Economics: Science, Art, Religion? Choose One

 I have dabbled in economics from time to time. The first thing I noted is that it uses mathematics to hide gross ignorance. Macroeconomics is especially prone to this. Lots of hand waving and assuming elephants had wings and then one is off to the circus.

Skidelsky has written an interesting piece. He notes:

The problem with quantitative easing (QE), quipped then-US Federal Reserve Chair Ben Bernanke in 2014 about the Fed’s bond-buying program, “is it works in practice but it doesn’t work in theory.” One could say the same about macroeconomic policy in general, in the sense that there is no robust theory behind it. Governments routinely “stimulate” the economy to “fight” unemployment, but with a theory that denies there is any unemployment to fight. 

 Macros generate tons of large scale data and then they try to understand this data via modela which may or may not be verifiable. Their models assume human behavior models which all too often are wanting. He continues:

The key assumption here is that everyone optimizes: they choose the best available option for themselves. Work is always available at some price. Therefore, unemployment is optimal for the unemployed. Given the assumption, the logic is unassailable. 

He proceeds as follows:

The relationship between theory and practice is thus not as Bernanke saw it. Monetary policy works in theory but not in practice; fiscal policy works in practice but not in theory. Fiscal Keynesianism is still a policy in search of a theory. Acemoglu, Laibson, and List supply a piece of the missing theory when they note that shocks are “hard to predict.” Keynes would have said they are impossible to predict, which is why he rejected the standard view that economies are cyclically stable in the absence of shocks (which is as useless as saying that leaves don’t flutter in the absence of wind). 

Theories after theories. We are now facing and  massive macro upheaval and it appears that having no rudder, compass, and not even seeing the sunlight, we sail ahead possibly over the abyss. 

FED Balance Sheet

 It is worth looking at this before we add another $2 trillion. Just Treasury Noted and MBS have exploded in the last year. We saw a slight dip back to rationality but it jumped.

The split is shown below.

The chart below is the total, and we are well above $7 trillion in debt. Compare that to 2007 which is about one tenth.

The complete profile is below.

FED Balance Sheet

Just thought it would be interesting to see the FED Balance Sheet.  Talk about an impulse function. Yep, that is a large blip, will be around for a while. The low end was before the 2008 disaster.

The above is the percent breakout of the massive doubling of the balance sheet.

Other People's Money

Louis Brandeis wrote a book on Other People's Money a century or more ago. It is worth the read:

President Wilson, when Governor, declared in 1911:

“The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great ^ industrial nation is controlled by its system of credit. Our system- of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men, who, even if their actions be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily, by every reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all; and to this, states-men must address themselves with an earnest determination to serve the long future and the true liberties of men.”

The Pujo Committee—appointed in 1912— found:

“Far more dangerous than all that has happened to us in the past in the way of elimination of competition in industry is the control of credit through the domination of these groups over our banks and industries.” . . .“Whether under a different currency system the resources in our banks would be greater or less is comparatively immaterial if they continue to be controlled by a small group.” . . .“It is impossible that there should be competition with all the facilities for raising money or selling large issues of bonds in the hands of these few bankers and their partners and allies, who together dominate the financial policies of most of the existing systems. . . . The acts of this inner group, as here described, have nevertheless been more destructive of competition than anything accomplished by the trusts, for they strike at the very vitals of potential competition in every industry that is under their protection, a condition which if permitted to continue, will render impossible all attempts to restore normal competitive conditions in the industrial world.

Interesting set of observations.

Words Mean Something, I Think

 The NY Times notes the following:

A Harvard-trained economist with outside-the-mainstream views. Mr. Navarro is a former a professor at the University of California, Irvine, who holds a doctorate from Harvard. He is one of the only credentialed economists in Mr. Trump’s inner circle.

Now I do not know this fellow and I know even less about trade. In fact I am not a fan of economists period so having just one may even be a good idea. But that is not the point either.

The NY Times had a style book and editors. So here is where I am going off the track. One trains a dog, a horse, maybe even a mouse. One never trains a cat, but I leave that to cat lovers. Harvard "educates" people, MIT even does that. The Commonwealth of Massachusetts used to have Training Schools for Juvenile Delinquents. But Universities, especially Harvard, do not "train" people.

