Brad DeLong makes an odd claim:
So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.
Larry Summers? If we’re going to base our economic policy on trusting in Larry Summers, should we not reappoint Greenspan as Fed Chairman? Or — better yet — appoint Charles Ponzi as head of the SEC? Or a fox to guard the henhouse? Or a tax cheat as Treasury Secretary? Or a war criminal as a peace ambassador? (Yes — reality is more surreal than anything I could imagine).
The bigger point though, as Steve Keen and Randall Wray have alluded to, is that DeLong’s list is the left-wing of the neoclassical school of economics — all the same people who (to a greater or lesser extent) believed that we were in a Great Moderation, and that thanks to the wonders of modernity we had escaped the old world of depressions and mass unemployment. People to whom this depression — judging by their pre-2008 output — was something of a surprise.
Now the left-wing neoclassicists may have done less badly than the right-wing neoclassicists Fama, Cochrane and Greenspan, but that’s not saying much. Steve Keen pointed out:
People like Wynne Godley, Ann Pettifors, Randall Wray, Nouriel Roubini, Dean Baker, Peter Schiff and I had spent years warning that a huge crisis was coming, and had a variety of debt-based explanations as to why it was inevitable. By then, Godley, Wray and I and many other Post Keynesian economists had spent decades imbibing and developing the work of Hyman Minsky.
To my knowledge, of Delong’s motley crew, only Raghuram Rajan was in print with any warnings of an imminent crisis before it began.
DeLong is, in my view, trying to whitewash his contemporaries who did not see the crisis coming, and inaccurately trying to associate them with Hyman Minsky whose theory of debt deflation anticipated many dimensions of the crisis. Adding insult to injury, DeLong seems unwilling to credit those like Schiff and Keen (not to mention Ron Paul) who saw the housing bubble and the excessive debt mountain for what it was — a disaster waiting to happen.
The most disturbing thing about his thesis is that all of the left-neoclassicists he is trying to whitewash have not really been very right about the last four years at all, as DeLong freely admits:
But we – or at least I – have got significant components of the last four years wrong. Three things surprised me (and still do). The first is the failure of central banks to adopt a rule like nominal GDP targeting or its equivalent. Second, I expected wage inflation in the North Atlantic to fall even farther than it has – towards, even if not to, zero. Finally, the yield curve did not steepen sharply for the United States: federal funds rates at zero I expected, but 30-year US Treasury bonds at a nominal rate of 2.7% I did not.
Yet we are supposed to take seriously the widely proposed solution? Throw money at the problem, and assume that just by raising aggregate demand all the other problems will just go away?
As I wrote back in August 2011:
These troubles are non-monetary: military overspending, political and financial corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, systemic fragility, and so forth.
These problems won’t just go away — throwing money around may boost figures in the short term, but the underlying problems will remain.
I believe that the only real way out is to unleash the free market and the spirit of entrepreneurialism. And the only way to do that is to end corporate welfare, end the bailouts (let failed institutions fail), end American imperialism, and slash barriers to entry. Certainly, cleaning up the profligate financial sector would help too (perhaps mandatory gladiatorial sentences for financial crimes would help? No more paying £200 million for manipulating a $350 trillion market — fight a lion in the arena instead!), as would incentives to create the infrastructure people need, and move toward energy independence, green energy and reindustrialisation.
Then again, I suppose there is a silver lining to this cloud. The wronger the establishment are in the long run, the more people will look for new economic horizons.
Brad DeLong is part of the UC Berkeley crew that can only be described as left of Marx.
One must look back into the 1990’s for a reference. The “Clinton” economists still think and take credit for the economic success of the 1990’s. Of course anyone with two firing neurons and an honest bone in their body could easily point out that:
1. Most of the gains in employment and living standards came from the tech sector and NOT from the government policies.
2. Most of the gains in employment and living standards were temporary.
3. Excluding debt, growth measured by GDP, grew very slowly.
There are many the obvious failures of the Neo Keynesian theories including:
1. Refusing to recognize the role of debt in the economy.
2. Failure to understand that GDP measures quantity and not quality.
3. The flat out denial to admit the the US Government (through Fannie, Freddie, CRA, the FED) and a a myrid of other policies was and is the main cause of the current mess we are in.
These economists are currently faced with a world that is too uncomfortable for them to accept (denial). In Jarod Diamond’s book, Collapse: How Societies Choose to Fail or Succeed, he tries to answer the question, “What did the inhabitants of Easter Island think when they cut down the last tree?”
I would pose a similar question to Mr. DeLong, “What did Clinton economists crew think when the US went into the 2nd great depression?”
Answer: They lived in denial and refused to accept their role in the current quagmire.
PS This is not a right or left paradigm discussion.
