A Strange Orthodoxy

My beliefs often fall outside the mainstream. I say this with a bit of pride; individualism is prized by the American culture. The national psyche cheers the archetype of the lone radical, confident in his eccentricity, who eventually convinces the entire world of his views. Our national mascot is the underdog. It is the inevitable legacy of a country founded by persecuted religious minorities. It is the echo of the omnipresent Jesus myth that lies beneath so much of our culture and shared values - America will remain a Christian nation long after it becomes a secular one.

But the persistant iconoclast must confront one of two uncomfortable possibilities: either all the world is mad or he is. Rebelling against the majority offers no greater assurance of finding truth than following the whims of the masses. There are more trailblazers that die in the dessert than lead their people to a promised land, more Time Cubes than Theories of General Relativity.

But economics offers ample sanctuary for the misfit. In more objective sciences, the weight of accumulated empirical evidence squeezes out non-comformity over time. Economics has long defied attempts to introduce objectivity. Especially in macroeconomics, thought seems driven by the tides of fashion and political convenience as much as it is influenced by fact. Islands of misfits recognize the illegitimacy of the forces deployed against them and hold out until the tide raises their side once again.

That is not to say that Economics does not have its own orthodoxy, defined by the authors of the latest textbooks for college Economics 101 and 102. These are the views that perculate through the financial press. Armed with some minimal knowledge of the principles of free exchange financial journalists are capable of challenging the grossest acts of economic illiteracy committed by the politicians and officials entrusted, foolishly, with the welfare of millions.

It is only after the discourse passes into subjects more complicated than supply and demand curves that we discover the limited imaginations of the interlocutors. Appropriately named for our purposes, the magazine "The Economist" bemoans European governments slowing the growth rates of their public budgets in an attempt to please nervous investors concerned that the governments will not pay back what they have borrowed. We are told that this minor retrenchment from flagrant excess will certainly herald recession, doom, and stagnation. The eventual end of American government stimulus programs is also feared to plunge the world economy into darkness. The Economist does not question the palliative affect on a flagging economy of any marginal increase in the rate of government spending.

Are they aware of the ample empirical evidence that contradicts the standard worldview? Do they know about the many counterexamples of countries that prospered under so-called austerity? I doubt they are so intellectually curious. The orthodoxy is a safe place to be. No writer was ever banished to writing ad copy for the Libertarian Party for the sin of parroting the official lines of the treasury and Fed.

Are they bothered by a twitch of doubt that the politicians responsible for passing massive spending programs might not be objective voices in judging their worth?

Over at the Marginal Revolution blog run by George Mason economists, a commenter writes:

...in 1981 Margaret Thatcher cut UK government spending in the middle of a recession, and against the advice of 391 economists that it would worsen the recession, and UK GDP started its recovery the same quarter. In 1991 Ruth Richardson in NZ cut government spending against the advice of 15 economists, and NZ GDP started its recovery the same quarter. There are a number of other cases of expansionary fiscal consolidations, and there's a causal theory to explain why this can happen - see http://ideas.repec.org/p/cpr/ceprdp/417.html (shortly, it's that cutting government spending improves people's expectations about the future of the economy and taxes, so they start investing more right now). Of course, correlation does not prove causation, and perhaps there is something about the EU countries now that is so different as to the cases I cite as to make those results no longer likely to hold, but Krugman writes as if he has forgotten entirely about the 1980s and 1990s."

("Krugman" is an economist so reliably socialist that he takes three left turns at intersections.) Later on Marginal Revolution, Tyler Cowen points to this must-read David Brooks column, which provides more evidence against the stimulus orthodoxy:

Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

This is a radical column. It contains a whiff of Austrianism. If David offered this information to a cable news anchor, he would be treated as dangerous and a bit whacky.

I am not an expert on Macroeconomics, just an interested outsider. But I am smart enough to realize that there is debate in academia on the effectiveness on standard policy perscriptions. And the opposition arguments have bite. I can't share The Economist's implicit faith in textbook Keynesianism.

Macroeconomics has a strange orthodoxy because so much of the discipline is outside of it. While media seems unaware that any other position exists, many big names in the field publicly doubt the wisdom of monetary and fiscal stimulus. Many of these big names hold research positions at top universities, a few have Nobel prizes.

It's a shame that the nuances of the debate are hidden from the public consciousness.

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The Economist responds to Brooks' column

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The fundamental problem with macroeconomics is...

...the inability to carry out controlled studies. That's the reason why truth doesn't crowd out nonsense over time like in physics or medicine.

I realized this long before I began studying economics, and thus, turned to the one approach that shunned empiricism: Austrianism. Of course, lack of empiricism doesn't solve the problem either. It merely admits the weakness of macroeconomics and gives up.

Good empirical work can be

Good empirical work can be convincing. In one EconTalk podcast, the guest compared good empirical work to journalism - you marshal the facts and try to tell a story. The quintessential example is Milton Friedman's "Monetary History of the United States".

Austrianism is a ghetto.

Empiricism is a good thing

But in macro, we're not going to get controlled studies, so the empiricism is always going to be relatively crappy.

I don't think Austrianism is a ghetto. In fact, from a macro perspective, it's on the rise.

The opening paragraph is

The opening paragraph is foolish:

...individualism is prized by the American culture. The national psyche cheers the archetype of the lone radical...

First, I have no idea why you believe this. I see all evidence pointing to the contrary. Second, I find it amazing that you can write of individualism and "the national psyche" in the same breath (so to speak).

There is no national economy

There are several national economies and several local economies. The most important pair are the economy of those who work for wages and borrow money and the economy of those who live off capital gains and lend money.

In the last century the only good times where both these economies increased was the 25 or so years after WW2 when freak post war conditions gave an edge to the US industry and strong labor contracts directed the majority of the net increased productivity to the working class.

In the last 20 years the labor unions have lost ground and the owner class has kept the majority of increased efficiency. Most of the increased profits now come by sending jobs off shore and laying off American workers.

It is true that some of the jobs have returned the US because Americans work better under industrial conditions but the jobs are returning to the scab states, not the union states. The jobs are coming back at $10/hour less, the new UAW contract for new hires, for example. When UAW wages are low enough I suspect that Toyota and Honda will sign on.

What happens when there is a world wide wage parity for semi-skilled labor? Henry Ford's thesis was that he had to pay his people high wages so that they could buy his cars. This has never been demonstrated. The people who built cars for Rolls Royce didn't buy the cars they built.