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Aug 03 2011

Geithner reveals exactly what is wrong with his view of the Economy

(2 pm. – promoted by ek hornbeck)

Burning the Midnight Oil for the Economics of Freedom

Quoted by digby:

TIM GEITHNER: Well, let’s start with what this deal does. The most important thing is it creates more room for the private sector to grow because although it locks in some very substantial long term savings, the near term cuts are very modest. So that– that was the really critical thing in making sure that this economy continue to grow and recover. Now, it locks in a very big down payment and it sets in motion what we think is going to be a very effective process for forcing congress to come together…

Now, for the ordinary person reading this carefully, the only reasonable response is, WTF?. However, as your insider correspondent from the quite bizarre Economist Tribe, my response is, “oh, yeah, that bullshit again.”

Ah, well, economics is not the only science {*} where analyzing scat is a necessary research tool. Join me after the fold.

{1 Economics? Science? Why, yes. There is a science of economics. Just because 80%+ of economists do not practice it, and will only ever talk about it in the past tense, as if it is dead and buried … it still exists. Of course, its frowned upon in the high ranked Economics departments, and Economics departments, running the same mix of obfuscation and fear of the unknown for which governments once relied on astronomer’s predictions of eclipses.}

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Make Space? WTF?

Within the orthodoxy, macroeconomic models must be based on accepted microeconomic theory. And accepted microeconomic theory is founded on long-since falsified models of consumer and producer behavior.

Here’s how it works. The consumer is ceaselessly making decisions among all possible choices available with their budget. They have no priorities, and no simplifying routines, just a relentless series of choices. The choices they make are based on how much stuff they can get with their budget, and how happy they know they will be due to buying each possible alternative basket of stuff.

And producers are making things by ceaslessly making decisions among all possible choices available of ways to produce things for sale, and the choices are best on the highest possible profit in terms of total amount of stuff that can be bought with that profit.

To tie the model together, assume that a market exists where a mass of producers and a mass of consumers meet, and then assume that more markets exist for all possible choices people might have, and you’ve got your model of the economy.

When I say “model”, I mean “set of mathematical equations”, because the point of the assumptions about how people behave (despite the acknowledged fact that they do not behave that way), and how firms behave is that pretending that’s the way it works allows a certain collection of math tools to be used to build a model. “No math model, no theory, not real economics” is drilled into the graduate students learning to become economists, and then enforced by the “high status” publications with review boards full of economists who only know that approach to economics themselves.

The only way the individual models of individual markets work is by finding the mathematical balance point between buyers and sellers ~ the “equilibrium” ~ and then predicting how that balance point will shift in response to various events.

Weird way to do things, but why is it so badly fracked up?

Now, you have a system of understanding the economy that rests on how these math balance points shift in reaction to events. And at the micro level, it seems straightforward to actually make statistical estimates of what the buyer and seller math models look like, including how they react to different observed events ~ and the whole thing gives a surface impression of being scientific.

But remember: the theory is false. We know that buyers and sellers don’t really behave that way. The argument is, “oh, if the statistical model fits, its ‘as if’ they act that way.”

Now, step into the macroeconomy. The “labor market” with unemployment is a market that is not in equilbiurm.

Its possible to come up with all sorts of clever models about how it “fell out of equilibrium” ~ but working with the standard toolkit means putting together a model of the whole economy where everything is always heading “toward” the math balance points. So the model is built so that by assumption unemployment is going to tend to go away on its own.

In the real world, unemployment can linger indefinitely, without ever automatically going away on its own … but this is not the real world, this is the math world that orthodox economists use to make sense of of the real world.

This is like Ptolomaic astronomers using a model of the earth at the center of the universe, and trying to refine their models to make it fit observations, and getting more and more intricate models … when in reality its just not so.

What does this mean for Economic Policy

What this Harvard Economics Department {*} bullshit means is that the tools orthodox economists use to understand the economy are broken for depressed economic conditions.

“In the model”, maybe in the short term things are out of balance, but “in the long term”, we will be at full employment. And at full employment, government buying stuff gets in the way of consumers and businesses buying stuff. So at full employment, avoiding government deficits makes perfect sense.

But the real world lies way outside the model, so this “making space for growth” is nonsense.

In other words, sometimes it makes sense, but not now.

This is JUST the trained incompetence of orthodox Economists

I am not saying that most of the actors in this tragedy are acting they way they do because of this. Most, of course, are simply following their own personal and short term self-interest. For most actors, this is just a convenient cover story to rationalize the plundering of the US economy.

However, when we see people talking the way Geithner is talking, we should bear in mind that this is not always deliberate lying. It is, for a large number of clever men and women who have been trained in the mathematical intricacies required to build models based on lies that still emulate the real world economy in certain limited ways, a trained incompetency.

What to do about it

We have to build the support structures an anti-corporate economic populist movement. In order to be an effective anti-corporate movement, it has to be equipped with the tools to counter the well tuned propaganda that is actively developed and widely distributed for reactionary populism to feed upon.

An important part of this is that it is not necessary for anti-corporate economic populism to be a majority force on its own. On the one hand, if it can establish its own independent support structures, it can make common cause with real economic Progressives for most of its core economic agenda. And on the other hand, since it grows and feeds on some of the same sense of outrage at how establishment insiders are lining their pockets and screwing the general public as reactionary populism ~ if it expands, it also serves to drain the swamp of reactionary populism.

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{2 I am not personalizing it as “Harvard Economic Department Economics” because they are particularly bad. Indeed, in many ways they are better than many. However, what is being referred to here is endemic to all of the orthodox approach to understanding the economy, and what I am doing here is rejecting a false choice between the more noxious and less noxious approaches to building false models of the national economy.}

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Midnight Oil ~ Power and the Passion

People, wasting away in paradise

Going backward, once in a while

Moving ahead, falling behind

What do you believe, what do you believe

What do you believe is true

Nothing they say makes a difference this way

Nothing they say will do

Take all the trouble that you can afford

At least you won’t have time to be bored

Oh the power and the passion, oh the temper of the time

Oh the power and the passion

Sometimes you’ve got to take the hardest line

4 comments

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  1. BruceMcF

    … I’d tear this building down.

  2. TMC

    what he has always babbled, supply side economics. Except for a few appearances on Sunday talk shows he has been virtually invisible though all this. But back to what he said. This morning Matt Browner Hamlin at AMERICAblog highlighted an analysis by J.P. Morgan economic team that contradicted what Geithner was babbling about growth.

    Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

    My nephew is in the graduate economics program at Princeton. He is amazed at the incompetence of both sides. A conversation with him about Milton Friedman, the tea party, Obama’s economic policies and this debt deal made me realize how duped Americans are.

    This is what this bill does.

    Any a good statistician can make bad numbers look good.

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