Economic Views – a Thought Brought About by Yves Smith’s (Excellent Book) Econned
by cactus
Economic Views – a Thought Brought About by Yves Smith’s (Excellent Book) Econned
I’m still reading Econned, by Yves Smith. Sadly, these days I only have two minutes here or five minutes there. One day I will post something about everything going on right now, but that’s for another time.
Anyway, its not a breezy book, but if you are willing to put in the effort, it is perhaps the best critique of where the economics field is right now that I have come across. I highly recommend it.
But I do have a quibble. Smith talks about how economists have built up a practice that makes a fetish of using fancy and elegant math. However, doing so often requires crazy, unrealistic assumptions, which might be OK, except that the predictions usually have very little to do with the real world either. Thus, GIGO.
However, Smith notes that somehow, economists whose models are based on silly assumptions and produce unrealistic outcomes are nevertheless very respected and have a seat at the policy table – a seat, incidentally, that is denied to those who don’t understand the math & models, or even other economists who think that unrealistic outcomes are a problem.
Perhaps the reason I agree with Smith is that I’ve stated similar things here at AB for the past few years. Consider the following graph, variations of which I’ve posted a few times last year here at AB:
(Quick notes… the data comes from the BEA’s NIPA Table 7.1, and the graph shows the annualized change from the year before a President takes office to his last full year in office. For those leaving mid-term due to death or resignation, the last full year is the calendar year prior to departure if the Presidency ended in the first half o the calendar year. Note also that I’ve posted a few graphs showing that FDR still outperforms all comers even when you stop his term in 1938, in the middle of a big recession. Additionally, the Democrats outperform Republicans even if you eliminate the best performing Democrat and the worst performing Republican.)
Now, I like this graph because it is simple, and it makes a few points very easily. There is no amount of massaging this that can make it compatible with Republican/Austrian School/Libertarian dogma. (And yes, Obama isn’t on this… and he may yet underperform… but then, FDR inherited the Great Depression, and his first year was much worse than Obama’s.)
Personally, if I believed in Republican/Austrian School/Libertarian, I’d either be putting a heck of a lot of time and effort into explaining why the results don’t apply, or, if I could not come up with a home run explanation, I’d give up my views. And that, btw, is what happened. I graduated from high school in the mid-80s, and I believed in Reagan the way, well, folks who call themselves Republican/Austrian School/Libertarian believe in him now. But some time in college I started looking at data, and realized that the data simply didn’t match the pretty story, and my choice was to go with the data or go with the pretty story. The fact that members of these dogmas don’t know or care that reality doesn’t fit their beliefs makes me a bit leery of other things they believe in as well. And yet, Republican/Austrian School/Libertarian is now the dominant paradigm. Even most Democrats believe cutting taxes, for instance increases growth – they just feel that even so, in most cases, the non-growth related benefits of keeping taxes higher (say, to pay for certain programs) makes it worth not cutting taxes in many instances.
But Smith goes farther. Consider this: “the assume that only they are qualified to opine about matters economic.”
I agree with part of this. I don’t think one needs to be an economist to opine about matters economic, especially when so many economists hold views that contradict reality. But plenty of ordinary people have views that diverge from reality at least as much as your typical U of Chicago econ prof. My bet is that most people at a Tea Party gathering would consider the graph posted above to be a hoax. If they were paid to spend a few minutes working out the results themselves, that probably wouldn’t change their minds. My bet is most of them would simply get angry.
Economics is not rocket science. Its not even civil engineering. (And no, I do not want Joe Sixpack opining on exactly how much concrete should go into the bridge that I’ll be driving on, thank you very much.) So what can be done to make it more likely that people making decisions have at least some vague passing acquaintance with reality?
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by cactus
What is interesting is that Adam Smith recognized that human behavior does affect economics, but the latter economists in their desire (almost fetish) to be like physics and eliminate the complications of human behavior, assume homo economics the perfect economic calculating man. There is now push back with behavioral economics, including recognitions that humans tend to follow the crowd, unless holding very strong opinions. (See Chuck Prince of Citi and the musical chairs quote- he knew things were heading for a fall but could not stop because his board would not let him).
Human beings often are irrational, or at least appear so. For example take the compact floursecent lamp issue. Homo Economics would go for them, but many say that they don’t like the lite the lamps produce. Homo Economics would ask does the lamp provide a light that allows a task to get done, the answer would be yes, issue closed. Of course peoples likes and dislikes also influence a lot of economics, as well as life experiences, but the economics profession had to assume these away to make the math work. Its sort of like in physics you assume no friction in simple problems because it makes the math much simpler.
