Monday, June 1, 2015

When Economists Write, It's Not About Economics

I read a lot of articles written by economists.  I know.  Boring, right?  But fun for geeks like me.  Lately, I have come to a conclusion about their writings.  For the most part, they don’t write about economics.  They write about their political views.

Many who have done break-through work have become celebrities of a sort, at least among the business press.  Robert Shiller predicted the bust while most were smoking cigars and drinking Champaign.  He also won the Nobel Prize for Economics in2013.  He recently wrote about FDR’s coining of the phrase “The only thing we have to fear is fear itself”.  He would have us believe that the main reason that consumers and businesses are not spending enough to boost economic growth is fear manifesting itself as “performance anxiety”. His follow up point is that such anxiety becomes a self-fulfilling prophecy. 

Fair enough. 

He extends this metaphor to our government’s failure to invest in infrastructure at a time when interest rates are at historic lows.  Is that the result of fear? I think not.  It’s the result of political dysfunction.

Shiller’s political views are not as much in evidence as some of his colleagues.  Fellow Nobel winner Joseph Stiglitz is a former chair of the President’s Council of Economic Advisors.  In a 27-page whitepaper, he lays out his prescriptions for reforming the tax code.

There is little doubt that the “hollowing out” of the middle class, as he puts it, affects the performance of the economy.  However, he connects this factor to the presumption that “one of the reasons that our economy is not performing is the high level of inequality”.  The middle class has suffered as a result of other macroeconomic factors, globalization and technology for example.  Inequality didn’t cause those things.

Stiglitz goes on to propose more complexity for our already onerous tax code.  He proposes higher tax rates on the rich “who save a large fraction of their income” having an effect on aggregate demand.  He fails to mention that, in economic terms, savings equal investment and investment creates jobs. 

Stiglitz also decries the schemes that corporations use to legally avoid taxation and lobby for preferential treatment in the tax code.  I quite agree with him on that point.  However, his prescription is to raise the corporate tax rate without regard to the impact on investment capital.  The high marginal tax rates we endured in the 1950’s had a terrible long-term effect on capital investment.  We paid the price in the 60’s and 70’s when we couldn’t compete with German and Japanese manufacturers and their newer plants and equipment. 

Robert Reich, another liberal economist, does a great job of presenting his views in short YouTube videos.  Generally, he supports the perspective of Democrats in Washington even when he contradicts himself.  Recently he argued in favor of the President’s proposal on corporate taxes despite having suggested doing away with them in his 2009 book, Supercapitalism: the Transformation ofBusiness, Democracy and Everyday Life.

Then, he argued that eliminating the corporate income tax would make corporate profits subject to a progressive personal tax and create greater equality for middle class investors.  It’s a sound argument.

Everyone has a bias.  However, learned economists who become thought leaders have an obligation to raise the level of political dialog above the petty, partisan politics we endure daily.  Presenting your political opinion as though it is derived from analysis is simply punditry.  Do we really need more punditry?



  1. One of the hard lessons I learned after graduating with my economics degree and one of my pet peeves. Why don't people leverage their intelligence and their education to solve problems rather than promote their own opinions? It's easy and fun to think your every thought is brilliant.

    Thanks for the reminder.


  2. Steven McKewen
    I think all fields that deal with society as whole tend to produce this type of writing.

    I think the thought process is something like this:
    I am explaining something
    You are not understanding
    I will explain the implication
    You are not understanding
    I will explain the effects

    You can probably substitute "accepting" or "agreeing" for "understanding".

    I think that the primary reason for the way punditry flourishes is that all strategic planning in politics is done as a guess. We don't have an accurate way to predict the behaviour of the masses about individual policy decisions or details.
    Much has been done statistically and analytically to predict trends and patterns, but without historical data, and control groups, we cant tell why policies work or don't work except through guessing and the most eloquent guess wins.

    1. I like your analysis, Steven. I would add that this type of writing feeds the confirmation bias of many readers. In today's world of fragmented audiences. Most of the people who read Stiglitz, Reich et al. are liberal and, therefore, agree before they finish the first paragraph.

    2. Check out "Human Action" by Ludwig Von Mises! Worth decades of op-eds from the Wall Street Journal.

  3. Frank Koye
    The economics of the Depression shaped the behavior of my parents generation. They learned the importance of owning things, bing wary of investments and living beyond your means. Our generation is seeing these effects with the burst bubbles, Wall Street bailout lacing the middle class to f me do themselves with politicians boosting entitl meets int h long term

  4. I don't think this is an accurate observation. Certainly the emphasis in the articles written by various economists is different but in fact there is a conservative vs. liberal divergence within the discipline of Economics.

    Conservative economists are typically adherents to the Chicago or Austrian schools which take the position that markets are, in the aggregate, perfect reflections of underlying economic reality and therefore should be left to function unfettered. Liberal economists are typically adherents to the theories of Keynes and others such as Piketty. This branch of economic theory takes the position that markets can in fact get "off track" as a result of inappropriate intervention by powerful players and thus need countervailing intervention in the form of government regulation or action. Central Banking is a reflection of this concept.

    In truth, both points of view have some validity and in my view it is a mistake to rigidly conform to one position or the other. In the case of "extreme" wealth accumulation, conservatives typically point to the benefits for the national economy of an "investing class", that is individuals of sufficient means to invest in beneficial initiatives either individually or collectively. This was exactly the outcome Hamilton had in mind when he established the countries economic foundation. He wanted America to become independent of European money so that the country's economic destiny could be self-supporting. Obviously we have succeeded.

    Liberal economists don’t dispute the need for private investors, but they are more likely to point out the perils of creating a powerful "rentier" class; that is individuals with great wealth seeking to utilize that wealth not for beneficial investment but solely to create the greatest personal return for themselves with the least possible risk. This is not a trivial concern. One of the primary reasons people settled America in the first place was to escape the extreme "rentier-ism" that pervaded the agricultural economy of Europe. This was the crux of Jefferson's opposition to Hamilton.

    From a theoretical perspective, the argument against rentier-ism is that it sets up a situation where unproductive assets are deployed in such a fashion that they divert productively deployed goods and services from the creation of additional productive goods and services. In other words productive assets are diverted to non-productive use.

    Obviously, serious investors need to get a return in order to invest. But at what point does the quest for a fair return turn into a situation where it is just too much money seeking the greatest return at the lowest risk. In 21st Century America we don't have hereditary nobility utilizing extensive land holdings to squeeze profits from impoverished serfs. But we do have highly sophisticated financial services firms deploying complex financial instruments that utilize tools such as derivatives, leverage and algorithmic trading in order to create outsized profits for wealthy clients. It is not often apparent that the returns thus generated are beneficial to the economy as a whole as opposed to the benefit of the few. For some, myself included, at this can be viewed as modern rentier-ism.
    --Chuck Roselle

    1. @Chuck. You have captured a lot of good thoughts here. Thank you for that.

      Yet, I think you are helping me prove my point. From a semantic point of view, I would be inclined to describe "liberal economists" as "economists who happen to be politically liberal".

      Economics is, at its core, about creating mathematical models to predict human behavior. When you describe the various schools of economics, you are correct when you say that "both points of view have some validity".

      My point is simply this: if an economist develops a policy prescription only using the data that supports his or her POV, he or she does the public a disservice. I have no doubt that, for example, Joseph Stiglitz knows that raising corporate or individual tax rates will have a negative effect on investment. He may still make a valid point about the tradeoffs that are necessary to achieve his vision of social justice. However, to write a 27 page paper on tax policy without accounting for said impact does us all a disservice.

  5. Eric Hulbert
    You make a great point John, that macroeconomics really is more about politics than any sound “science.” Macro models attempt to describe a system where they don’t know the starting point, have no idea to what degree various inputs affect the behavior of the system, and rely on assumptions that are demonstrably false (such as rational behavior, utility theory, etc.). With conditions like those it is little wonder that they write based from a political point of view rather than an academic one. Also economists ironically act in their own rational self-interest. Politically charged books sell far better than ones based on well researched material. I’d be willing to bet Bill O’Reilly and Glenn Beck out sell Daniel Kahneman and Richard Thaler by an order of magnitude.

  6. Pete Marchetto
    What we're forgetting here is that economics isn't a science. Indeed, it could never be. If it were, economists would all agree with some of the basics at least, but there seems to be precious little they can indeed agree about.

    Economics, in the end, is a branch of the social sciences. Everyone has decent ideas - bar the loonies at the extremes - and all those ideas can be backed up by observation, common sense, or research. However, they still reach differing conclusions.

    At the other extreme, I've found myself reading a great deal of economic literature that endeavours to be cool and clinical. In particular, I've read a fair bit of it on the subject of China and what I see again and again is this sense of 'So many mysteries' as one analysis after another tries to get at the clever-clever behind some seemingly counter-productive initiative. What they never take into account is that corruption, political interests, etc. are actually producing counter-productive initiatives and that what looks to them like folly which needs to be explained in terms of some hidden rationale may, indeed, be nothing more than folly.

    Much the same thing may be said of much of the literature preceding the 2008 crash in the west. There was no mystery there. A giant pyramid scheme in which no one lost out except the tax payer, but no, can't be that, there must be some real clever stuff going on here, it must be sustainable. Well, not really. For the instigators it all went pretty much according to plan.

    From much of what I've read, I believe that no course in economics should ever be offered without compulsory side helpings of psychology and sociology. Get far beyond one dollar plus one dollar equals two dollars - and even that may be debated in some instances and in some quarters - and the human condition, society, politics, and heaven knows what else comes into play. Ignore that fact and trite rubbish is written as though the system is somehow rational. Embrace that fact and yes, at the fringes you're going to get all sorts of rubbish spoken.