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Debunking Free Market Fundamentalism

Reaganimics as Economic Lysenkoism of 1980-2009

This page is written by a non-specialist mainly for his own consumption. Like in Soviet Union people were glued to BBC and Voice of America but generally distrusted any and all information from official media, few 401K investors trust now to CNBC or other official media channels. Foreign source like Financial Times and financial blogs filled the vacuum. This page is based on author's browsing experience and does not pretend to any completeness, objectivity or value. The key question is "How are things going to proceed from here?" The most plausible answer is that all views of the future should be taken with properly-sized doses of skepticism.

It is important to note that the author is an IT specialist and does not understand what he is writing about or quoting, but this is true for many other similar pages ;-). My impression is there is a wide scale attack on middle class in the USA. The middle class, in colloquial usage, consists of those people who have a comfortable standard of living, significant economic security, considerable work autonomy and rely on their expertise to sustain themselves, but not a great deal of social influence or power. The term often encompasses professionals, bureaucrats, managers as well as other white-collar workers with college degree. An important part of this attack is confiscation of 401K assets. And that creates dangers for 401K investor that are rarely discussed openly: it look more and more plausible that the USA middle class is turning out to be the main loser of globalization.

All relevant disclaimers apply. Please remember that authors of such pages (and economists in general) "...are often in error, but never in doubt" to use a catch phrase. It might well be that my favorite subject Lysenkoism have firmer grounds in economics then in if genetics and agriculture were it originated. It is especially popular among supply-side commentators. Are the usual suspects feeding us deliberate lies for the same reason as in the USSR during dark period of Lysenkoism is an open question. The ruling elite is different and more humane then Bolshevik bastards but the economic policy of squeezing of middle class has a lot of similarities. The historical event which once was a tragedy now repeats itself as a farce. There is also something deeply occult in the mainstream economic thinking. Here is one quote from Thoughts On Economics March 2007

"Furthermore, in the West, in a climate of intellectual intolerance charmingly reminiscent of Sino-Soviet totalitarianism, all varieties of non-mainstream economics - including Marxism, Post Keynesianism and the 'old' institutionalism - have systematically been driven out of university departments in several countries in the 1980s and 1990s. Contrary to the more pluralistic state of affairs in the 1950s and 1960s, non-mainstream economists are increasingly rare in economics departments in Britain, the United States, Germany and elsewhere. Against such developments, 'A Plea for a Pluralistic and Rigorous Economics' was signed by 44 leading economists - including four Nobel Laureates - and published in the May 1992 edition of the American Economic Review. This plea included the words:
We the undersigned are concerned with the threat to economic science posed by intellectual monopoly. Economists today enforce a monopoly of method or core assumptions, often defended on no better ground than it constitutes the 'mainstream'. Economists will advocate free competition, but will not practice it in the marketplace of ideas."
-- Geoffrey M. Hodgson (1999). Economics & Utopia, Routledge: 263.

At the same time Lysenkoism label can be abused as there generally should be some level of an external coercion present, although not necessary directly government-sponsored. As one contributor to Hobson's Choice wrote:

Unfortunately, the use of "Lysenkoism" as an epithet has been degraded by overuse, especially in absurd situations. I propose to restrict "Lysenkoism" to circumstances where a clear case can be made for coercive enforcement of the belief system from outside the system (e.g., by state patronage). For example, if a concept spreads concurrently among the scientific communities of several countries, it is almost certainly not Lysenkoism. One might feel like calling it that, but the analogy with Lysenko would fail to apply

But if we assume that the essence of Lysenkoism is not state patronage, but the usage of cult methods in science then this objection is less relevant. Moreover government patronage might be implicitly present in economics as no government looks approvingly on people who throw stones at created by the same government financial glass house. At the same time this objection suggest that it might be more proper to classify this phenomenon as an economic obscurantism [Obscurantism - Wikipedia]:

obscurantism (from the Latin obscurant, "making dark") is the practice of deliberately preventing the facts or full details of something from becoming known. There are two common senses of this:

  1. Opposition to the spread of knowledge: a policy of withholding knowledge from the general public, and
  2. A style (as in literature or art) characterized by deliberate vagueness or abstruseness.[1]

This first sense of the term "obscurantism" can be seen Plato’s “noble lie.” This is the lie that the ruler, (Plato’s philosopher king), would transmit to the people for their own good. The notion that rulers or leaders know what is best for the people can be found in all forms of totalitarianism; as Bergen Evans warned, “obscurantism and tyranny go together."[2]

...One powerful source of supposed obscurantism is found in Plato's Republic, where he advocated the use of the "Noble Lie," the lie that philosophical kings find necessary to guide society as they see best. This notion is said to have been adopted by Leo Strauss and his Neo-conservative adherents.[6]

...The philosopher Leo Strauss has also been criticized for presenting a related notion of "esoteric" meanings in ancient texts that are not meant to be accessible to the "ordinary" reader or citizen.