Several thoughts. First, way back in the early 70’s I would probably have gone to grad school in economics except that for the life of me I could not get comfortable with calculus. Second, I am reminded of a brother in law who is sort of an adrenaline junky and blew out his knee skiing. During rehab, he started mountain biking and had to get all the bells and whistles. At the time I was running a lot and we talked about him getting into triathalons. His response was that he could never get into running–not enough gear. I often think that is why there is so much math in economics–it seperates the professional from the amateur. Finally, while the economists refer to their assumptions as models, the fact is they are theories. In every other discipline when the facts do not match the theory, you go back to the drawing board. Economists just cite anecdotal or historical events and argue it supports their theories er models.
“Finally, while the economists refer to their assumptions as models, the fact is they are theories.”
The fact is…? Or is the fact more likely that those models are little more than assumptions that increase the degree of error at each step of a mathematical computation from data collection to final comparisons of the measures An idea rises to the level of theory when that theory can lead to testable hypothesis which will bhopefully, for the theorist, support the assumptions which the theory suggests are facts.
Dan,
How does one review past commentary? I’m sure that the very same point having to do with the assumptive nature of mathematical modeling in economics has been made before on this blog site. Do you suppose that they call it modeling because it is practiced by hobbyists?
http://www.angrybearblog.com/2010/02/how-to-build-economic-model.html
Ken H.
http://www.angrybearblog.com/2010/01/finding-20-bills-on-fhe-street.html
These are the most recent posts.
I’ve never liked these Dem vs Rep comparisons. The actual impact of presidents is vastly overrated. You are also ignoring Congress in this mix and even more importantly whether or not one party controls both Congress and the White House. There’s also no control for how “badly” the existing situation was perceived at the time adn how much tolerance ther was for enduring painful remedies. Finally, it’s alsmost impossible to disentangle technological impacts on economic growth from vague tweaks in tax laws.
All of these types of comparisons suffer from being unable to distill specific policy changes that actually contributed to the economy.
Not to get off topic, but as an engineer, I can tell you that even tho the assumptions we make simplify the math, the properties of the world remain consistent.
In other words, the math is correct to begin with, we simplify the math by looking at the real environment and noticing that frictional effects are negligible in said instance and therefore can be assumed 0 for the purposes of approximation. I’m not saying we never make errors, but we start from an absolute truth and assume our way to catastrophe. It seems to be reproducibly shown that Econ starts from an assumption and claims absolute truths.
MGK,
We went back and forth on this graph (and many others). Your points are just some of many I (and others) brought up. Correlation is not causation. Your last sentance encapsulates a large part of the ‘so what’ response to the graphs. For example would GDP growth under Bush Sr during ’92-96 have really been any different than under Clinton? We can argue around it forever. The implicit assumption is that you should vote Dem. based on GDP growth I reject as simplistic – its not all about GDP growth. Carter, IMHO, is still the worst President in my lifetime (built ’62).
But we are getting a ring-side seat in in a test of this in Obama. I expect no less than LBJ level GDP growth…and a pony!
Go buy cactus’s book. (Link at the top).
Islam will change
When I started digging into economics about a year ago, I realized that economic models were nothing like engineering models. As you say, in engineering, you make assumptions that simplify the problem. That is, what engineers do is assume away complexity that is not needed to understand the problem. Whether or not you use the simplifying assumptions, you get the same answers.
Economic models, on the other hand, assume away facts that make the models fail.
Lay-folk are unlikely to be able to offer a useful analysis of how economics came to its current state, and so won’t be able to point the way to a more useful path. We need to ask sociologists and anthropologists.
Sorry. Couldn’t resist.
But seriously, the path from Samuelson to today can be understood broadly without hiring social scientists. Samuelson offered precision and power at the cost of a firm grasp of undergraduate math. For those of a mathematical inclination, the formalities of economics are a romp. The result is precision and power. Answers to questions that were indeterminate on theoretical grounds became clear and simple with math. Income or substitution the bigger effect? Ask Slutsky.
Power and precision are very good things to have. So is a grounding in economic theory. It is worth recalling, I think, that many members of the profession bemoaned the slim grounding in theory that has been required in many PhD programs in recent decades. That is not entirely the objection to economics that applies in this after-the-fall era, but it’s pretty close. There was often a failure to discriminate between simplifying assumptions and any other kind of assumption.
Are we utility maximizers? No, but it sure makes the math easier to assume that we are. Are firms profit maximizers? Same answer. Are we rational? Is perfect competition common in markets? Are the price and quantity results of monopolistic competition sufficiently like those of perfect competion that we can reasonably assume them to be the same? No, but it sure…makes…the…math…simpler.