Excellent criticisms, FO-SHO.
I agree — FO-SHO’s criticisms are spot-on. However, the facts and roles denied are surely LEFT in popular, though flawed, classification.
It’s scary that a person teaching at one of America’s top colleges can be so clueless. If not clueless than so disingenuous. Krugman is another one. Don’t see how these guys are allowed to continue in such jobs and high profiles when they got it so wrong and continue to get it so wrong. smh.
The college system is in an archetypal bubble based around state-directed malinvestment.
Correct, Aziz, plus a super-size layered self-serving* bureaucracy.
* Redundant: self-serving is the very essence of bureaucracy.
If former Bank of America CEO Ken Lewis knew about secret Federal Reserve loans in 2008 and 2009, how did he not recieve BAC without knowing inside information?
If former New York Fed Chairman and Goldman Sach’s alumni Stephen Friedman knew about secret loans to Goldman in 2008 and 2009, how did he not buy GS with unknown information?
Is Delong aware of this?
If Delong was aware, what would he say?
Have many coddled the status quo,
by ignoring what they should be screaming about?
That pretty much sums it up!
AZIZ: A question simple to ask, but maybe, repeat maybe, complicated and difficult to answer: Is modern macroeconomics (if that is the proper term for the actions practiced by the Fed, Goldman, et al — QE, credit swaps, etc.) based on/tethered to “real” economics as explained by Adam Smith, Hayak, Friedman, Sowell et al?
If so, why doesn’t the U.S. government listen to the latter? I forget his name, but a smooth- talking Harvard economist was academia’s and the Kennedy administration’s ultra-brilliant economic guru. He and Milton Friedman disagreed on basics. It turned out that Friedman was right.
If the answer to my first question is “yes”, the answer to the second must be “politics” in its worst meaning — elites exploiting people.
The smooth-talking fashionable political economist was John Kenneth Galbraith. I don’t remember to what extent his influence was to blame for LBJ’s disastrous Great Society, but it must have been >> zero.
The modus operandi of the modern economic establishment is largely taking data from the past and constructing mathematical models (usually very unsuccessful models) to try and predict the future.
I wrote about the problems here:
And of course, non-mathematicians like Smith and Hayek are shunned.
Maths and modelling is not reality. My economics is constrained to the study of reality. I am not interested in idealised black-swan-free non-realities.
AZIZ: At the risk of appearing to be a sycophant, I shower more attaboys on your perspicacity! I recommend your linked zerohedge/pseudoscience paper (> than a mere “post”) to everyone interested in economics in any/all of its aspects. You even expand the oversimplified understanding of the term “oversimplified” with your “massively simplified alternative universe”. However, …….
A nit-pick: Newton’s laws were not “superseded” by Einstein’s, nor were they less than 100% accurate in the universe known at the time. The technology of propellers was not superseded by jet engines nor Bernoulli’s lift by rocketry. And ….
An additional point or two: Reality (“nature” to scientists) is consistent always and everywhere, whereas humans are fickle, prideful, greedy, etc. (see the medieval Seven Cardinal Sins), especially in groups. This explains why nature can be predicted to the extent that science has progressed, but human events cannot. Even the awesome power of mathematics is limited: Kurt Godel proved (by means far beyond a humble engineer’s ability to understand) that no formal system can be both complete and consistent, meaning, I think, able to both cover everything and always be accurate.
As to economists, some (Galbraith and Krugman come to mind) turn out to be little better than witchdoctors or snake oil peddlers — whatever brings status, power and profit, like most politicians. Heck, let’s just call them Political Economists! But you, AZIZ, may not be perfect, but you ain’t one of ’em!
You got that right.
I search all over the internet, looking for blogs and sites that support Krugman and the economic establishment. I can’t find the volume or ferocity of debate for the economic establishment, as I see for the Austrian economists. Why is this?
I believe the economists support budgetary spending that allows politicians to spend the public’s money, keeping them in power.
If this is so, then the very nature of democracy, regulatory capture and human nature is sending us over an economic cliff.
As far back at 1776 in Adam Smith’s wealth of nations, Adam saw what damage regulatory capture caused, even to a simple economy. His reference to the landlord class that could influence laws:
“That indolence, which is the natural effect of the ease and security of their situation, renders them too often, not only ignorant, but incapable of that application of mind which is necessary in order to FORESEE (emphasis added) and UNDERSTAND (Emphasis added) the consequences of any public regulation” Adam Smith – Wealth of Nations 1776
All that I was taught in elementary economics, was that Adam Smiths free market and invisible hand theories. If this passage was emphasised it would discredit Socialism. It would also discredit executive legislation for the sake of legislation.
The best we can hope is to discredit bureaucracy and regulatory capture, so the lay voter can understand the consequences of their actions.
