Monday, August 27, 2012

The Altar of Economic Ignorance

After the financial meltdown of 2007-2009, spurred on by the huge losses incurred by financial institutions from mortgage-backed securities, one of the immediate and most predictable consequences was a search for the "why" behind it all. Needless to say, this resulted in a good number of books written by various people, all attempting to explain this "why," sometimes in general and sometimes with regard to very specific situations that may or may not have been trigger events for the collapse. And, as can be expected, some of the books are better--and more authoritative--than others.

For those interested, I'd recommend two books to read, with regard to the big picture, the general "why" behind it all. First, there is Thomas Sowell's very readable volume The Housing Boom and Bust: Revised Edition. Then, there is Johan Norberg's Financial Fiasco: How America's Infatuation with Home Ownership and Easy Money Created the Economic Crisis. Far more detailed--and difficult--than Sowell's, Nordberg 's book digs deep into the specific mechanisms and policies that created the crisis. With regard to a more limited perspective about a distinct and vitally important situation, there is William D. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, which details the fall of Bear Stearns in relation to the overall crisis.

Those familiar with these authors--especially the first two--might suppose my favoring of them is reflective of my own ideology. And that's fair, because it's more or less true. However, note the bonafides of these men:

Sowell is a published economist with a BA from Harvard, an MA from Columbia, and a doctorate from the University of Chicago, one of the top universities in the world for economic studies. He is currently the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution and is a syndicated columnist.

Norberg was educated in Sweden and has worked for various think tanks, currently serving as a senior fellow at the Cato Institute. In the field of economics, he has received a number of awards. His published works--of which he has quite a few, despite his young age--are academic in nature and have all been lauded for their depth.

Cohan, though less of an academic than the other two, still has impressive credentials, with degrees from Duke and Columbia. He has worked as an investigative reporter, on the financial industry, and has been recognized for his expertise in the field. And the book I've cited here is an investigative one, not one about theory or general idea. Plus, he's actually worked in the filed, having been an executive at both JP Morgan and GE Capital. Thus, this is exactly the kind of thing at which Cohan should excel.

The point of all this? When looking for understanding from others, background matters. Economics and Finance are not simple things, especially when looked at through the prism of government policy. This carries through to those thousands of pieces by journalists, pundits, and politicians that appear in various media sources. How do we know who to believe and who not to believe? Who really has the right of it.


I've devoted a number of pieces to critiques of people like Paul Krugman and Mark Zandi, but why should anyone take me seriously? Well, I'd like to think that I've backed up my criticisms with real evidence and with logically consistent and sustainable arguments, when such is required. Though of course, part of what I am criticizing is fundamental assumptions and ideology, the flawed premises of neo-Keynesians like Krugman and Zandi. And in that regard, I have a lot of ready made support from the folks at Cato, the Heritage Foundation, the Hoover Institute, the Mercatus Center, and Zerohedge.

There is--in my opinion--a true crisis of knowledge in the field of economics right now. Deeply flawed beliefs about the nature of the economy and about the effects of government policy hold sway in a majority of the media, most of whom simply lack the knowledge base to understand why these beliefs are so wrong. So, they allow themselves to find truth via their own political beliefs: they accept as true what they are told to be true from people like Krugman (and each other), but question what really is true because it comes from a different ideological source.

Michael Grunwald has a new book out, The New New Deal: The Hidden Story of Change in the Obama Era. In it, he argues that the Obama Stimulus--the American Recovery and Reinvestment Act of 2009--has gotten something of a raw deal, that criticisms of it are unfair and incorrect, that it has had a huge effect on the nation's economy and can only be called a great success. But Grunwald--while a highly skilled writer and, yes, investigative reporter--probably doesn't have the intellectual chops to make this argument. His bonafides? A BA from Harvard and years of working as a journalist specializing on the environment. The book itself relies on interviews and analysis provided--by and large--by people who have a stake in all of this, who want positive spin on the bill to come out, especially as Election Day nears, not on a fundamental analysis of the economy.

I have not read the book--but I will--so I'm not going to engage in any specific criticisms at this point in time. But already praise for the book is piling up, mostly by like-minded fellow journalists who also lack the knowledge base to pass judgment on the arguments in the book. For instance, there is Alec MacGillis at the New Republic, who doesn't even bother to wonder if Grunwald is making valid points, but just assumes that he is, then takes to task everyone in the media who had dared to criticize the Stimulus bill:
Granted, journalism is just the first draft of history. But in this case, that draft was particularly imperfect, with lasting consequences for how the public came to regard a program that, while not designed as well as it could have been (I’ve written often on my nagging lament about what the program was missing) still did a lot more for the country than it got credit for. It’s a good thing, at least, that we have one journalist who went back to give us a vastly improved second draft.
MacGillis takes it as a given that the Stimulus was a Good Thing. Why? Because fellow journalist Grunwald said it was in a new book. MacGillis' bonafides? Well, he's a journalist. That's about it. Look as this laughable claim by MacGillis, with regard to the effect of Stimulus funds:
If anyone pocketed money illegally, sure, prosecute them, but even if they went out and bought themselves a Harley, it was still economic stimulus.
He thinks he has a point, that such an action qualifies as "economic stimulus" as a matter of course, nevermind the surrounding circumstances. And there still remains no argument--aside from ignorance--as to why the Administration was so terribly wrong on the consequences of the Stimulus bill, with regard to employment.

These two things, the notion of what "economic stimulus" actually means and the consequences of such spending on employment, lay bare the lack of real knowledge in economics on the part of people like Grunwald and MacGillis. And the real tragedy here is that they cannot accept the truth. The self-congratulatory circle-jerk in the world of elite journalists results in self-assurance of their rightness, with regard to these things. Anyone who says differently obviously doesn't know as much, even when they have vastly superior credentials, when it comes to economics.

The upshot of all of this is the idea that maybe the Stimulus bill can be sold as a bold and effective move to jump-start the economy. The lame-brained understanding of "economic stimulus" thus becomes accepted doctrine and the problems of employment are explained away with phony numbers eagerly accepted by people like Grunwald and MacGillis. They defend their beliefs by citing each other, thus perpetuating their own ignorance.

It's a circle of stupidity that's difficult to break. Paul R. Gregory--an actual economist with real credentials in the field including a PHD from Harvard--has a new piece out at Forbes. In it, he lays out some very basic ideas, with regard to how Obama--via action and policy--might actually spur on job growth. In fact, he had sent these same suggestions to the President a year ago, and was predictably ignored. The final suggestion, germane to our current discussion:
Seek and accept the resignations of die-hard Keynesian advisors behind the failed trillion dollar stimulus and who favor more stimulus. They are out of touch with modern economic analysis’s consensus that temporary fiscal measures are ineffective. Keynesian advisors have made the President look foolish and inept with ludicrous arguments that more expenditures on transfers for food stamps and unemployment benefits create jobs and generate recovery. (I guess we should all go on food stamps to promote recovery).
Gregory takes it as a given that the Stimulus was an abysmal failure. Why? Because he knows the reality. It's been analyzed, sliced, and diced by his fellow economists; those with their intellects in the twenty-first century now take the above as a given. Grunwald's arguments in his hew book are stale and meaningless. Gregory is hardly Moses coming down from the mountain here. He's speaking plain truth, supported by empirical evidence. The Stimulus was not a Good Thing. It just wasn't. It was a waste of resources and a waste of time that--at best--impeded recovery.

But journalists like Grunwald and MacGillis can't be bothered with such heresy, because at the end of the day their opinions on the economy aren't based in knowledge, but in ideology. They are a part of a belief system, grounded--ultimately--in a profound ignorance.

Cheers, all.

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