In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.”
But precisely what was useless and harmful turns out to be Krugman’s own espoused Keynsian beliefs. John Cochrane explains:
Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not clear on what the “beauty” is that we all fell in love with, and why one should shun it, for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income. The second siren is plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again. It presumes that people don’t think about the future in making decisions today. Logical consistency and plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”
Cochrane’s short paper is a really beautiful response to Krugman and his archaic, causality-reversing Keynsian answers to everything.
Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks.
Ouch.
posted on Tue, 06 Oct 2009 at 08:07 | permanent link | view comments
Too insulated from risk to fail
This article miffed me a bit:
In recent months such big banks as Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) have rolled out newfangled corporate credit lines tied to complicated and volatile derivatives. Others, including Wells Fargo (WFC) and Fifth Third (FITB), are offering payday-loan programs aimed at cash-strapped consumers. Still others are marketing new, potentially risky “structured notes” to small investors.
There’s no indication that the loans and instruments are doomed to fail. If the economy keeps moving toward recovery, as many measures suggest, then the new products might well work out for buyers and sellers alike.
But it’s another scenario that worries regulators, lawmakers, and consumer advocates: that banks once again are making dangerous loans to borrowers who can’t repay them and selling toxic investments to investors who don’t understand the risks—all of which could cause blowups in the banking sector and weigh on the economy.
I’m not so much concerned about the stupid products these banks are peddling. As the article states, these products may work out well in the end. What concerns me is that the article completely misses the obvious question that nobody seems to even ask anymore: is it the role of the US government (paid for by my taxes) to prop up bad businesses?
When giant corporations are backed by the good faith and credit of the United States Federal Treasury—no matter what—then these corporations have no incentive to curb risky behavior.
And today we have the same management teams that got us into this mess, still running strong. Goldman is doing better than ever, in fact.
We have a perfectly good way to deal with bad businesses in the US: let them fail. When an entity files for Chapter 11, the assests are sold off, often in pieces, to new management. This has worked for some extremely large businesses in the past, and perhaps if we could fix some of the mistakes we’ve made in the past and let financial institutions bear their own risks, they’d stop being stupid.
The financial industry borrowed their Dad’s Corvette, drove it off a cliff, then goes back home and asks for a new car. Dad gives them a new car with a “now don’t do that again!”
It’s not working for me.
posted on Thu, 06 Aug 2009 at 10:36 | permanent link | view comments
Remember a few weeks ago when I griped about global warming? What bothered me wasn’t that we have fringe groups, conspiracy theorists, and “deniers.” These folks will always be with us in everything (sometimes they’re even right).
What bothered me was that there seems to be a legitimate case against the predominant view and few scientists in the mainstream are addressing it directly and scientifically. Almost nobody from the scientific “consensus” community are taking these people on, rather they’re using name-calling and ostracism to maintain their position. It also bothers me that scientists feel they have to stoop to “consensus” and PR smear campaigns to make their point.
Consensus is fine—great—for some things, but not in science:
If the brightest minds on Wall Street got suckered by group-think into believing house prices would never fall, what other policies founded on consensus wisdom could be waiting to come unraveled? Global warming, you say? You mean it might be harder to model climate change 20 years ahead than house prices 5 years ahead? Surely not—how could so many climatologists be wrong?
What’s wrong with consensuses is not the establishment of a majority view, which is necessary and legitimate, but the silencing of skeptics. “We still have whole domains we can’t talk about,” Dr. Bouchard said, referring to the psychology of differences between races and sexes.
(tierneylab.blogs.nytimes.com)
I would argue that there are even more things than psychology that aren’t being talked about, including climate change, because of this fear of consensus. Politicians and business-types are the kinds of people who look for consensus of opinion—that’s because they don’t actually know or do anything. They mobilize opinion to get other people to actually think or do. But scientists are different—they’re doers. Science is for observing, gathering, analyzing and interpreting data with confidence intervals. Maybe come up with a theory. Scientific disagreements should be about the data and its interpretation, not posturing and raspberry-blowing.
Scientists are of course entitled to have opinions as much as the next op-ed writer, but a scientist is expected to have some rigor and discipline when engaging in and refuting arguments. More importantly, a scientist is expected to be a thinker capable of ignoring the ridicule of his or her peers to get to the truth of a matter.