Thus I ask the noble NY Times, why did you select this verb? It most likely is not allowed in your style book, and its usage, besides being derogatory, states that the article is political and not factual. One perhaps must reject all of its contents.

Now on to tariffs. Everyone one seems to be for free trade, even the President suggested the elimination of tariffs. But it may be perhaps of value if someone could lay out the current tariffs. Let's just start with Canada. Having a home on northern New Hampshire I always see a constant flow of trucks from Quebec coming south, even with wood. That is somewhat like bringing coals to Newcastle but then again I never spent any time in the lumber trade.

So my point is simple. Stay with the facts. Harvard has not trained anyone since pre-WW II NROTC units and tariffs really need to be let out in the sunshine. Oh yes, and for the economists, perhaps zero is a good number.

Economics 101?

I always have had a problem with economics. It inherently assumes some basis rules that humans will follow when producing and selling. Having spent time across a wide base of businesses there is only one thing I know; competitors can do really strange things.

Now in a piece in Cafe Hayek the author notes:

In one of the most astonishingly fallacious assertions in an essay teeming with astonishingly fallacious assertions, ..... writes “Critics claim tariffs will raise steel prices.  That’s questionable.  The opposite is more likely to happen, industry experts suggest.  Tariffs will shift demand to domestic steel, enabling plants here to operate closer to capacity.  That will bring down the unit price of American-made steel – not raise it.  That’s Economics 101” ... Here are relevant lessons that are really taught in Economics 101 ... First, shielding producers from competition makes the outputs they produce more scarce, thus raising prices.  Second, if it is true ..... that untapped economies of scale are available by expanding outputs, and that such expansions will lower prices and enable (in this case) American steel and aluminum producers to profitably charge lower prices than they now charge, then American steel and aluminum producers will so expand their outputs without any government prodding.  So why have they not yet done so? That is.... the current existence of untapped economies of scale is true, then the men and women who currently run American steel- and aluminum-producing firms should not be rewarded with protection from competition but, instead, fired for gross incompetence.

 First, I guess if you make more perhaps the price would go down. But that depends on how rational the manufacturer is. They often do not do what one would expect. How do they set a price? Tariffs are just a plain tax on one segment of suppliers. If that supplier can deliver at a lower price then the tax brings the effective price higher. Got that, I think. But is the price related to the cost? Is the supplier subsidized?

The second argument is that there are scale economies and if so then the domestic manufacturer could use them to compete with an import. This again assumes that the management is willing to risk this because the competitor could drop their prices and it becomes a price death spiral. No logic, just price competition. Then the customers may start to hedge on futures against price changes and so forth.

The problem with economics is that managers are not as rational as the economists think they should be. The often do "stupid" things, which leads to results which are against "theory" and then the other side does similar things.

The true argument is not looking at this dispassionately as an economist but trying to understand the management and their motivation, as well as the customer, as well as the financial markets. It is truly messy! That is why I find economics too neat for a messy world.

Economics: Old and Older

In a piece in Project Syndicate, that left wing blog which seems to be a watering hole for economists and others espousing their political versions of reality, springs forth a defense of the economics, both old and older.

Skidelsky, a defender of Keynes and other left leaning purveyors of the art of economics states:

A decade ago, two schools of macroeconomists contended for primacy: the New Classical – or the “freshwater” – School, descended from Milton Friedman and Robert Lucas and headquartered at the University of Chicago, and the New Keynesian, or “saltwater,” School, descended from John Maynard Keynes, and based at MIT and Harvard. Freshwater-types believed that budgets deficits were always bad, whereas the saltwater camp believed that deficits were beneficial in a slump. Krugman is a New Keynesian, and his essay was intended to show that the Great Recession vindicated standard New Keynesian models.But there are serious problems with Krugman’s narrative. For starters, there is his answer to Queen Elizabeth II’s now-famous question: “Why did no one see it coming?” Krugman’s cheerful response is that the New Keynesians were looking the other way. Theirs was a failure not of theory, but of “data collection.” They had “overlooked” crucial institutional changes in the financial system. While this was regrettable, it raised no “deep conceptual issue” – that is, it didn’t demand that they reconsider their theory.