Economics has a bunch of really great tools at its disposal. A substantial problem with the tools is that it is not obvious when a given tool is inappropriate. Another is that the tools only work the way they are intended under what are often quite constraining conditions. For the purposes of understanding, it is useful to assume a set of ideal conditions to see what results you get, as a starting point. Every econ undergraduate knows the steps. “If we assume…then we get the result that…(and then the critical step)…if we relax the assumption that…”
The way the pedagogy works, the first assumption the prof relaxes is usually not deadly to the analysis. Sometimes, relaxing an assumption will stand a result on its head. Sometimes, it can only be shown that in the absence of some ideal condition, the result will lower, but in the same direction. But as assumptions are progressively relaxed, the eventual result is that the tools are no longer precise and powerful.
Math guys with a less-than-perfect grounding in theory whose tools stop producing powerful results if they relax many simplifying assumptions – uh oh. Seems like a great way to produce an unhealthy affection for simplifying assumptions. Add to that the payoff of being able to provide non-economists with simple, appealing answers to their questions if you just stick to the simplifying assumptions. A demand-side equation in which providing the desired analysis pays way-the-hell better than doing it right is a distinct problem, but one which marries up with the appeal of turning simplifying assumptions into dogma, since many of the simplifying assumptions are highly business-friendly.
This little bit of barstool sociology is surely just as schematic and misses just as much as the approach to economics it seeks to characterize. But I think it’s better than the “economists are stupid”, “they need to study more accounting”, “isn’t a real science” stuff that has recently counted as “criticism” of economics.
cactus,
“My bet is that most people at a Tea Party gathering would consider the graph posted above to be a hoax.”
I wouldn’t. And the rest would easily be convinced with the data that the graph is true. That’s NOT their gripe with Obama and the Dems. Which many on the left keep missing (and right for that matter). But I’m looking forward to the next 3 years seeing if the idea we should vote ‘D’ to increase GDP.
But I would consider it a failure if GDP went up even if we stagnated at 10% unemployment and dropping standards of living… YMMV
And I still bet we hit 15% unemployment under Obama…double the worst under old maligned Bush Jr.
Islam will change
Assumptions aren’t models or theories. Assumptions are conditions adopted for the sake of making problems tractable. Assumptions are in economic parlance more or less what they are in normal English, but formalized so that everybody means the same thing when they say “rational” or “perfect competition”. Models are notions of how things work, stripped down to make them tractable. Theories, in the normal scientific parlance, are not mere models, but in fact powerful models which explain more than any earlier view of the world and, in the best case, are confronted with few examples which they fail to explain. Theories aren’t lesser things. The are not guesses. In science, “theories” are (pardon the expression) supermodels.
mcluvin,
Sadly, I agree.
I still remember when I was in grad school, showing my father a paper written by a prof at UCLA which used Brownian motion to “prove” something or other. My father, a physicist, upon reading the paper, said: “Either he knows what Brownian motion is or I do.”
But see… its a cool sounding tool, so shoehorning your assumptions onto it makes for a paper impressively adorned with symbols. I admit I fell for that trap myself when I was a grad student… but I grew out of it quickly.
buff & MGK,
I’ve addressed this before here. It is also addressed in the book. I will no doubt address it again. No time right now… sorry.
The sociologists and anthropologists spoke a long time ago on economics, and what you got was Institutionalist economics (a la Thorstein Veblen, John Kenneth Galbraith and Gunnar Myrdal). No need to reinvent the wheel.
Um, nope. It is a received assumption in economics than preferences are a given. There is no assumption in economics, even sloppy economics, that people will ignore their own aesthetic sense in making economic decisions. Impoverished preferences are not at all part of economics, even when badly done. Economics has had the fault of over-simplifying human behavior, but not like this.
This sort of ill-informed critique of economics might be harmless, because anybody who is in a position to do anything about the training of economists and the uses to which economic analysis will be put, or to demand better analysis, is unlikely to give claims like this one about light-bulbs any consideration. On the other hand, there is a lot not to like about the ready offering of views this far removed from reality. It means somebody holds his own misunderstanding in high esteem, and it also means our culture has failed to get across even the most basic understanding of how economists do what they do.
When the interested public can be this far off the mark, the odds of “regulating” economics to some good purpose are slim. We can’t insist on the best that economics can provide without understanding at least the basics about what economists think about, how they think and – in this case – what they think.
There are two other issues that will invalidate almost all of the analysis around the political impact:
1) The GDP number itself is derived from the total change minus the contribution of inflation. Change the way we meaure inflation (or just measure it badly) and the “asumed” GDP growth will be way off. Here’s the problem with measuring inflation – you need constancy to draw meaningful comparisons, but society changes its mix on how it spends its money. Take for example food, if you have steak in your inflation measuring basket and prices increase you’ll get a component of inflation from increasing steak prices, but if the consumer switches to chicken you are likely to see a lower overall food inflation. Now consider consumer preferences over time shifting to more chicken for health reasons, rather than price pressure. Is that moderation in inflation?
