Saturday, June 20, 2009

The obtuseness of macroeconomics

Consider The Economist’s Romer roundtable:  Debt will keep growing.

Not one macroeconomist acknowledges what I believe to be the true cause of the current collapse of effective demand, the extreme skewness of the income distribution and the attendant indebtedness and inability to spend at previous levels of the bottom half or better of the household income distribution.  My reference rant on this subject is here

The macroeconomists keep talking about “monetary stimulus” and “fiscal stimulus” as if they’re talking about stepping on the accelerator of a gasoline internal combustion engine.  Except that the engine is running on one cylinder, and if they “prime” the engine, all the gasoline is only going to fire on one cylinder, the one that’s getting the gas—in terms of this metaphor, the rich folks at the top of the currently neo-feudal pecking order.

The fiscal and monetary stimuli of the Great Depression failed to make the income distribution more equal, and failed to reduce unemployment to reasonable levels.  Most households weren’t participating in the flow of income to a sufficient degree for that to happen.

It’s time for the policymakers to realize that the economy is in the middle of a vast transition from a debt-financed consumption-heavy economy to one that is higher saving and more investment oriented.  That’s a big change, one that will take years.  Businesses aren’t going to want to invest in capital formation for consumer markets when they won’t know what the prospective returns are until we burn off some of our excess capacity and consumption patterns stabilize, in sum and in composition, in some new configuration. 

It took World War II to equalize the American income distribution last time, a frightening thought.  I have no idea what it will take this time.

The best macroeconomic policy right now, and the only one we can afford, is to provide honorable workfare to the growing ranks of the unemployed—in part so that they do not become radicalized and alienated from America—and health benefits so that we don’t compound the losses of the current slump with avoidable sickness.

Macroeconomics in toto—the academic work plus the way it has entered policy—is a joke.  The Keynesians misinterpreted Keynes in the 1960s to fund a guns-and-butter expansion that blew up prices; somebody told Richard Nixon that putting on price controls while the Fed was pumping up the money supply would help cure the ‘Sixties inflation; we suffered through Jerry Ford and Jimmy Carter relearning the lesson of monetary history that to stop an inflation you have to slow down money growth, and Jimmy appointed Paul Volcker in 1978 to do that, ensuring that he, Carter, would be a one-term president; Ronald Regan came in and took credit for Carter’s decision, saying “stay the course,” and took advantage of the schadenfreude generated among the majority of the population to lower tax rates on the rich in the massive con known as “supply side economics” (the tax cuts were supposed to reduce the federal deficits, but instead, Reagan started the growth of federal debt on the meteoric rise that George W. Bush consummated with his massive tax-cuts-for-the-rich-and-a-stupid-war-to-boot that have put us so deep in the hold).  And at every step, a credible, academically certified macroeconomist or ten has stood ready to offer “proof” of why these were going to be the right policies.

It’s time to give the macroeconomists some time off, a collective sabbatical, perhaps.  Let’s concentrate on people, the American people, by providing, quite simply, a means for them to survive the crisis that was not of their own making; by providing a livable dole, as they call welfare in Europe, in the form of workfare, while these people look for jobs in a recovering private sector.  Let’s not plunge the federal budge into massive deficits with pork-barrel projects that will provide yet another opportunity for the massively corrupt, money-compromised federal government to prove how corrupt it is in handing out taxpayers’ money.

There are 25 million unemployed and underemployed people in America right now.  That number could easily double within five years.

Because if we’re taking care of the people, won’t the rest work itself out?  I can’t get on board with the ultra-conservatives who say “do nothing,” because it is plainly evident that doing nothing will cause human misery, waste of productive potential, and ultimately, I believe, a revolution or severe repression in the United States of America.

But listening to macroeconomists talking about the dangers of “withdrawing the stimulus too early” makes me gag.  So far the stimulus has done very little for the unemployed.  Look at who got the big windfalls from the banking crisis!  Goldman Sachs and a host of rich bankers!  Who’s going to get the rich government contracts that will come with the stimulus?  Beltway insiders, friends of the Democrats!

More direct aid to the unemployed may not do anything to equalize the income distribution.  More and more, I think such an outcome is a quasi-mystical occurrence that requires a national crisis (or not—we could settle into neo-feudalism). 

But let’s not become a nation of debt-slaves more than we already are.  America was the world’s greatest creditor in 1930—now we’re the greatest debtor.  Substantially more debt—which caused the problem we’re in now—could sink us.  Anyway, you can’t trust the macroeconomists.

Bail out the people directly.  Give them honorable work and a means to survive a crisis that is likely to last a decade.  The people know what to do with the money.  They will spend it well.  Keep the government and the macroeconomists du jour out of it.


  1. So true.
    After frying my brain by ODing on economic theories awhile back, I'm slowly recovering to my senses... It has to been the "hard" power of the nation that contributes to depression-proof wealth.
    Work, in any form, which is demanded by the market and not created for the sake of creating work, is a form of "hard" assets. In short, meaningful work.
    Time for an episode of Mike Rowe's Dirty Jobs. Peace.

  2. Just a quick note to applaud and fully endorse your comments on modern macroeconomics, from the perspective of an advocate of Minsky's alternate vision (the "Financial Instability Hypothesis"), which I have been developing as a rogue academic macroeconomist for 20 years now.

    Cheers, Steve Keen

  3. Hello Steve Keen -

    I've been to your site, and yes, Minsky tells it like it is, and because he does good *political* economy, and disses the regulators and financial institutions, he and his followers have been marginalized. That's why I view the vast majority of academic economics as ideological cheerleading.

    There is another angle, a "behavioral" business cycle, that I find useful, an introduction to which can be found here:

    I believe this perspective on the ending of a business cycle as an "animal spirits" collapse is consistent with the Minsky moment when the cycle has been mostly credit fueled, and even if not.


  4. "Banking was conceived in iniquity and born in sin. The Bankers own the earth. Take it away
    from them, but leave them the power to create deposits, and with the flick of the pen they will
    create enough deposits to buy it back again. However, take away that power, and all the great
    fortunes like mine will disappear — as they ought to in order to make this a happier and better
    world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own
    slavery, then let them continue to create deposits.”
    Sir Joshua Stamp (1880-1941), one time governor of the Bank of England, in his
    Commencement Address at the University of Texas in 1927.

  5. Just read Hyman Minsky's "John Maynard Keynes". Keynesians unfortunately reduced Keynes to equations (which they could manipulate and understand), leaving out the Knightian uncertainties. Academically, one can get a lot of mileage out of mathematical perturbations of highly theoretical arguments, but math-turbation doesn't get you very far...