Alchemists and Quacks

Here is the title, “Goldman Sachs Model Evokes Blood-Sucking Leeches” and here is the point:

Macroeconomics really is stuck in the Dark Ages.

These are the opening statements:

Take ‘fiscal stimulus,’ for example, the idea that the government can step in to fill the void when the private sector isn’t spending and boost economic growth in the process.

Economists have been debating the pros and cons of fiscal stimulus since the 1930s, when John Maynard Keynes diagnosed the problem as one of inadequate private investment and prescribed public spending, financed by borrowing, as the cure.

The discussion hasn’t advanced very much in eight decades. Sure, economists have devised elegant mathematical models that purport to show that $1 of government purchases translates into — take your pick — no increase in gross domestic product (the multiplier is zero, according to Harvard’s Robert Barro) or $1.50 of GDP (a multiplier of 1.5, according to Berkeley’s Christina Romer, who was chairman of President Obama’s Council of Economic Advisers when the $814 billion stimulus was crafted in 2009). They haven’t really proven anything.

And here is the conclusion:

As I said before, we entered the 21st century with macroeconomics still looking for an Age of Enlightenment.

Five thousand years ago in ancient Egypt, medics used leeches to suck the blood of ill patients, believing the practice could cure everything from fevers to food poisoning.

Today’s physicians have largely forsaken bloodsuckers for modern medicine.

It’s about time macroeconomics emerged from the Dark Ages as well.

And this is the article itself by Caroline Baum at Bloomberg.

You have heard plenty from me over the years about what a wasteland Keynesian economics creates. But the size of the catastrophe it has now led to, and the absence of any other genuine explanation for its undeniable failure to move our economies forward, at last means we are seeing the beginning of the end of one of the most damaging experiments in the history of economics. It is not at the level of Marxist-damage but given the years it will now take to reverse the problems we have deliberately created for ourselves there is little doubt that the cost of this theory will be in the trillions across the globe.

The classical economics that Keynesian economics replaced, with the Law of Markets – economic theory’s Law of Gravity – at its very core, will need to find its way back. Amongst many things, the Law of Markets was designed to explain why increases in aggregate demand do not lead to increases in production and employment. In its own way we do have experiments in economics and this experiment with aggregate demand has been one of the worst.

The basics in understanding the classical theory of the cycle may be found as part of my Ludwig von Mises Memorial Lecture which I gave just one year ago this month. Its title was “Why Your Grandfather’s Economics was Better than Yours” and that economics really was better. The presentation can be found here. It is back to the economics that are described in this presentation that we are now heading.

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28 Responses to Alchemists and Quacks

  1. sdfc

    The deflationists were proven wrong in the early thirties.

    That monetary and fiscal stimulus put a floor under economic activity in the aftermath of the GFC is history.

    The overwhelming reason for the shit debt/GDP ratios in the EZ and US are prior budgetary decisions.

  2. .

    The deflationists were proven wrong in the early thirties.

    You can’t say that. It was inappropriate policy. They ought to maintain liquidity and price neutrality.

    “That monetary and fiscal stimulus put a floor under economic activity in the aftermath of the GFC is history.”

    We paid 4% of GDP to get at most 3% change in growth.

    Does not compute.

  3. Peter Patton

    The deflationists were proven wrong in the early thirties

    Can’t wait for this new-fangled, imaginative take on what “proof” is.

  4. Capitalist Piggy

    Dot,

    What/where are the numbers that support your 4%/3%?

  5. .

    That’s what it cost. -2% GDP is as low as the forecasts went.

    Do you have other figures?

  6. Capitalist Piggy

    I have NO figures, that is why I am asking you. Are you referring to GDP in 2008-09? Do you mean GDP grew 3% in that year despite Govt exp of 4% of GDP in that year?

    I just want some clarification, that’s all.

  7. .

    I reckon they spent 4% of GDP to get 3% of GDP when they spent the stimulus. Feel free to correct me.

  8. sdfc

    Dot

    The budget deficit injected cash into the private sector, it was entirely appropriate policy in a deflationary environment.

    Your baseline for growth is arbitrary. It is no different from me saying it prevented a 10% drop in real GDP.

    Forecasts are often wrong. That’s why they are constantly revised.

    Peter

    That little was done to prevent the collapse in the early thirties is history, But then again you don’t put much stock in economic history do you?

  9. JC

    The budget deficit injected cash into the private sector, it was entirely appropriate policy in a deflationary environment.

    Professor Sumner believes that fiscal policy doesn’t work if the interest rate level is above zero. Why are you right and he’s wrong?

    Also the terms of trade turned around here.

    Your baseline for growth is arbitrary. It is no different from me saying it prevented a 10% drop in real GDP.

    It is different. Because we would know you’re bullshitting as that sort of comment would be totally absurd.

    Forecasts are often wrong. That’s why they are constantly revised.

    US modeling was telling the White House that level of fiscal intervention would drag unemployment down to 8%. Instead it rose to 10%.

    Asset markets also collapsed with the news of the fiscal program which showed that collectively people thought they were nuts to even try that on.