 I believe there was and is a fundamental problem. Economics works best when looking backward. It fails almost continuously looking forwards. It can collect and analyze existing facts, yet it cannot use the facts in any predictive manner. Take the classic example of unemployment as predicted by Romer. She said we would drop to 5% in just a short while. It took nine years. Did unemployment eventually get there? Yes, but time is as important as the end point. 

The Government under the last Administration threw ten trillion dollars at the problem, doubling the debt, and far exceeding anything that FDR ever contemplated. But when did the stock market respond, after a new Administration came. Was it in response to any new policy, perhaps.

Skidelsky continues:

Krugman comes close to acknowledging this: New Keynesians, he writes, “start with rational behavior and market equilibrium as a baseline, and try to get economic dysfunction by tweaking that baseline at the edges.” Such tweaks enable New Keynesian models to generate temporary real effects from nominal shocks, and thus justify quite radical intervention in times of emergency. But no tweaks can create a strong enough case to justify sustained interventionist policy. The problem for New Keynesian macroeconomists is that they fail to acknowledge radical uncertainty in their models, leaving them without any theory of what to do in good times in order to avoid the bad times. Their focus on nominal wage and price rigidities implies that if these factors were absent, equilibrium would readily be achieved. They regard the financial sector as neutral, not as fundamental (capitalism’s “ephor,” as Joseph Schumpeter put it).

Tweaking is what you do when the theory and data do now comport. Macro-economists should admit that their  theories are pure speculation. Inherent in the macro world are the effects of externalities that all too often dominate the result. Radical uncertainties are pandemic in the current world environment. That demands leadership not economics.

Economists: Do They Make Sense?

Perhaps it is because I am writing a long work centered in the 14th century amidst the academics studying grammar and logic, among a few other things, I have become concerned by the use of words and the application of logic. Let's leave aside the induction/deduction issue and consider a NY Times piece by one of those Harvard folks.

The piece states:

The question is whether Mr. Trump can alter these disturbing trends. Few economists point to flawed trade agreements as the main source of the problem, as the president often does. More important is what economists call skill-biased technological change. When entrepreneurs introduce new technologies — think robots, for instance — those advances are likely to replace unskilled workers. At the same time, skilled workers are needed to implement and maintain the new technologies. As the demand for unskilled workers falls and the demand for skilled workers rises, the wage gap grows larger. The solution is to increase the skills of the labor force through better education and training. Yet this is easier said than done.

Yes it is easier said than done. The assumption in the above, and it may be correct, is that as technology advances, technology developed by engineers using scientific advancements, no T&M parts here, I include Math folks in science, it is after all the Queen of all of them, and frankly I have no idea what Technology means. Then we have these smart productive people building better machines and improved medicines and treatments, and real smart people using them, where do all the other people go? Namely the people who failed to be productive in High School or majored in graphic arts, History, or political science. We can afford just so many lawyers and I suspect that they too will become somewhat obsolete.

What is a skilled worker? Clearly an economist most likely is not a skilled worker. What can they make? Charts, projections, like the Roper curve, which often do not turn out even nearly close. Can they install a light bulb, a faucet, a bookcase? The solution is not to increase the capabilities of the labor force. We cannot do that. People must make a choice to defer some gratification and work hard and be productive learning the skills. You cannot "teach" them. Frankly I have never been able to "teach" someone, especially some one who would rather be drinking beer or watching some football game. 

What motivates someone to do this? Generally the reality of the alternative. More so the reality of the economic choice they are making. If we want these types of people then we can spend money on them. Namely we give student aid to those in productive fields and no others. No loans for economics, history, political science. Full room board and tuition for engineering and science. Oh yes, throw medicine in that pool as well. That way at a very early age we can send real economic messages to students. Get a good job and at no cost. They win, the economy wins. The criteria for these sets of funding are merely performance. Do well in Grammar School, you get a good secondary, then do the same and a good college, and so forth. I believe that is economics without economists.

