Thursday, March 7, 2013

Michael Boskin's neoclassical madness

Michael Boskin has been for me, the idealized Platonic ideal of everything that went wrong with the economics profession ever since—I swear—I saw him on television in 1992 claiming that it wasn't important whether an economy produced computer chips or potato chips.  These days, he claims he never said it—I don't wonder that he wants to disassociate himself from perhaps the single stupidest sentence ever uttered by an economist (and trust me, there are MANY worthy competitors for that title.)  I don't have access to TV archives and even if I did, I am pretty sure I wouldn't want to go through them to remind me what exactly Boskin said that day.  But it really doesn't matter much because he has spent his professional life as if he believed it.

Manufacturing Policy is NOT “Industrial Policy”


During the 1992 presidential election, Bush economic advisor Michael Boskin infamously stated “computer chips, potato chips, what’s the difference” to reflect his disapproval of candidate Bill Clinton’s proposals to support the high-tech industry. Many people at the time scoffed at Boskin’s comment, thinking how could anyone actually believe this. But in fact, many, many people believed it and still do. Those people are called neoclassical economists. For them the market is sacred and all-knowing and any effort by government to “pick winners,” no matter how mild or broad, is doomed to failure and will only make matters worse. For these ideologues the actual industrial composition of an economy is irrelevant. If America ends up with no high-tech manufacturing, or even no manufacturing at all, we are actually better off for it, since this result would have been produced by the all-knowing market.  more
Of course, Boskin was not merely content with selling the de-industrialization of USA to credulous politicians and newspaper editors who should have known better, he now feels compelled to inject himself into the corrupt swamp called "entitlement reform."

Why Michael Boskin Deserves Our Contempt

By Barry Ritholtz - January 19th, 2010
“The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”
-Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003
I’ve been meaning to get to the absurd argument put forth last week by Michael J. Boskin in the WSJ, titled “Don’t Like the Numbers? Change ‘Em.”

Fred Sheehan saved me the trouble with a brutal takedown of Boskin here.

For those of you who may be unaware, Boskin is the economist/weasel/fraud who helped to officially distort the CPI, making it more or less worthless as a measure of inflation. The Boskin Commission was an act of fraud, a backdoor method to suppress Social Security cost of living adjustments (COLAs). To be blunt, it was an act of cowardice. Rather than man up and say “fix this, its broken, we can’t afford it” the commission took a different route — they fabricated a series of nonsense adjustments that artificially lowered CPI by 1.1%.

The Boskin Commission’s massive government falsehood allowed former Fed Chair Alan Greenspan to take rates to absurdly low levels, as the official CPI data showed no inflation, despite double digit price increases.

As such, he is one of the contributors to the financial collapse.

The specific fraudulent methods of the Boskin Commission are laughable. That the Economics profession failed to kick him out of its membership is as much an indictment of the profession as it is about Boskin.   more
And then there's this takedown of Boskin's latest drivel in the Wall Street Journal.  Michael—just go away!

World’s Wrongest Man Ventures Latest Prediction

By Jonathan Chait   3/5/13

Michael J. Boskin — former George W. Bush economic adviser, Hoover Institute fellow, and staunch advocate of conservative anti-tax doctrine — appears today, as is his wont, in The Wall Street Journal op-ed pages to warn that the Democratic president’s economic policies will lead us to misery.

If you are an investor, Boskin’s doomsaying is a sure sign of a coming bull market. Four years ago, Boskin penned a Journal op-ed whose thesis was captured in the headline, “Obama’s Radicalism Is Killing The Dow.” That was the signal for the Dow to go on a tear, doubling over the next four years. As Kevin points out, the Dow’s current “high” is an overstated artifact of dumb, unweighted statistics, but the underlying reality remains that the stock market has enjoyed an incredibly good four years under Obama’s radicalism.

One might suppose that Boskin has simply suffered a single unfortunate coincidence. In fact, his career is a mighty testament to the power of enduring, invincible wrongness. In 1993, Bill Clinton enacted an economic program centered around some public investment, coupled with deficit reduction with higher taxes on the rich. Boskin was very, very sure it would fail. In a Journal op-ed entered into the Congressional Record by grateful Republicans, he accused Clinton’s administration of “fundamental distrust of free enterprise.” He made a series of predictions: “The new spending programs will grow more than projected, revenue growth will be disappointing, the economy will slow, and the program will reduce the deficit much less than expected.”

Boskin repeated his prophecies of doom in a summerlong media blitz. Boskin labeled Clinton’s plan “clearly contractionary,” insisted the projected revenue would only raise 30 percent as much as forecast by dampening the incentive of the rich, insisted it would “take an economy that might have grown at 3 or 4 percent and cause it to grow more slowly,” and insisted anybody who believed in it would “Flunk Economics 101.” (The preceding pre-Internet quotes are all via a Lexis-Nexis search.)

As it happened, literally every Boskin prediction turned out to be the opposite of reality. The economy grew much faster than predicted, revenues surged by a much greater amount than forecast, and the deficit shrank by a much greater amount than Clinton forecast.

Following the utter repudiation of the Clinton years, Boskin decided to take his talents back to Washington. He had spotted a brilliant new economic mind in Texas governor George W. Bush.
"These people were immensely impressed with him, how quick he was to pick stuff up," Boskin said. "His instincts were all very good, very much market-oriented; that created a very, very favorable impression."
Boskin went to work as a Bush adviser, and thus, unfortunately for the historical record, had to limit his ability to make terrible predictions in public forums. He did return to public punditry to insist that George W. Bush’s tax cuts would reduce revenue by far less than the official forecasts predicted. (“I don't think it's going to cost anywhere near $674 billion.”) This was another natural outgrowth of Boskin’s worldview — just as it was necessarily true that Clinton’s tax hikes on the rich must reduce the work incentive and hamper economic growth, Bush’s tax cuts for the rich must do the opposite. Naturally, tax revenue declined by far more than the forecasts predicted.

Now, in defense of Boskin, he is probably suffering from a large dose of bad luck on top of a horrendously wrong ideology. He is probably not universally and inherently wrong. If you chained a thousand Boskins to a thousand keyboards for a thousand years, eventually one of them would make a correct prediction.

The point is this: Taxing the rich has clear first-order effects. It gives affluent people less money to spend on nice things and gives the government more revenue to reduce the deficit. Boskin insists that the first-order effects will be overwhelmed by second-order effects: The economy’s health is largely tethered to the fate of tax rates on the rich in particular, and the success of the Republican economic agenda in general. In reality, the second-order effects are very minor.

If Boskin were lucky, Clinton’s tax hike would have been followed by a double-dip recession, or Bush’s tax cuts by an impressive boom, or Obama’s stimulus by a market crash. But, in addition to being in thrall to a rigid and disproven ideology, Boskin suffers from unbelievably bad timing. Any investors who have actually put real money on the line after listening to him deserve the punishment they’ve received.  more

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