2) This whole analysis assume GDP growth is the best measure of progress or to put it in economic terms, the goal of each administration is to maximize GDP. Personally, I thnk people who try to do this end up screwing up the system more than people who focus on other issue that government should concern itself with.
cactus,
The problem with economics is that there are so/too many variables to model.
If you take a simple theory, such as “Reducing Capital Gains taxes increases investment” you can find a lot of real data to support this in the vein of “if you reduce price of a good, you increase quantity demanded for that good” However, if you, cactus, cannot find that the historical macroeconomic data supports the theory, you conclude that the theory is no good.
In reality, the theory may be totally valid, but is overwhelmed by other variables.
I thinking more along the lines of this:
Robert Waldmann: Economic Theory as a Subbranch of Mathematics, here:
http://www.angrybearblog.com/2009/01/robert-waldmann-economic-theory-as.html#comments
There was also a thread some time in 2008 having to do with the work of Romer and Romer, but I’m having a hard time finding that.
@buffpilot,
What gripe do Tea Partiers have with Obama and the Dems that they shouldn’t also have with the Repubs? Both parties essentially govern in the same manner: as pro-corporate, anti-individual Hamiltonian Federalists. Yes, they dress themselves up nicely for their bases to secure votes, but out of the public eye, most of them are basically the same. (Clear exceptions: Ron Paul, Dennis Kucinich and Bernie Sanders. There may be more.)
One of the problems that I see prevalent in Libertarain/Austrian School/Chicago School dogma (which seems to influence Tea Partiers a great deal) is the complete failure to recognize the effect of corporations on economics and liberty. When a corporation becomes large enough, it can be just as tyrannical as any government, if not more so, because the people have no say.
Waaaay off topic, but one question that I have is why capital gains taxation applies to investments in the stock market. Investing in the stock market is not counted in the GDP calculation as “investment,” so why is it subject to capital gains treatment? Our stock markets are casinos, and we tax casino winnings as income, not as capital gains.
What would happen if we eliminated capital gains treatment of stock market investments (i.e., you only get capital gains treatment for the initial purchase of a share of stock)? Might we see more real capital investment in the U.S.?
cactus – I wasn’t looking for a reply. I think we have plowed this field many times before. Just replying to MGK…
Buy cactus’ Book
Ah, but I’m not asking socs and ants to do economics. I’m saying we could call on them to do sociology and anthropology – review the progress of economics as behavior among economists over time from a sociological and anthropological perspective. A difference of object and subject…I think. Either way, it would drive economics faculty nuts to know this week’s social anthropoligy symposium would put the behavior of economists under the ‘scope.
Tao J
“What gripe do Tea Partiers have with Obama and the Dems that they shouldn’t also have with the Repubs?”
None. I agree they are both big federal government. More control in the hands of DC, less liberty for you and I.
And they are just as mad (if not more) with the entire concept of “Too big to fail” as they are with the sweeping increase of the reach and span of the Feds going on steroids with the Dems in control, the explosive growth in US debt, again on steroids with Obama, topping off with Obamacare and now talk of SS “fixes”.
The Tea-Party types have been around for awhile, its just they are finally starting to coalasce after the recession combined with the obvious out-of-control governments (Fed and state – see California). Its a grass roots movement still in its relative infancy. It will be interesting if it grows into a true 3rd party or gets absorbed by one of the existing ones (my bet it gets absorbed).
Islam will change
Um, note quite. The point made, more often than not, is that strong claims for the virtues of tax cuts of a light regulatory hand cannot be supported by the data. If strong claims were anything like true, then overwhelming them with other factors should be tough to do. Go for a few cycles, when other variables differ, and see no evidence in the data, and you begin to suspect that strong claims for the importance of taxes as a determinant of economic activity don’t hold up.
The claim that cactus dismisses some notion or other as “no good’ oversimplifies.
However, the point that the inputs to economic performance are complex does make sense, so much sense that we should be wary of any political part that resorts over and over to the same policy prescriptions, winter and summer, in good times and bad. The GOP of 35 years ago was willing to examine the economy and try a variety of things – and make a variety of mistakes in the process. Today’s GOP comes back to the same talking points over and over – cut taxes, regulation and regulation. It attempts to do only two of the three, which has been disastrous, but even reducing economic policy to the same three points, all seasions, all tax rates, all points in the business cycle, is to claim that the economy is far simpler, and requiring far less understanding, than is actually the case.
kharris,
Today’s GOP comes back to the same talking points over and over – cut taxes, regulation
That’s because taxes and regulation add to costs, and therefore prices. And there is a lot of microeconomic data and evidence regarding the effects of higher prices.
kharris,
Today’s GOP comes back to the same talking points over and over – cut taxes, regulation
That’s because taxes and regulation add to costs and prices. And there is a lot of microeconomic data and evidence regarding the effects of higher costs and prices.
