It’s been about 50 years since I studied macroeconomics, so perhaps a lot of theory has been changed. I have not heard any national politician say anything that would indicate that they have any knowledge of the subject. Does knowing anything or admitting to knowing anything disqualify one from national office? The general public certainly knows precious little. Can any of you tell me which members of Congress appear to have any qualifications in economics. Heck, do any of them know the difference between the ideas of Keynes, Hayak and Pigou? Besides a magic wand, do you have any good ideas about what we should be doing.

Regards,

FC

Thanks for the email, FC. I suppose it is time to share a little bit about why I haven’t blogged much lately.

First, economic theory hasn’t changed all that much in 50 years. Yes, theories have been refined and economists understand a whole lot more now. Trying to fine tune the economy as Kennedy, et al did in the ’60s would not be tried today (except in China, of course, which somehow seems acceptable and miraculous by the credulous). But economists remain woefully oblivious when it comes to refining other theories for current understanding. Take the fact that people are not homo economicus- that is, people are not wholly rational even when it comes to their own best interest. This fact is still widely ignored because it is both inconvenient to many theories and inconvenient for simpletons to understand. Economists seem to have fallen to the level of politicians, relying on quips, phrases and half-truths to debate instead of rigorous logic. Even 70 years later we still have a raging debate between Keynesians and Hayekians, neither side seemingly able to admit anything useful from the other side, despite there being much. So yeah, economics is better, but not great. It seems as if some sort of unified theory is just not within the mental capacity of thinkers today, despite such being an obvious truth to me.

I can’t tell you which members of Congress appear to have any qualifications in economics. To me, none appear to have a rational grasp of the field. From time to time, I get to meet many members in small rooms, sometimes as few as a dozen people and the Representative. They put on a good show and speak convincingly, just like any good salesperson, but to a careful listener they are still just campaigning. Do they really understand anything other than politics? I doubt it, and it saddens me.

I was born an optimist and find myself playing the role of curmudgeon. Frankly, curmudgeon is easier to play, but not nearly as fun. It is down right depressing to be a mid-30′s “Debbie Downer“. I wanted to blog about finance and economics- something I am passionate about and enjoy greatly- and found that most often I was tearing down an idea instead of building something. While I can easily and swiftly point to flaws and holes in ideas, it isn’t something fun and uplifting to write about. Sort of like walking around without a smile- it’s  just not a great way to go through life.

When I look around, I see problems which are intractable not because the solutions escape us, but because greed and idiotic adherence to flawed ideology destroys any rational problem solving. I have plenty of rational, realistic solutions- but no one listens to such ideas (from anyone) because they are too busy being mad that our President is a Muslim, that the world doesn’t need banks, that global warming is a farce, that taxes are too high, debt/deficits don’t matter, that cold water boils faster than hot and … You get the idea. It feels as if there is currently a level of national insanity- or at least enough anger to override logical thinking. What I’d like to know is, how is this different from other times in history? Was the nation seeming insane in 1977? 1969? 1933? 1862? Will this pass (my optimistic side says definitely yes) or will the empire destroy itself unnecessarily (it might, it has to someday, but we have survived conditions worse than now, it doesn’t seem right to go down unnecessarily premature and voluntarily)?

I have also been reluctant to comment on current market conditions simply because much of it seems to be irrational. I see bubbles, mini-bubbles and speculation everywhere. The Depression wiped out speculation (particularly leveraged speculation) in financial markets for decades. Our two recent experiences, the tech and the housing bubbles and their aftermaths, seem to have encouraged even more speculation rather than extinguishing it. The 70′s bear markets also punished speculation. Have we entered a new paradigm or is there worse to come?

To appease the desire to be constructive, here are a few practical solutions, facts and thoughts destined for the dustbin:

• Taxes are low by historical standards. Very low. Currently, the Treasury is collecting just 14% of GDP in revenue. The average has been 18-20%. How can anyone realistically complain taxes are too high? Roughly half the current deficit is due to lower revenue, half due to increased spending of which most was supposed to be temporary. And the lower revenue part is in large part due to tax reductions meant to stimulative, which we might consider as ‘alternative spending’, I guess. Those are the facts.
• Longer-term, Social Security and Medicare are the budgetary problems. Social Security has some easy fixes, namely lifting in whole or in part the wage cap. No one pays the SS tax on income over $106,000, which you may be surprised to learn wasn’t always the case. Medicare is the real basket case. Unfortunately, the problem there is multidimensional:
• Too few workers supporting too many retirees. These demographics were known decades ago, but as is typical, the Boomer generation has voted in policy which directs benefits to them at everyone else’s expense.
• Obamacare solves little. It does not address the real cause of expensive health care, instead it treats some of the symptoms. Symptoms such as the fact that some 40million people can’t afford insurance; that many things we would like covered are often not; that people are often denied coverage at any price; and that we all want the best unlimited treatment and feel entitled to it. These symptoms are all a natural result of the disease which has something to do with non-transparent pricing (any idea what an xray costs before you get it?), poor incentives (do you care what the xray costs when the co-pay is just $25?; does an insurance company care if your xray is denied when by the time the complications arise, you probably work for someone else and have a different insurer? etc); and if I get sick, whether that is cancer, heart disease or a bunion, I want the best, don’t care what it costs and want someone else to pay for it! Obamacare does not address any of these root problems and it appears few want to. Until then, the Medicare situation is going to get worse.
• As Medicare gets worse, the policy prescription will almost certainly be to cut benefits and/or raise taxes, which will make us sicker and poorer as a nation still. The first change I would make is to raise the eligibility age for Medicare from65 to 67 to match the SS full retirement age. I would add a system where anyone over a certain age, say 62, could purchase coverage at a fair and actuarially true price. Eliminate Part D. Let the insurance and pharma companies figure out how to offer care economically. Let them compete with a non-profit. Remove the “economic rent” seeking that pharma and big insurers have legislated in place for them (which requires massive overhaul, but could be started incrementally).
• Inequity & Shared Sacrifice. There is something horribly wrong with today’s policy prescriptions. We are unfairly indebting future generations to benefit the Boomer retirees. Yet, the Boomers did faithfully pay into the system their whole lives. Where is the fairness to either side? It seems the country needs a sense of shared sacrifice to unify and make the big decisions. WWII gave us that for decades, but no one should have to go through that again. No wonder older folks decry aloud “what happened to my country?”
• Some sort of economic Marshall plan seems possible. Higher income taxes, but also a more neutral corporate tax policy (stop the subsidy, but encourage capital formation), public works such as infrastructure, true healthcare reform, a renewable energy “space race” complete with a new electric grid- all with definite quantifiable goals and an end in sight. If any normal family were faced with tough times, family members would pitch in. They’d do the yard work together, fix the drafty windows, give up a few luxuries, and the teens would help with the groceries until mom/dad could get a better job and sis got out the hospital. Is America a decent family or a dysfunctional one?
• I recommend paying for this economic Marshall plan with fully amortizing 20-30yr bonds – thus, they repay principal as well as interest, just like a mortgage. In conjunction with real entitlement reform, this would affirm both our commitment to practicality and confidence in our debt.

Thanks for a good opportunity to explain how I currently see things, FC. I will probably blog more again in the future, but I see no point in getting bogged down in depressing dead end discussions. I encourage the discussion in any way I can help, especially if it can be positive in nature. Any suggestions, questions and contributions are welcome (really!).

Thanks,

Brett

Article on the state of economics

Brad Delong just posted about “Economics in Crisis” referring to current thinking in the profession. I think he’s right and recommend this article.

http://www.project-syndicate.org/commentary/delong113/English

Keynes vs. Hayek Round 2

In case you missed it, Round 1 is here.  A bit biased, but brilliant nonetheless. Enjoy.

A Greek Tragedy for Anti-Keynsians

It’s common for Austrians and pro-freemarketers to lambast even light Keynesians about their conclusions. We hear things such as “you just don’t understand” economics or markets constantly. For better or worse, Wall Street is overwhelmingly pro- free market and anti-Keynesian. As we often point out, people have a fantastic ability to fool themselves. Here is a great example.

Keynes vs. Hayek

Yo yo yo! Rap style!

Word.

Keynes wasn’t all wrong. He just wasn’t all right.

Keynes’ General Theory of Employment, Interest and Money revolutionized economic thought in 1936 and ignited a debate that continues to this day. Prior to Keynes, classical economists correctly believed that economies have self-correcting mechanisms that maintained prosperity and full employment. Keynes argued that the propensity of firms to invest could be too low compared with that of household savings, leading to recurring depressions. Keynes believed that through government fiscal policy, i.e. lower taxes and higher spending, that the government could help the private sector and restore full employment. Politicians seem to have forgotten the part of the policy about lower taxes for the most part.

The Great Long Run Blog Debate #2: Keynesian Economics

Keynes has been a popular topic lately. By Keynes I mean both John Maynard and his economic theory of government intervention into the free market. To quote wiki:

Idiot Revisited: Fisher

A while back, last September 9th to be exact and right before the world really fell apart, I took some flack for calling the Dallas Fed President Richard Fisher the economic idiot of the week. If you don’t recall why, let me help you. As the world was rapidly deflating in a giant credit crunch, Mr. Fisher’s position was described in the Fed’s meeting minutes as

“While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation.” [Emphasis mine]

A few months later he changed his tune and accepted that the right thing to do during a credit crunch is not tighten credit, but rather expand credit and liquidity. Thankfully, Bernanke already knew this.

I raise this issue again because Mr. Fisher was in the news again today. Bloomberg reported on some of his remarks this week. I’ll quote from Bloomberg’s article (again, emphasis mine):

Sokath, his eyes opened

I recently moved back to Canada after living for four years in Seoul, Korea. Before Seoul, I spent four years in Seattle, WA. For the first time in eight years I’m a Canadian tax payer and soon to be a voter again. We’re having a Federal election in October. I’m thinking of voting for the Natural Law Party as a kind of protest vote. The Liberal and Conservative parties look nothing like the versions I knew eight years ago.

One of the interesting things about living abroad is you begin to understand how much internal propaganda your own nation generates and how much you subconsciously swallow. It’s not until you live abroad and see Americans or Koreans telling themselves nearly the same kinds of things Canadian tell each other, you realize this.

Economic Idiot of the Week

The Fed doesn’t get it, at least not entirely. While I normally don’t read the minutes to the Federal Open Market Committee meetings, I thought they might shed light on the Fed’s thinking at this critical stage in the economy. Here is a paragraph from the minutes of the August 5th meeting: