Where economics REALLY gets it wrong

Hey, its election time and even Democrats who should know better are boasting about how they will be better deficit-cutters than the Republicans.  Of course, they don't seem to understand that there is a HUGE difference between running up the tab for real investments (building new energy systems to cope with the end of the Age of Petroleum, etc.) and pure conspicuous waste (the war against the people of Afghanistan.)

The economics "profession" is the cause of this problem.  They actually teach and believe that making clear distinctions between productive investment and waste involves value judgements that would impair the "objectivity" of their so-called "science."  In doing so, they would have the rest of believe that there is really no difference between up and down.  Folks who resolutely believe there is no difference between up and down will very likely get a whole lot of other things wrong.

The Soft Bigotry of Incredibly Low Expectations: The Case of Economists

Dean Baker

Co-Director of the Center for Economic and Policy Research

Posted: September 13, 2010 05:13 PM

In a country with almost 15 million people out of work, it is amazing that any economists still have jobs. This one is their fault first and foremost. Economists are supposed to know about the economy and provide advice on how to avoid disasters before they happen and help us recover from the bad things happen in spite of good advice.

The economics profession has not done well on this simple scorecard. Remarkably, rather than improve their game, economists are now busy dampening down expectations so that the public will not hold them responsible for the state of the economy.

Towards this end, a group of Fed economists recently put out a new studyclaiming that it was impossible for economists to recognize the $8 trillion housing bubble before it wrecked the economy. In effect, they argued that economists should not be blamed for this failure because:

"The state-of-the-art tools of economic science were not capable of predicting with any degree of certainty the collapse of U.S. house prices that started in 2006."

This raises the obvious question: if economists can't see an $8 trillion housing bubble, what can they see? This is bit like the firehouse where everyone sits around calmly sipping their coffee as the school across the street burns down. Completely missing the largest financial bubble in the history of the world is pretty inexcusable, even if economists continue to make excuses.

Having failed to prevent disaster, economists are now anxious to tell us that there is nothing that they can do to remedy the situation. The story they are pushing is the unemployment is structural, not cyclical. This means that people are not unemployed because of a lack of demand in the economy, but rather they are unemployed because there is a mismatch between the available jobs and the skills and location of the available workers. more

Austerity Chic: It's This Year's "Weapons of Mass Destruction"

by RJ Eskow | September 17, 2010 - 10:11am

Sometimes our political commentariat seems to go fashion-crazy. When a new trend gets popular it overwhelms everything in its path: logic, poltical divisions, even expert opinion. The latest vogue is deficit reduction, and our nation's Anna Wintours tell us we simply have to have it. In Washington, screaming about being in the red is the new black.

Call it "austerity chic," and it's catching on fast. We've already written about an odd quartet of recent austerity-chic pieces from pundits that included Tom Friedman and Anne Applebaum. These pieces tell us why we should find this new style appealing: Self-denial is what makes a nation great.

We've seen this herd mentality before, of course, most notably in the run-up to the invasion of Iraq. The experts warned us what would happen, but our keyboard-clacking dedicated followers of fashion thought they knew better. Ever eager to issue the clarion call for sacrifice - on somebody else's part - they issued their calls to arms. Their support played a pivotal role in building support for the invasion.

How'd that work out for you?

Once again, the experts tell us that the warning lights are flashing red and the fashionistas aren't listening. That was made clear again this morning, when a conference call was held to announce that 300 economist and civic leaders have signed a statement saying that "there is a grave danger that the still-fragile economic recovery will be undercut by austerity economics." The statement, released by the Institute For America's Future*, adds: "A turn by major governments away from the promotion of growth and jobs and to premature focus on deficit reduction could slow growth and increase unemployment - and could push us back into recession."

Contrast those sentences with the fetishized way Friedman approached reduced spending in his column. "The Greatest Generation's leaders were never afraid to ask Americans to sacrifice," he writes, whereas today's Americans "had a values breakdown." Here's what Friedman's missing: With 15 million people unemployed and 44 million in poverty, a lot of people are sacrificing right now. As for Applebaum, her orgiastic descriptions of "axe-wielding," "slashing" British budget cuts have to be read to be believed (although I did provide a summary here, if you're the type who shuts their eyes during slasher movies.) more

But there IS some good news.  The chief economic drooler is heading back to Harvard where folks like him are considered normal.

Larry Summers Is Resigning to Spend More Time With His Money

September 22, 2010 8:51 AM | By Tom Scocca

Now that America's finance sector has recovered its health and the wealthiest class feels more secure about its ability to stay wealthy, economist Lawrence Summers announced yesterday that he will resign as head of the National Economic Council later this year. Having successfully guided the nation into a state of jobless recovery, President Obama's lead economic adviser is turning his attention to job protection: namely, holding on to his own tenured Harvard professorship.

Summers will return to a university that is in an ongoing budget crisis. As Harvard president, earlier in the decade, Summers oversaw the conversion of the school's endowment into adangerous tangle of overleveraged and vulnerable investments. Owing to his bad manners, however, Summers got forced out of the presidency for other things before the financial disaster arrived. So he retained his reputation as a financial superhero, rather than a bungler. more