Economic Views – a Thought Brought About by Yves Smith’s (Excellent Book) Econned

by cactus

Economic Views – a Thought Brought About by Yves Smith’s (Excellent Book) Econned

I’m still reading Econned, by Yves Smith. Sadly, these days I only have two minutes here or five minutes there. One day I will post something about everything going on right now, but that’s for another time.

Anyway, its not a breezy book, but if you are willing to put in the effort, it is perhaps the best critique of where the economics field is right now that I have come across. I highly recommend it.

But I do have a quibble. Smith talks about how economists have built up a practice that makes a fetish of using fancy and elegant math. However, doing so often requires crazy, unrealistic assumptions, which might be OK, except that the predictions usually have very little to do with the real world either. Thus, GIGO.

However, Smith notes that somehow, economists whose models are based on silly assumptions and produce unrealistic outcomes are nevertheless very respected and have a seat at the policy table – a seat, incidentally, that is denied to those who don’t understand the math & models, or even other economists who think that unrealistic outcomes are a problem.

Perhaps the reason I agree with Smith is that I’ve stated similar things here at AB for the past few years. Consider the following graph, variations of which I’ve posted a few times last year here at AB:

(Quick notes… the data comes from the BEA’s NIPA Table 7.1, and the graph shows the annualized change from the year before a President takes office to his last full year in office. For those leaving mid-term due to death or resignation, the last full year is the calendar year prior to departure if the Presidency ended in the first half o the calendar year. Note also that I’ve posted a few graphs showing that FDR still outperforms all comers even when you stop his term in 1938, in the middle of a big recession. Additionally, the Democrats outperform Republicans even if you eliminate the best performing Democrat and the worst performing Republican.)

Now, I like this graph because it is simple, and it makes a few points very easily. There is no amount of massaging this that can make it compatible with Republican/Austrian School/Libertarian dogma. (And yes, Obama isn’t on this… and he may yet underperform… but then, FDR inherited the Great Depression, and his first year was much worse than Obama’s.)

Personally, if I believed in Republican/Austrian School/Libertarian, I’d either be putting a heck of a lot of time and effort into explaining why the results don’t apply, or, if I could not come up with a home run explanation, I’d give up my views. And that, btw, is what happened. I graduated from high school in the mid-80s, and I believed in Reagan the way, well, folks who call themselves Republican/Austrian School/Libertarian believe in him now. But some time in college I started looking at data, and realized that the data simply didn’t match the pretty story, and my choice was to go with the data or go with the pretty story. The fact that members of these dogmas don’t know or care that reality doesn’t fit their beliefs makes me a bit leery of other things they believe in as well. And yet, Republican/Austrian School/Libertarian is now the dominant paradigm. Even most Democrats believe cutting taxes, for instance increases growth – they just feel that even so, in most cases, the non-growth related benefits of keeping taxes higher (say, to pay for certain programs) makes it worth not cutting taxes in many instances.

But Smith goes farther. Consider this: “the assume that only they are qualified to opine about matters economic.”

I agree with part of this. I don’t think one needs to be an economist to opine about matters economic, especially when so many economists hold views that contradict reality. But plenty of ordinary people have views that diverge from reality at least as much as your typical U of Chicago econ prof. My bet is that most people at a Tea Party gathering would consider the graph posted above to be a hoax. If they were paid to spend a few minutes working out the results themselves, that probably wouldn’t change their minds. My bet is most of them would simply get angry.

Economics is not rocket science. Its not even civil engineering. (And no, I do not want Joe Sixpack opining on exactly how much concrete should go into the bridge that I’ll be driving on, thank you very much.) So what can be done to make it more likely that people making decisions have at least some vague passing acquaintance with reality?
by cactus