Tax and Spend Republicans

They are at it again. The Luddites who believe that the only way to attack an issue is to tax it. The NY Times presents another article by the group of tax and spend Republicans. The authors state:

First, the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints. Second, the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments. Third, American companies exporting to countries without comparable carbon pricing would receive rebates on the carbon taxes they’ve paid on those products, while imports from such countries would face fees on the carbon content of their products. This would protect American competitiveness and punish free-riding by other nations, encouraging them to adopt their own carbon pricing. Finally, regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan.

Has anyone ever heard of the Government "returning" money! Are they living in some alternate universe. Also, again, unlike Harvard Professors, what of the poor person living pay check to pay check. Tax the hell out of everything and then a year later perhaps send them a check. That may have starved to death by then!

Why not solve the problem. Like engineers do! Perhaps that is why Harvard has no Engineering school, it would harm the economists!

Could Not Agree More

What is Economics? That question is what was the start of this Blog. Now I am not an economist, nor do I pretend to affect any tenancy thereto. I have studied Economics, I have critiqued Economics, I have even disdained Economics. You see, unlike the real world, and one would think Economics is more real than anything, Economics is in today's world opinion and not science. It is a collection of idea, emboldened by mathematics, that state the way the world should work from the eyes of the presenter.

Now in a recent piece Skildelsky states:

What unites the great economists, and many other good ones, is a broad education and outlook. This gives them access to many different ways of understanding the economy. The giants of earlier generations knew a lot of things besides economics. Keynes graduated in mathematics, but was steeped in the classics (and studied economics for less than a year before starting to teach it). Schumpeter got his PhD in law; Hayek’s were in law and political science, and he also studied philosophy, psychology, and brain anatomy. Today’s professional economists, by contrast, have studied almost nothing but economics. They don’t even read the classics of their own discipline. Economic history comes, if at all, from data sets. Philosophy, which could teach them about the limits of the economic method, is a closed book. Mathematics, demanding and seductive, has monopolized their mental horizons. The economists are the idiots savants of our time. 

Indeed,  if Economists were first engineers, physicians, plumbers, carpenters, or some professions based in reality then perhaps so too would be there prognostications. Remember the employment rate curves sent out eight years ago by the Administrations incoming Economists. Never worked so what did they do? Changed the rules. Eliminated tens of millions from those looking for jobs. If your theory does not work, change the data.

Try that one on a bridge. Gravity is not as kind!

Do You Trust an Economist?

Over the past eight years I have examined economists and the economy. Now in many ways economists are akin to the Scholastics in the 13th Century. They follow a set of rules for the debate and adherence to the rules often surpasses the facts. We have gotten a mass of confusing and conflicting tales from some of the best. I had followed Romer's employment projections just before the change in Administration and we all know how they turned out.

Now another Ivy league savant basically states that is is we uneducated, that is PhD engineers from MIT, who are misguided. In the NY Times the savant states:

Voters clearly aren’t listening to economists. In a recent poll, an overwhelming number of leading economists agreed that Brexit would most likely lower incomes both in Britain and in the rest of the European Union. Similarly, in the United States, most top economists agree that “past major trade deals have benefited most Americans” and that “trade with China makes most Americans better off.” But those aren’t sentiments we will be hearing anytime soon from Mr. Trump or Mrs. Clinton.In one respect, it is easy to understand why. According to a CBS News/New York Times poll conducted last month, only 35 percent of registered voters thought the United States gained from globalization, while 55 percent thought it lost. On issues of international trade, the current crop of candidates is following public opinion. 

The real problem is not that we are not listening but that we are and it is all too often a cacaphony of conflicting ideas devoid of any factual base. They are politically oriented opinions. There are no laws of nature in economics. We know more about cancer genetic dynamics than we know about trade. We feel trade as a good or bad thing, yet it is complex and it benefits are often lacking. We see everything as made in China, Vietnam, Philippines, Malaysia, Cambodia, but then again we see nothing made in Russia or even Argentina.  

Leadership can focus the populace on the benefits and make them see what works, Lack of leadership results in lack of trust, lack of trust then in suspicion, especially of all things. 

Thus is is not the white non-college educated males that are the economists problem.  It is the PhDs who work in the real world that do not tolerate the mystical machinations of these soothsayers. Sorry folks, we just don't trust you.