“Assumptions are conditions adopted for the sake of making problems tractable.”
That is what they are supposed to be. But often they are used to assure the conclusion. I can tell you three things that will flow with a model that has the three following assumptions: perfect competition, rational expectations and full employment. Sometimes assumptions are innocent sometimes they are not.
Phil Mirowski and others do this to some respect. You might find this article of interest:
http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
From the intro:
http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
The reason, I want to argue, is that the core of modern economics—
neoclassical price theory—is seen to be at stake. In particular, minimumwage
research has come to be seen as a test of the applicability of
neoclassical price theory to the determination of wages and employment.
The modern minimum-wage controversy is not just a technical quarrel
over the sign and magnitude of wage-elasticity coefficients; it is the
latest chapter in a longstanding methodological dispute over whether
and in what domains neoclassical price theory can be said to properly
apply. One does not make opposition to minimum wages a disciplinary
litmus test, unless there is something this important at stake.
Phil Mirowski and others do this to some respect. You might find this article of interest:
http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
From the intro:
http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
The reason, I want to argue, is that the core of modern economics—
neoclassical price theory—is seen to be at stake. In particular, minimumwage
research has come to be seen as a test of the applicability of
neoclassical price theory to the determination of wages and employment.
The modern minimum-wage controversy is not just a technical quarrel
over the sign and magnitude of wage-elasticity coefficients; it is the
latest chapter in a longstanding methodological dispute over whether
and in what domains neoclassical price theory can be said to properly
apply. One does not make opposition to minimum wages a disciplinary
litmus test, unless there is something this important at stake.
Phil Mirowski and others do this to some respect. You might find this article of interest:
http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
From the intro:
http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf
The reason, I want to argue, is that the core of modern economics—
neoclassical price theory—is seen to be at stake. In particular, minimumwage
research has come to be seen as a test of the applicability of
neoclassical price theory to the determination of wages and employment.
The modern minimum-wage controversy is not just a technical quarrel
over the sign and magnitude of wage-elasticity coefficients; it is the
latest chapter in a longstanding methodological dispute over whether
and in what domains neoclassical price theory can be said to properly
apply. One does not make opposition to minimum wages a disciplinary
litmus test, unless there is something this important at stake.
“Math guys with a less-than-perfect grounding in theory whose tools stop producing powerful results if they relax many simplifying assumptions – uh oh. Seems like a great way to produce an unhealthy affection for simplifying assumptions.” Kharris. This catches a bit of the larger issue today the movement of quants into finance and economics, without thinking about other factors. It is possible to construct beautiful models and set up intracut rococo financial structures that appear to serve a real purpose but really are just about extracting money for the seller. Since Econ deals with people, more knowledge of human behavior makes a lot of sense. As noted its simpler to assume people are rational etc, and most of the time the assumption is not to bad except those few times when the assumption is terrible.
I don’t think you need to have a PHD in economics to conclude many economic doctrines aren’t borne out by simple observation let alone through mathematical analysis, so while it would be nice to disprove theories with calculus, I don’t think it is mandatory. Examples of doctrines that are easily disproved by observation include
1. An asset bubble disproves the Efficeint Market Theory.
2. The economic boom after Clinton raised taxes show that there is littel relationship between taxes and growth.
3. Regulation may add costs in the short run, but in retrospect it always seem less costly when unregulated markets fail.
Yoru bar graph is in the vein of providing observational evidence of the obvious. Whether people are receptive to it is another matter, but putting the information out there is the best you can do. Some people are delusional and will find any excuse to avoid concluding what the facts show.
Buff
You bring up an important point about which metrics we choose to look at our economic improvement. GDP happens to be a lousy one and many progressive economists have been trying for years to have a better measurement. However GDP IS an aggregate demand picture. It purely measure the amount of spending in an economy which means it will measure the amount of INCOME in an economy since income only comes from spending. So a better GDP will always result in higher incomes (in aggregate) but says nothing about distribution.
What would be “dropping standards of living”? A rising GDP even in the face of the same unemployment is still adding income to those working so their living standards would be raised.
The problem with our employment situation, and why we will likely reach 15 % (we already have actually and were almost there under Bush) is the neoliberal aversion to any employment not tied to the private sector. We have waited two years for the private sector to step to the plate and start hiring. They have tax incentives and a very willing work force. Whats the problem? How much do they need to be bribed to start hiring people? An ELR program is the only thing that can kick start the job recovery because the private sector needs customers before they will respond with supply
Islam will change but American conservatives will stagnate
The problem with that “theory” of yours is it gets the flow of money backwards. More saving does not create more investment more investment creates more savings so cutting capital gains will never increase investment. The money you are receiving from capital gains and paying taxes on is money you ALREADY SAVED, which came from a previous investment.
Capital gains is simply another form of income (and should be taxed as such) and trying to argue that lowering income taxes raises investment would prove to be difficult. The investment comes FIRST which creates the incomes which can then be taxed.
kharris,
“There is no assumption in economics, even sloppy economics, that people will ignore their own aesthetic sense in making economic decisions.”
You misunderstand or I miswrote. The problem – and here Yves Smith seems to be in agreement – is that many in the profession will use the assumptions because they make the models pretty and make the math work. Its not a requirement of economics per se, but it is how economics is practiced in some very influential circles.
MGK,
1. Yes, but…. a change that occurs in the 90s that makes Clinton look good, say, should not also let GW look bad. Nor should you get Nixon looking bad right after LBJ looks good, or JFK looking good after Ike did poorly. Whatever happens in inflation is not enough to explain how adjoining administrations can do so differently.
2. Sure, real GDP per capita is a shorthand. (In my book I look at everything from abortion to crime and debt, etc.) Its imperfect, but if you’re going with one measure, its OK for that purpose… it doesn’t take much imagination to conclude that when real gdp per capita was running quickly, say, during the JFK years, things felt better than during the GW years.
sammy,
“That’s because taxes and regulation add to costs and prices. And there is a lot of microeconomic data and evidence regarding the effects of higher costs and prices.”
I won’t rehash Greg’s response. But I will add… then if higher costs and prices are a bad thing, you should expect high tax and regulation presidents to have slower growth. But that doesn’t seem to be the case. So either higher costs and prices are not a bad thing, or they have such a small effect as to be irrelevant. Either way, the macro facts on the ground don’t match the story line.
“so while it would be nice to disprove theories with calculus”
I’m not sure. The older I get, the less use I have for calculus in econ. I think the problem is that the field has fancy tools, but we have no idea how to use them properly. Its like giving an alchemist access to a particle accelerator. I’m concerned we don’t even have the first principles right.
At some pont the question of ideology and economics will need to be broached.
Hey, don’t forget Coolidge – if you are going to put Hoover in there during the Great Depression years, you might as well have the time when Hoover was Commerce Secretary. But that might unskew the data a bit.
If the polls are any accurate indication most of the Tea Partiers are already Republicans.
Add to that the role that GOP operatives have played in bankrolling and organizing this “grass-roots” movement and what you have is just a way to keep the adrenalin pumping among the Republican party faithful in between elections.
Jest sayin’…
Mathematics in economics is basically a cargo cult. Real science uses mathematics. Real science gets real results. If economists use mathematics, their results will be real. Unfortunately, I don’t even get the impression that economists use mathematics correctly, let alone check if their results match reality. Economics is full of differential equations, and every scientist and engineer knows that differential equations mean the system can have oscillations and a possibility of explosion. That’s why electrical engineers put capacitors in their circults and align the poles and zeros. That’s why mechanical engineers add ballast and elasticity and design structures to bend and flex. Economists act surprised when their systems oscillate and argue that ballast, capacitors and the like are dead weight to be ejected.
‘S Funny how of all the freakin’ experts here non of yah have figured out how to upload an avatar. Or so a first order analysis would indicate…
Maybe I don’t know how to use a search engine, but when I use a search engine to look for actual experiments on economic topics, there are amazingly few. I found some experiments that show that prices tend to converge repeatedly to a value — which may or may not be the economists’ “Equilibrium Value”. Other than that, the field of experimental economics seems to be largely an unpopulated wasteland.
Economics appears to largely an elaborate logical structure built on mildly plausible premises. That has some disconcerting similarities to such fields of study as Phrenology and Astrology. And like those two fields, economics seems to be quite unable to consistently make accurate predictions. One might think that would cause people to question the underlying assumptions. For the most part, one would be seem to be wrong.
I would point out that the difference between pre-Copernican astronomy and economics, is that pre-Copernican astronomy might have been pretty much dead wrong about how things worked, but it yielded quite accurate predictions as to where the planets would be in the sky on any given future or past date. As far as I can see, Economics is quite likely every bit as wrong about mechanisms. On top of which it seems to be largely useless for navigation.
There’s nothing wrong with simplifying assumptions … if you know enough about the model to make them.
For example, I doubt if most engineers would have the slightest idea how to correct the standard equations of their field for relativistic affects — which are far too small to worry about when designing a bridge or trying to produce a power line transformer that won’t explode. Assuming relativistic affects to be zero doesn’t affect the practical results and substantially simplifies the math.
The problem seems to be that Economic models seem overall to be pretty much worthless. At best, simplifying models that don’t work just makes it easier to get to wrong answers. At worst, it produces new and different wrong answers that people can then argue about interminably.