The recent rise of neo-conservatives suggest that social base of obscurantism has widened and it represents now a serious threat, despite setbacks suffered due to pushing the country into Iraq war. Also important is that the fairy tale of free-market economies, the financial markets provide for the efficient allocation of capital might be less true today that it was in any period of "free market" concept existence. In the real world it looks like that the financial markets among other things are heavily regulated: the widespread terms "Greenspan put" and "Bernanke put" as well as such nicknames as "Easy Al" and "Helicopter Ben" are apt demonstration of the presence of heavy handed government regulation of the markets; bailouts are just a form of regulation -- government insurance for big banks so to speak. Being a former bank lobbyist Greenspan explicitly adopted 'asymmetric' policy: privatization of profits obtained due to excessive risk ("casino capitalism") but social insurance from losses.  

And due to existence of 401K plans and meager returns on bonds markets efficiently provide for the transfer of wealth from the middle class to the elite (which is the essence of Bushonomics). According to Vanguard data the average return for 401K investor accounts is less then 3% per year. That means that most people lose their money to inflation and financial middlemen (and financial speculators) are those who profit. The proliferation of mutual funds is a direct result of 401K plans existence.

There is enough money in the financial system to sustain any desirable for this noble purpose myth in media, no matter how absurd it is. In a very subtle way the level of corruption in the system and myths propagated by those who benefit from it might actually undermine the economic security of the nation. It is a cliché to state that there is little attempts to get an objective picture by the mainstream press anymore (IMHO Bloomberg is this respect is still more objective then others and reports wider range of opinions; CNBC is the worst; Fox is simply out of measurement scale). I suspect this might be connected to the US ruling elite views that the American (and probably large part of European) middle class is an obstacle to a global economy. Since Bushonomics means transfer of more and more money to go into fewer and fewer hands mechanisms were put in place to help accomplish this goal. All this propaganda about coming insolvency of Social Security program, which actually collects more taxes the it spend and in reality subsidize the government overspending. After serving as a chairman of the 1983 federal commission that enacted dramatic raise of Social Security tax and in 2001 helping Bush administration to waist the surpluses (Greenspan, in testimony before Congress in 2001 gave a major boost to Bush’s tax-cut plan) Maestro with strait face recommended in 2004 to cut social security benefits. As professor Harry J. Holzeraptly wrote in Alan Greenspan's Amnesia:

Let's refresh our memories. In 1982, Greenspan co-chaired (along with the late Senator Daniel Patrick Moynihan of New York) a bipartisan commission to improve the future solvency of Social Security. The commission called for stiff increases in the nation's payroll tax, along with increases in the retirement age and some reductions in the rate of benefits growth over time. The commission's recommendations were largely implemented, passed by Congress and signed by President Reagan into law. They remain in effect today.

This alone is "economic felony" in words of Brad DeLong who judging Greenspan legacy proposed to distinguish between economic misdemeanors and felonies. See also interesting discussion Rep Bernie Sanders vs. Chairman Alan Greenspan. While Greenspan is out pitching his book on TV where he portrays himself as a free market warrior this discussion can serve as a brief antidote.

Still there is a strong tendency of confiscation of assets from middle class by both Fed (via inflation) and government. The average retired worker's Social Security benefit is just $922 a month -- about $11,000 a year. Disabled workers average just $862. But cutting those meager sums and raising retirement age is not a farce, this is a deadly serious business with a lot of gurus crying out load about the insolvency of Social Security (with Greenspan -- the father of  "casino capitalism" -- as a cheerleader).

Please note that for American men, life expectancy at birth was 61.6 years in 1940, 65.5 in 1950 and 66.8 in 1960. Therefore not all men who paid Social Security tax will live to enjoy the retirement. In this sense each fatal car or plane crash is in essence a small contribution to Social Security fund. And it does not last too long for half of baby-boomers (extremely obese, asthmatics, diabetics, etc). The current life expectancy in the USA is only 77.6 (80 for woman). So average Social security fund expenditure per person is probably around $100K-$200K, taking into account the number of life threatening diseases for this category. Total number of baby boomers is 78.2 million (as of July 1, 2005) and they are distributed evenly with 7,918 tuning 60 each day [US Census Press Release]. Their average life contribution to Social Security fund is well over $60K and that plus interest should mean that the program is solvent

Also increasing numbers of baby-boomers who used to depend on the interest and dividends from safe investments such as bonds and money markets were finding their nest egg growth insufficient. This forced many older American’s to take on more risk by increasing their exposure to the stock and, possibly, real estate markets. It's like someone shaking the brush forcing the birds to fly used by hunters. This image suggest that older American’s might well be an easy prey for the ambitious financial institutions who used leverage. As article The Debt Endgame the essence of Bushonomics was slightly but very colorfully overstated by using analogy with the lending policies that the World Bank and the IMF have used for the developing nations: getting them into debt, then cutting oxygen for borrowers who get into debt hole and then cutting a deal for remaining assets. Alan Greenspan has cast himself as a champion of fiscal responsibility while lending crucial support to policies that undermine it.

