Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
It is funny being part of a profession which doesn’t deserve to exist in its current form. The fact is that I might have better helped the world if I was an anthropologist or perhaps just stayed being a professional musician. My profession is a total disgrace and our arrogance leaves us blind to reality. The latest survey by the National Association for Business Economics reinforces how far removed from reality my profession is. They think the most pressing problem in the US at the moment is the deficit and the public debt and downplay the importance of the entrenched unemployment. When pressed to explain this crazy set of priorities they invent a fantastic (as in fantasy) narrative about the dangers of deficits (which are?) and emphasise that unemployment is largely a voluntary choice by the individuals involved. The academic members of the profession teach their students this nonsense. They talk about the virtues of efficiency but ignore the huge losses that arise from unemployment. The reality is that the economics profession is a disgrace.
First, I was interested in this article in the UK Guardian (March 2, 2011) – The business press must prove its economic literacy – which seemed to echo a concern that I often express in this blog.
The author said:
The media reported the financial crisis and stimulus poorly. Now the story is deficit and cuts, is it equal to the task? The drama of Wisconsin and the fights down in DC about the state of government finances are a chance for US journalists to write about an economic story that affects everyone. It would be good to see more articles on the big picture questions of what sort of policies make sense, rather than just ones about the political processes of what sort of legislation will get passed.
We should all be able to relate to that.
The mainstream finance and economics media is divided into two types of journalist. First, the interesting writers who mostly do not fully understand the way the monetary system operates and who have been educated only in the language and reasoning of orthodox macroeconomics but try to offer some sort of balance. They usually get a “deficit dove” to reflect the progressive viewpoint and usually fail to understand that that the doves are part of the problem.
Second, the lazy journalists who do not understand very much and choose mostly to rehearse press releases from organisations or from politicians in an uncritical way. They become mouthpieces for the conservative think-tanks and have zero credibility.
I often get called up by journalists (most days) and some of them astound me with the questions they ask – such is the level of ignorance. Others are well-intentioned and closer to reality.
So it would be good to “see more articles on the big picture questions” in the current macro debate. The biggest picture is unemployment and rising inequality. But even articles that attempt to provide more than rabid political posturing such as “the US has run out of money” etc fail dismally to represent the situation as it is.
The Guardian author holds out an example of what she thinks is a good reporting approach:
A recent report in the Christian Science Monitor was a good example of the kind of drill-down coverage we need more of. By contrast, it’s been disappointing to see the news pages (though not the opinion columns) of the New York Times report on the deficit as though there is no room for debate about whether cutting spending is even a good idea right now.
The article she referred to (February 22, 2011) – Why the budget deficit is so hard for Congress to shrink – is not a model for accurate reporting.
The CSM article notes that even if the US Congress:
… takes a machete to … discretionary spending – it will barely make a dent in the budget deficit. That’s because a growing share of the US budget is dedicated to entitlement programs for retirees and the indigent and to paying interest on the national debt – none of which is part of Congress’s annual budget cycle or easy to reduce.
But it doesn’t provide any analysis of why it is a non-issue to worry about any of these things …
It chooses to reiterate the erroneous statements of neo-liberal organisations such as the Committee for a Responsible Federal Budget which it calls “bipartisan”. What does “bipartisan” mean when both major political parties are neo-liberal? Answer: nothing. So why include it as descriptor that we should take into account and attribute increased credibility to anything the organisation says?
The article suggests that the National Commission on Fiscal Responsibility and Reform (Obama’s neo-liberal organisation to advise the government on fiscal policy) has been prescient in bringing what they call the impending fiscal disaster to our attention.
So we read statements like this:
If current policy does not change, rising retiree health costs and claims on Social Security will propel mandatory spending to levels never seen before, squeezing out room for future discretionary spending.
That is a total lie. Even if outlays increase for health and pensions as a result of an ageing population the US government is not squeezed for future discretionary spending. To suggest that US government has to make “financial” trade-offs is a lie. All trade-offs when there are underutilised resources are political.