An article in the New York Times recently wrote about how Groupthink might be the culprit of our financial crisis (read: “collapse”):
In his classic 1972 book, Groupthink, Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group.
(I think Peter Schiff would agree.)
When scientists bond together and form a consensus, science itself is imperiled. Because scientists are human and care about what their peers think, they take a big risk of stifling creative, scientific thought. Science is, at its core, the opposite of what we achieve by consensus. Science needs naysayers and village idiots every bit as much as the respectable, well-groomed, mainstream thinkers.
Paul Graham wrote an essay called “What you can’t say” that puts it even better:
Of course, we’re not just looking for things we can’t say. We’re looking for things we can’t say that are true, or at least have enough chance of being true that the question should remain open. But many of the things people get in trouble for saying probably do make it over this second, lower threshold. No one gets in trouble for saying that 2 + 2 is 5, or that people in Pittsburgh are ten feet tall. Such obviously false statements might be treated as jokes, or at worst as evidence of insanity, but they are not likely to make anyone mad. The statements that make people mad are the ones they worry might be believed. I suspect the statements that make people maddest are those they worry might be true.
Another way of putting it is Bob Sutton’s “strong opinions, weakly held.” Whatever we call it, it’s something more scientists need to learn apparently. We’re not in high school anymore, and any scientist who puts popularity and peer acceptance ahead of their scientific rigor, even in their spare time, is doing more harm than good.
posted on Fri, 24 Jul 2009 at 16:59 | permanent link | view comments
From What went wrong with economics:
In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”
Alright, maybe not all of economics is bunk, but I think a lot of macroeconomics was simply invented by economists to justify their own positions. Even economist John Kenneth Galbraith (lousy Keynesian) said:
Economics is extremely useful as a form of employment for economists.
Create an academic field around a small idea and pretty soon your experts in that field will be finding new ways to justify themselves. It’s true in every field. We do this in the name of science, of course, but the trouble is that there aren’t enough people in the world to say “Hey, your entire field of study is stupid and wrong. You’re making things worse.”
Well, I’m going to say it here: Macroeconomists, you’re making it worse. Stop pretending you have answers. You don’t. I don’t either, but I’m not pretending. Stop talking to policy-makers. Tell them that you don’t know and nobody else does either. Tell them that maybe we ought to consider getting out of debt as a country, to spend less than we make, as a lark, you know, to see what happens. Then please find another area of study.
posted on Wed, 22 Jul 2009 at 11:06 | permanent link | view comments
No Such Thing as Nuclear Waste
I’m a fan of nuclear power. I was delighted to come across this recent article in the Wall Street Journal.
So is this material “waste”? Absolutely not. Ninety-five percent of a spent fuel rod is plain old U-238, the nonfissionable variety that exists in granite tabletops, stone buildings and the coal burned in coal plants to generate electricity. Uranium-238 is 1% of the earth’s crust. It could be put right back in the ground where it came from.
Of the remaining 5% of a rod, one-fifth is fissionable U-235 — which can be recycled as fuel. Another one-fifth is plutonium, also recyclable as fuel. Much of the remaining three-fifths has important uses as medical and industrial isotopes. Forty percent of all medical diagnostic procedures in this country now involve some form of radioactive isotope, and nuclear medicine is a $4 billion business. Unfortunately, we must import all our tracer material from Canada, because all of our isotopes have been headed for Yucca Mountain.
What remains after all this material has been extracted from spent fuel rods are some isotopes for which no important uses have yet been found, but which can be stored for future retrieval. France, which completely reprocesses its recyclable material, stores all the unused remains — from 30 years of generating 75% of its electricity from nuclear energy — beneath the floor of a single room at La Hague.
“Nuclear waste” is only waste because it was designated so by Presidents Ford and Carter in the 70s.
posted on Wed, 17 Jun 2009 at 22:28 | permanent link | view comments
but does it work?
Any money I receive will be spent on new pens (Pilot G2, of course).
posted on Wed, 10 Jun 2009 at 22:20 | permanent link | view comments
I work from home and to avoid too much familiarity (or just to get out), I go out to lunch a few times a week. One place I visit is a little pizzeria in downtown Pleasant Grove. They love making pizza and do a decent job. The biggest draw for me is that the owner has passion (I’ve overheard him get after an employee when I was the only patron in the store: “You don’t care about the food! You have to care about the food!”).