***why capital gains taxation applies to investments in the stock market.***
There’s no real justification for short term capital gains except for the somewhat artificial construct of allowing one to subtract short term capital losses from them, but not from other income. That’s a matter of equity. If you make $200,000 daytrading and lose $193,000, it really does seem a lot fairer to tax you on $7000 than on $200,000.
One can justify taxing Long tem capital gains at a lower rate to avoid taxing inflationary gains as if they were real usable income. However, current capital gains tax rates are preposterously low from an inflation correction point of view. Probably ought to index capital gains to inflation.
***That’s because taxes and regulation add to costs and prices. And there is a lot of microeconomic data and evidence regarding the effects of higher costs and prices.*** Sammy
And when we tried it your way, the results were a total disaster. What part of IT DOES NOT WORK do you fail to understand?
pebird,
I can only go back to 1929. GDP was not calculated before then.
***’S Funny how of all the freakin’ experts here non of yah have figured out how to upload an avatar. Or so a first order analysis would indicate…***
Just maybe you need to work a bit on your priorities laddy.
Math imposes a rigorous logical mathematical methodology on economic analysis. Therefore, to do away with or significantly diminish the use of mathematics is to abandon logic and reason. It’s no wonder the left is out in front arguing for the end of logical accountability.
Im a layman
All I see in that graph is that real GDP has fallen off a cliff since FDR and the total results are skewed by the addition of Hoover.
All we need now is WW3 and 0bama can really kick some presidential RGDP butt.
That graph explains nothing and has no value that I can determine.
Ill stick to the Austrian School business cycle theory as it and they have been able to correctly predict what is to come economically even if they have been unable to adaquately explain what transpired in RGDP under various Democrat and Republican political hacks in the past.
Ooops teas boiling……When Lipton blows the whistle you gotta have a cup of tea…brisk brisk brisk….Lipton Tea
cactus,
My point with #1 is that society changes preferences faster than the CPI measure can adjust and therefore it’s always behind the curve. Comparisons across timespans that approach decades are simply not meaningful.
I disagre with your #2. Feeling better and actually being better are two different things. Take this example: you go to a hooker and spend your money right before an election that changes parties; feels good doesn’t it. But you end up with a drug resistant STD that requires lots of medical treatment that ends up costing you more than the amount you spent on the hooker. The 2nd event contributes more to GDP than the 1st. So which feels better? The point is that it’s easy to confuse short term gains that are not only unsustainable, but actually create long term problems with “feeling” better. FDR loks great in terms of GDP, but I would argue that “fixing” the retirement age at 65 has serious long term implications. Same was done in the 60’s with Medicare. These structrual issues with the USG budget are long terms issues that are causing problems now and will eat into future GDP growth potential, but have nothing to do with any individual presidency. You should be more worried of the longer term trend of declinig GDP regardless of the party in the White House.
cactus,
Probably the best line from you ever:
“Its like giving an alchemist access to a particle accelerator.”
Which is exactly my point on your entire series. We really don’t understand the economy anywhere near what we think we do. The idea that Clinton could have had LBJ style growth if he had NOT raised taxes is just as valed as the idea that he would have had Ford style growth if he had NOT raised taxes. Did Clinton’s tax decision make him underperform or overperform against the other choice. Your data and economics, even in hindsight, can’t answer that simple question.
Islam will change
Gregg,
ELR is workfare by another name. Maybe its just a difference in how much you give people on the dole. They get less if they sit around doing nothing and more if they are out in Obama jumpsuits picking up trash on the highways….at least they would get some excercise and fresh air.
See the other thread.
Islam will change
So here’s the deadly confluence. Take cactus’s conclusion, “I think the problem is that the field has fancy tools, but we have no idea how to use them properly.” I have always thought that the social sciences, within which I was educated, do not pay sufficient attention to the limitations inherent in the varying types of measurement. Add Travis”s point concerning ideology and economics. Stir well. Recognize that it is only in the field of economics that the professional can command enormous income/payment for nothing more than a considered opinion. Dr/Prof Summers being an excellent example. You end up with a “scientific” profession top heavy with ideological orientations that are highly valued by private industry, especially the financial industry. It certainly makes for some subtle external forces. Maybe not so subtle.
Math is fine and necessary. Mathematical liars, or those who think they understand statistical analysis but are in fact the butts of jokes in the statistical profession, are the problem. And that is a problem that knows no ideological perspective. Numbers don’t lie, but people who use them often do.
Cactus,
Yes…..you addressed it, but you would only except a certain amount of lagging that made the Democratics look good, and the Republicans look bad. Then when I pointed out another analysis of the same topic by the Heritage Foundaiton, that showed a much more real world analysis of lagging effects, it showed how there was no question that Republicans are better for the overall health of the economy, your only response was………”They are liars!”