This is why ill-informed and ignorant people should not vote.
The problem with restricting voting is who should decide who is ill-informed and who isn’t? If it was up to the present economics establishment, I doubt I would get a vote as I do not have a PhD in economics from UC Berkeley.
In my view, true democracy is the market. It is a dynamic, continuous and open feedback mechanism. You can vote against systems and businesses you don’t like by withholding your business immediately, not waiting for four years and voting in an election. And if you want to vote more, you can work more and earn more money. Unfortunately in the modern world the banks (and by proxy the corporations that surround them) have a monopoly on money-credit creation, and so unsurprisingly the power balance has been massively skewed toward these corporate creatures.
The fallacy here is that it is possible to engineer human characteristics [greed, delusion, fear, etc.] out of human systems.
“The Market,” although better than the centralized control, has all of the same problems, albeit, attenuated. If it involves human beings, then it is going to read like every Greek tragedy ever written.
It seems to be one of the principal responsibilities of the Elite to tell everybody this, and then, do that. It is very important to lie to the people so they can go on living their desperate lives, “in peace.”
What better example exists then the non-sense that intellectuals spew in Academia?
I agree that the market votes best. I think legislation should be restricted to matters of safety and other factors regulating the worst excesses of man, not economics.
That was my point about educated people. Perhaps people have to be over 40 or 50 to vote (Similar to our ancient elder system), so they can reflect on life’s experiences. I think 18 is far, far to young. Do we give a 5 year old the right to vote? Then we’ll have McHappy meals mandated.
I am sympathetic to your sentiment, but I don’t believe that someone should be able to enlist to die in a war while denying them the right to vote. To be honest, the people who have (in my view) voted the “wrongest” in recent years have been baby boomers, who are quite elderly. Look at the stats regarding who was supporting Ron Paul and who was supporting the junk candidates (Romney, Gingrich, etc).
So I am generally against restricting the franchise at all.
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We need to ask who is really in charge? Politicians or the Financial Elites? To me it looks like a small group of financial elites control everything and if this is true they will dominate or control all conversations that take place in society and which affect their actions and behaviour. They have I believe become very powerful. Barclay Bank in the UK recently got fined a measly sum (250 million pounds) for trying to rig the inter bank lending rate. The quantity of money being mentioned on the news was 300 Trillion pounds…this indicates that it is a pure fantasy system.
This is definitely the case in Australia and its lackey media.
I contacted a reporter at the “Australian” regarding the experiences I had dealing with employers wanting to import foreign workers for our remote mines. I told the reporter that I had tried to “sell” Human Resources to said mines, but they were not interested. The media hype about miners desperately needing foreign workers because Australians would not travel to remote places to work. Has anybody seen Crocodile Dundee? Hello!
The reporter was most interested, and said he would discuss with the Editor, but did I see anything in the paper to dispel the myth? No. The elites control the papers and get the cheap foreign labour they want to keep wages down and steal our minerals. Th richest women in the world Gina Rinehart’s father Lang Hancock, found the minerals while flying over the outback. Then he was supposed to lobby politicians to change laws which allowed him to accumulate his massive wealth.
Now Gina wants to a board seat on “The Age” broadsheet paper board, just because she tipped in 19% share capital. Hopefully if Gina gets too big for her boots we’ll nationalise her mines and throw her in jail.
I always thought papers exposed corruption and worked in the nation’s interest. Boy was I surprised.
Hopefully the MSM papers will go bust because people get their news fix online. Over time the elites power will fizzle.
Are the youth of today going to buy broadsheet and tabloid papers in 10 years time. I don’t think so.
It should be no surprise that the media elite are the force proposing most of the internet-restricting legislation like SOPA, ACTA, etc.
If you can scrounge up the capital, I know a cheap printing press going up for sale. Workers desperate to negotiate a good wage deal.
After extensive brainstorming with “you lot” (is this cliche popular anywhere but in my DVDs of British TV?), and after arriving at rough consensus on diagnosis and prognosis, I think it’s time to consider a treatment leading to a cure — at least in the U.S.
1. Return to Constitutional government. This would cleanse the body of GOVERNMENT charity, healthcare, retirement, education, housing, racial discrimination, etc.
2. Amend the Constitution to clarify and modernize.
3. Amend the Constitution to strengthen the “consent of the governed”: term limits, limits on taxing power, ending special privileges of members of congress — retirement, healthcare, exemption from laws, etc.
4. Tax code complete overhaul.
4. Update and strengthen immigration law and enforcement.
5. Strengthen ballot security with state law and enforcement.
6. Eliminate all unnecessary federal regulation and interference with resource development, industry, labor contracts, drug enforcement, etc.
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