They all know my name when I come in. I don’t come that often, I thought, but perhaps two or three times a month qualifies me as a regular. I’m always careful to leave a generous tip here. I don’t know how much longer the place can stay in business the way things are going with the economy (I’m often the only customer at the hour I eat), but I hope they can pull through it, and so I contribute what I can because I value what they do here.
Which brings me to my point. My grandparents lived through the Great Depression and taught their children (my parents) to be frugal, to pinch their pennies and so forth. This is a good way to live in general, I think. On the other extreme, some people are just bad consumers: they spend their money on things that have no real value because they can’t control themselves, and often later they need help.
Between those extremes is one lesson that didn’t seem to come out of the Great Depression clearly enough: those who survived, those who had employment enough to feed their families did so because other people spent their money. People who had more means hired others to work for them and paid them money. Any fool can make money by putting his head down and working, making something that other people want, but the other side of that coin is that in hard times those with money should loosen up a little bit to help those who need a break.
Yes we should save some for hard times—it’s not right to burden others with our own problems when we could have avoided it, but when people hoard, everyone gets poorer. It’s a kind of sinister selfishness that spreads quickly and quietly. It says, “As long as I have a job, I’m ok. If a local business goes down, that’s not my problem.”
The antidote to this is, in part, to remember that money is a renewable resource, and more importantly, it’s only a representation of wealth; it is not wealth in itself. People are wealth: rather, people make wealth and have an infinite capacity to do so.
If you have a little means to help a brother out, do it. Yes, you’ll be helping someone who could use it, but you’re also turning the tide of selfishness and pessimism back to generosity and optimism.
posted on Wed, 27 May 2009 at 23:12 | permanent link | view comments
On having one’s performance managed
Stefan Stern posted an article in response to Bob Sutton’s piece entitled “Why Mangement is Not a Profession”. Both articles have important insights into management-as-a-profession (of which I’ve been a constant critic). Sutton writes:
There is remarkably little conversation about whether [MBA school] teaches people to do a better job of helping and serving clients, employees, or anyone else. Yet sociologists will tell you that a defining feature of a profession is that members are trained and socialized to put their client’s interests AHEAD of their own. That is what lawyers and doctors promise to do before they start to practice, for example.
In contrast, the societal message — and it is often quite explicit — is that the most effective managers take as much money as possible for themselves from their clients. There isn’t even the pretense of putting other’s needs ahead of your own in most talk about management education. Look at your cell phone or credit card contract if you don’t believe me, or think about what it means to succeed in a hedge fund or private equity firm — it is all about managers taking as much for themselves as possible, and leaving clients (and in some cases employees) with as little as possible. The people who run these firms will protest, but look at the financial structure.
Ouch. Stern’s article examines the issue from the side of the professional who is being “managed”:
Richard Sennett, a professor at the London School of Economics, argues that many professional people have lost “a sense of craft” in their day-to-day work. They are being judged according to their position in an occupational hierarchy, not by what it is about their work that makes them feel professional: their dedication to their craft.
“We have misunderstood the idea of quality, and how people go about doing quality work,” he says. “A most important motivator for professionals is being able to do a good job for its own sake, rather than just to meet a target. If you take that ability away from professionals they get very unhappy.”
You haven’t heard enough about the AIG bailout
Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
posted on Tue, 17 Mar 2009 at 22:06 | permanent link | view comments
Hauser’s Law: raising taxes doesn’t help
The five dollar question being kicked around (and already decided upon) is this: “Will raising tax rates on the rich increase revenues, as Barack Obama hopes?”
[W. Kurt] Hauser uncovered the means to answer these questions definitively. In a Wall Street Journal article in 1993, he stated that “no matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 percent of GDP.”
This article is updated with recent data through 2007 (alternate link). Politically, of course, you can’t just let those dang rich people off that easily, but if you care about results more than political points, you have to find ways to raise the GDP.
posted on Sun, 15 Mar 2009 at 22:07 | permanent link | view comments