    I keep telling you that the real problem was the failure of the Fed to recognize the severity of the problem when they should have focused on raising NGDP

    That little was done to prevent the collapse in the early thirties is history, But then again you don’t put much stock in economic history do you?

    Bullshit. Hoover’s policies made things worse.

  10. sdfc

    Professor Sumner believes that fiscal policy doesn’t work if the interest rate level is above zero. Why are you right and he’s wrong?

    He’s wrong. In any casae what interest rate?

    You don’t “know” I’m bullshitting? That’s absurd.

    What the same labour market modelling that “forgets to model the impact of the increase in private sector income as a result of the change in the BOP between the public and private sectors.

    Both household income and business cash balances have increased as a result of the stimulus.

    Hoover ran a peak deficit of ~5.5% of GDP in an economy where NGDP basically halved. There was no stimulus in the early 30s.

  11. .

    Your baseline for growth is arbitrary. It is no different from me saying it prevented a 10% drop in real GDP.

    1. No it is not. It is conservative in terms of arguing against the policy action. I’m being redoubtably sporting. 2. You’ll believe anything old son.

  12. sdfc

    Of course I believe that in a deflationary environment, inflationary policies are the way to go.

    The exchange economics is no way to analyse a monetary economy.

  13. JC

    There is no such fucking thing as a balance of payments between the public and private sector. You’ve been told this before yet you persist in posting such a comment which is alien to economics.

    There was no stimulus in the early 30s

    There was inappropriate policy that made things worse.

  14. .

    The exchange economics is no way to analyse a monetary economy.

    Since when is macroeconomics stuck in the Edgeworth box? FFS the other night the point was made that money is simply the most sought after and liquid commodity. Your comparison is pulled out of thin air.

  15. sdfc

    Money is not just another commodity because all claims demand payment in it.

    A rise in the value of money puts downward pressure on the price of all other commodities and assets (excluding some derivative products).

  16. .

    A rise in the value of money puts downward pressure on the price of all other commodities and assets (excluding some derivative products).

    That’s true of all commodities. Alex, what is an oil shock?

  17. JC

    Money is not just another commodity because all claims demand payment in it.

    So what if all “claims demand payment in it”? All airplanes demand aluminum in them.

    Money is the commodity in most demand. The reasons it is demanded are not relevant to its characteristics and what it is used for.

    A rise in the value of money puts downward pressure on the price of all other commodities and assets (excluding some derivative products).

    Not in all cases. You need to be specific and explain yourself exactly as this just isn’t good enough.

    A material rise in value in terms of the general price index? What? Explain yourself, young man.

  18. sdfc

    Airplanes are constructed because of the promise of a monetary payment.

    Aluminium is paid for by the promise of a monetary payment.

    Just to make it clear. A change in the relative price of aluminium does not precipitate a general change in the price level over and above its share of activity.

    Prices are denominated in money of course a change in the value of money will lead to a change in the price index.

  19. JC

    Airplanes are constructed because of the promise of a monetary payment.

    So what. Aluminum is demanded to construct airplanes.

    Aluminium is paid for by the promise of a monetary payment.

    Or is could be for by loves of bread.

    Just to make it clear. A change in the relative price of aluminium does not precipitate a general change in the price level over and above its share of activity.

    Yea, but a change in the price of aluminum will certainly have an effect on the cost of producing a plane.

    Prices are denominated in money of course a change in the value of money will lead to a change in the price index.

    What’s your point.

  20. .

    Somehow this justifies not criticising the stimulus. Um?

  21. JC

    Somehow this justifies not criticising the stimulus. Um?

    Yea.. lol.

    It’s the current account deficit between the public and private sectors that causes the deflation and we therefore need a stimulus.

    Isn’t that right SDFC.

  22. sdfc

    Dot

    A change in oil price will impact on petroleum products. It only impacts on the price level to hte extent of its share of activity. A rise in oil prices will only have a large impact on general prices to the extent that it is accomodated by monetary policy. That is by an increase in the money supply.

    This could also be achieved by a decision of government to increase the size of the deficit (or conversly by shrinking the surplus).

  23. sdfc

    JC

    Aluminium is not paid for by loaves of bread. Nor are any financial claims.

    My point is that money is not just another commodity and it is incorrect to say so.

  24. .

    You’re lecturing us about MCM and CMC but you’re talking about nominal, not relative prices!

    “A rise in oil prices will only have a large impact on general prices to the extent that it is accomodated by monetary policy. That is by an increase in the money supply.”

    No.

  25. sdfc

    That’s because nominal matters because everything is priced relative to money.

    A general change in the price level is due a change in the supply of money and that alone. An increase in the price of oil or any other commodity has a depressive effect on prices as a whole unless there is monetary accomodation.

  26. .

    An increase in the price of oil or any other commodity has a depressive effect on prices as a whole unless there is monetary accomodation.

    That’s kind of the point. Your distinction is meaningless and proves nothing.

  27. Capitalist Piggy

    Dot,

    I did my own calculations (right or wrong) and came up with similar numbers. That is, Fed Govt expenditure increased by 4.1% of NGDP in the year to Sept 09 while NGDP increased by 2.6%.

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