So what if its workfare by another name!? This is a crazy idea that only people who are working for the private sector are “productive”. Is a Wal Mart greeter productive?
People who want to work ought to be able to and currently (and probably forever) the private sector is unable to provide secure jobs to everyone. Why should someone have to wait for the private sector to offer them a job? The private sector solution is to say let wages come down until we decide they are all profitable to hire. When will that be $6.50/hr, $4.00/hr, $2.75/hr.?
buff,
From this graph alone, we cannot say what works. But we can say that the Republican approach is probably unlikely to produce rapid economic growth. And as I’ve shown in past posts, there is something that the cuts across the party lines, and that slow growers have in common, and that’s reducing the actual tax burden. It may not cause slow growth, but it always seems to be there with slow growth… Again, our tools may be insufficient to know why, but we cannot ignore what is always there.
Math is only useul after data has been observed. Genius that he was, Kepler had to have been preceded by Tycho Brahe. As a profession, we still haven’t figured out observation… most of the profession will still tell you that FDR caused the Great Depression.
AndyC,
I assume you are kidding. The Austrians would have predicted the fastest growth under Reagan and GW, and the slowest under FDR and JFK (remember, the “Kennedy” tax cuts came under LBJ).
As to things going down hill after FDR… you mean they went downhill after taxes stopped being hiked.
As to skewing… I’ve mentioned in the post:
1, Leaving out the war years, or even post 1938, FDR still outperforms all others
2. Leaving out Hoover and FDR (worst Rep, best Dem) Dems still outperform Reps.
I’m not sure how the Austrians explain any of this at all.
Jack,
Yup.
cactus,
Then if you really beleive that, then the Dems should be RAISING taxes, not looking at lowering them. Well taxes will get raised here shortly as all the Bush era tax cuts sunshine away.
Are you really implying that increasing the reach and span of the Federal government is the way to a robust full employment economy? More Fed control and regulations? more taxes?
I’m sorry I’ll trade slower GDP growth for less Fed gov every day. The more interaction you have with the Feds the less freedom you have.
Islam will change
Jimi,
As you describe it, either I’m an a-hole or you’re coming awfully close to slander. So let’s see what my response was. And btw… it wasn’t Heritage, it was a website called the American Thinker you were quoting. My response (http://www.angrybearblog.com/2009/12/comparing-presidents-real-gdp-per_14.html#comments) was this (cut and paste):
—
I had some posts (and I’ll try to redo ’em at some point, they relate to a chapter I started working on for my second book in which I lay out the information in far more detail than in this response) looking at the Fed’s behavior in the six months leading up to a Presidential election, and there seems to be a bias. (There’s some economic literature that looks at this as well.) Consider three consecutive elections in the Greenspan years… there was a monster increase in real M1 per capita leading up to the election in 1992 (intended to boost the economy which a cynic might think was intended to make the Republican incumbent look good) and monster decreases in 1996 and 2000 (intended to kill the economy which a cynic might interpret as intended to make the Democratic incumbent or the candidate associated with the Democratic incumbent look bad). But the ramifications of that manipulation continued past the election. (Think recession of 2001 – what exactly do you think is the textbook example of happens when the Fed strangles the money supply following a stock market crash.)
But even so, the “Thinker” is wrong. This is also a post I’ve had before, and will redo at some point (maybe in the coming weeks – its actually on my current to-do list so you won’t wait long). I don’t have the time to go over his fallacies, but I can point you to data from the BEA that is a lot closer to right. This file (http://www.bea.gov/national/xls/gdpchg.xls) shows the % change from year to year in real GDP and nominal GDP. Forget the nominal and focus on the inflation adjusted (i.e., real).
If the Thinker were correct, than leaving out the first year of Democratic administration that follows a Republican administration should lead to average growth in their term decreasing.
And yet…
1. The second worst year in FDR’s term was his first year in office. Thinker fails.
2. The single slowest year in JFK’s term was his first year in office. Thinker fails.
3. Carter… the Thinker’s rule kind of works. Not entirely, but OK.
4. Clinton. He had two years with growth in real GDP of less than 3%. 93 was one of those two years. Thinker fail.
Except for Carter, each of those Dems would see his av growth rate increase leaving out his first year.
The converse also doesn’t quite work:
1. The third best (out of eight) years in Ike’s term was his first
2. Nixon’s first year was his third worst… out of 6. So about par.
3. Kind of OK for Reagan – 81 was his second worst year, after 82.
4. Bush… Thinker gets a win on this one.
So among Reps following Dems, the Thinker is about half right. Among Dems following Reps, he’s easily wrong.
—
And you refer that as “your only response was………”They are liars!””
Wow.