The US government can and will always be able to purchase anything that is available for sale in US dollars and can always pay their pension obligations as well as purchase other things that are available for sale.
The only issue will be whether there are real resources available to be purchased. But that is not a consequence of any financial constraint.
Running a deficit now does not diminish the capacity of a sovereign government to run a deficit next period or the period after next. If the economy reaches full capacity and non-discretionary government spending pushes the economy beyond the inflation barrier (that is, pushes demand (spending) beyond the capacity of the firms to respond in real terms (increase output) then political choices have to be made. There are no financial constraints involved here.
The article which the Guardian author thinks is a model for financial and economic commentary then articulates a number of “scary” financial ratios. For example, we read that “(b)y 2025, Medicare, Medicaid, Social Security, and interest on the federal debt would claim all federal revenues”. So what?
What is the point? There is no point that we should be worried about from a monetary perspective. We might not want the recipients to have that standard of living – but that judgement will reflect political considerations. We might not be able to provide that standard of living – from the perspective of available real resources. But again this is not a financial constraint.
There is no discussion in the CSM article questioning the monetary basis of the discussion about deficits and public debt. There is no critical argument.
I found the “model” article to be appalling.
Then I was sent the latest survey conducted by the National Association for Business Economics (NABE) who describe themselves by way of understatement (not!) as:
… the premier professional association for business economists and those who use economics in the workplace. Since 1959, NABE has attracted the brightest minds and the most prominent figures in economics, business, and academia to its membership with highly-regarded conferences, educational and career development offerings, industry surveys, and its unrivaled networking opportunities.
All those brightest minds must be quite glaring – as in shining intensely! Don’t you just love an organisation that has to actually tell you – in your face like – that they are the brightest, most prominent people who are clearly so important and unrivalled. I suppose when there is little substance to hang on to the rhetoric becomes all you have.
But the only thing that is glaring about NABE (as in patently obvious or blatant) is the degree to which the NABE panel is incapable of predicting anything with any accuracy.
For example, CNN who came up with the Brainstorming the Deficit segment this week only to put three commentators and a presenter in front of us whose collective grey matter in relation to macroeconomics is questionable to say the least had previously waxed lyrical about the NABE panel’s predictive capacity.
On May 19, 2008, CNN Money noted that:
A survey to be released Monday by the National Association for Business Economics found a majority of economists now believe the economy is in a recession or will be in one this year. A February survey found a slight majority still expecting to avoid a recession.
The latest survey also found and that forecasters expect unemployment to continue to rise, but that they believe the economy has already weathered the worst of the housing downturn and credit crunch.
May 19, 2008! What happened after that? We all know.
The NABE panel was hopelessly wrong – they were oblivious to the dynamics that had been building for some years that a financial disaster was coming. By the third-quarter of 2008 that is what happened. The US credit market worsened crisis and the US housing market collapsed. Unemployment not only rose – it skyrocketed as the recession deepened and persisted well into 2009.
The problem is that it is the likes of these characters who were incapable of seeing the worst recession in 80 years that was looming up before them but who are now lecturing us from behind the desks of their secure jobs that the deficit is the number one problem.
We should discount their predictions by 100 per cent – that is, ignore them. They are charlatans to say the least. The reason they continually make errors in their outlook is because they do not have models that reflect an understanding of the way the system actually works.
CNN Money was at it again this week when the NABE put out its February 2011 forecasts from its “brilliant” panel. they are running a series which it is calling “America’s Debt Crisis”. It is public debt they are referring to when the crisis was (and probably still is) the private debt. But whoever produces CNN Money clearly is incapable of appreciating that obvious point.
In the recent news report (February 28, 2011) within this series – Economists’ biggest worry: Federal budget deficit – the senior CNN Money writer reports that:
Government deficits are the biggest long-term worry of top U.S. economists, according to a survey released Monday.
The survey of 47 top economists by the National Association of Business Economics predicted that the Federal deficit will jump to $1.4 trillion in the fiscal year ending in September. In the November survey, the economists had forecast a $1.1 trillion deficit.
What does it take to be a top economist? Answer: the more errors you make the higher you will be ranked as long as you make your predictions with an air of authority and clothe them in jargon no-one will know the difference. Once your predictions go awry (as they always do) it is a simple matter of blaming one or more pieces of government policy as the culprit.
When things get dire – that is, some progressive corners you and is about to reveal how bereft your understanding of the economy is you can always pull out the “the facts are wrong” defence which usually works.
If things going really bad – you can just lie low – take whatever public handouts are forthcoming which allow you to keep your job and high salary – and when the air is a bit clearer – resume your attack on public handouts. You can also do this while away down or up the coast while holidaying in your nice seaside home with boat. Or whatever!
Anyway, with reference to the February 2011 NABE Survey, CNN Money says that:
Asked to rank the seriousness of various economic problems, with one meaning no concern and five equaling extreme concern, the federal deficit was the biggest worry, with an average score of 4.1.
State and local government budget deficits and debt was the second biggest worry with a score of 3.4.
The Survey itself (which I cannot link to because you have to pay for it – mine came off the back of the truck) actually said:
Panelists continue to characterize excessive federal indebtedness as their single greatest concern
So unemployment was ranked well down the list of concerns yet a non-issue – the size of the federal deficit and related build-up of federal debt is “their greatest concern”.
Unemployment is a real problem in the sense that it summarises a massive daily loss of income (production). Most people do not understand the daily scale of the losses that arise when there is mass unemployment. The lost income is never regained – it is what economists call deadweight losses.
If you are unsure I recommend you read this blog – The daily losses from unemployment – which provides further detail.
In addition to the economic losses (real output foregone and lost income) there are huge social costs associated with entrenched unemployment which spans the generations. A child growing up in a jobless household tends to inherit that disadvantage and display problematic labour market outcomes as adults. So a poor policy choice now – not to target low unemployment – commits the society to a diminished future.
The inherited disadvantage is easily prevented – direct public sector job creation. But my colleagues do not think it is a high priority. They prefer to focus on so-called microeconomic inefficiencies and alleged public finance issues.
The microeconomic inefficiencies inasmuch as they arise are always measured by agencies that do that sort of thing (for example, the Productivity Commission in Australia) to be relatively minor compared to the macroeconomic losses associated with unemployment.
But while my professional academic colleagues hector students who are forced to listen to them in lecture theatres in order to graduate in economics about the need for “optimal allocation” of resources and the primacy of “efficiency in resource use” they overlook the largest inefficiency of them all – mass unemployment.
My professional academic colleagues spend an inordinate amount of time writing about optimal policy frameworks which then form the basis of the lobbying efforts which pressure governments to privatise, deregulate, cut benefits, attack the poor etc. Yet when it is clear that governments can actually avoid these massive macroeconomic losses they claim that the “deficits” are the number one problem.
Question: What demonstrated costs are there relating to on-going budget deficits? Answer: none excepting the bright officers who are tied up in the unnecessary process of issuing debt to match the rise in the deficit ($-for-$) when they could be doing something useful.
Question: Who is worse off when the government runs a deficit? Answer: no-one, everyone is better off.
Question: What would have happened if the governments around the world had have followed the advice of my professional colleagues to let the market sort the financial crisis out? Answer: the total collapse of the financial system and the real production system.
My professional colleagues didn’t even see the collapse coming. So what would they know about anything that is important to the welfare of our communities. Answer: nothing.
I also note that in its November survey, the NABE panel said that the US Federal Reserve’s purchase of bonds would be inflationary. Some months later when it is clear that the only inflationary pressures are on the supply side (food and oil) the economists are backtracking in the February 2011 survey.\\
The majority of financial and economics journalists are part of the problem and fail the test of journalists – to ask questions and get to the bottom of things. Most of the reports are meagre reiterations of what some conservative (read majority) economist has said.
The same economists failed to even see the crisis coming even as it was already manifesting. These economists should be brought to justice for the statements they make and the policy influence they have. Their record of prediction is appalling and their policy advice leads to damaging policies.
That is enough for today!