In any complex situation the most difficult part is to find right questions. Among the key question that any 401K owner should probably ask himself are:

Mathematics does not mean anything without correct model. And correct model depends on the level of accuracy of data. As data are either known with substantial error, or substantial lag, or manipulated only very simple models are viable. At the same time one need to be concerned about level of mathematical and outright ignorance demonstrated by financial commentators. Levels that are noticeable not only to specialist but to people who specialize in completely different area like myself. Sometimes listening to Kudlow's revelations I am wondering how this guy got Ph.D. Or more correctly in what area he should be awarded Ph.D. (there might be a possibility to get something like Ph.D. in occult studies somewhere in the USA universities, I think). Folks like Kudlow seem incapable of objective analysis. He's like Dr. Pangloss, from Candide: whatever happens is always the best of all possible outcomes. Frankly, it is comical to watch "free market " zealot complaining that the Fed did not do enough rate cutting. But he is a very amusing example in many other ways, an example of a guy who claim to be an economist but probably has difficulties not only in multiplying numbers but sometimes adding them as well :-). Also level of amnesia (this guy never remembers what he said a month or two ago; and actually he does not care as jugging his market "principles" in the air and crying for a government intervention when his Wall Street friends are in trouble is a part of the fun) is also very illuminating.

Actually "supply side economics" is nothing but another incarnation of a cargo cult. Like most cargo cults, supply-side economics has at its core a central insight that have some level of plausibility. The government can't simply raise tax rates as high as it wants without adverse consequences. In other words there is a rate of taxation at which quantity turns into quality. Other then that it looks like a classic pseudoscience. And "supply-side" economics is just one example.

This example suggests that methods and fallacies typical for pseudoscience are perfectly applicable to" pseudo-economics".  Among them are concepts of "pragmatic fallacy", "occult statistics" and "ad hoc hypothesis". We will discuss them one by one:

pragmatic fallacy

The pragmatic fallacy is committed when one argues that something is true because it works. For example, astrology works, numerology works, therapeutic touch works. What 'works' means here is not clear. At the least, it means that one perceives some practical benefit in believing that it is true, despite the fact that the utility of a belief is independent of its truth-value. At this level "works" seems to mean "I'm satisfied with it," which in turn might mean "I feel better" or "It explains things for me." At most, "works" means "has beneficial effects" even though the evidence may be very weak for establishing causality.

The pragmatic fallacy is common in "alternative" health claims and is often based upon post hoc reasoning. For example, one has a sore back, wears the new magnetic or tectonic belt, finds relief soon afterwards, and declares that the magic belt caused the pain to go away. How does one know this? Because it works!

There is a common retort to the skeptic who points out that customer satisfaction is irrelevant to whether the device, medicine, or therapy in question really is a significant causal factor in some outcome. Who cares why it works, as long as it works? You can argue about the theory as to why it works, but you can't argue about the customer satisfaction. They feel better after using the product. That's all that matters.

It isn't all that matters. Testimonials are not a substitute for scientific studies, which are done to make sure that we are not deceiving ourselves about what appears to be true. It is especially necessary to do controlled studies of alleged pain relievers to avoid self-deception due to the placebo effect, post hoc reasoning or the regressive fallacy. We may not want to question too deeply the felt relief, but we must question the cause of that relief.

Occult statistics

Occult statistics are statistics used as the handmaiden of occult theorizing, in much the same way that philosophy was used by theology during medieval times, viz., to justify beliefs in supernatural beings and occult forces.

... Skeptics have noted many times while investigating the statistical claims of paranormal researchers that there are often significant problems with subjective validation, confirmation bias, optional starting and stopping, the clustering illusion, the regressive fallacy, etc.

Sometimes the variables being correlated are ambiguous or vaguely defined, if defined at all, so that practically anything can count in support of the occult hypothesis. What is a "great" athlete or a "rebel"?

...Skeptics have noted that many times something seems to be statistically improbable when, in fact, it is not improbable at all. Some spurious correlations are due to lack of clarity regarding the variables; others are due to incorrect calculation of the odds. Both errors are common occurrences regarding so-called clairvoyant dreams.

Finally, skeptics are unimpressed with artificially evoked statistical anomalies because such anomalies are expected to occur with some frequency given the vast number of trials that are made.

Correlating just a couple dozen variables with one another will produce a matrix containing nearly 300 correlation coefficients. By convention, results that occur at a level expected by chance just 5% of the time are called "statistically significant." We can therefore expect about fifteen spuriously significant correlations within every matrix of 300 (Ruscio, 45).

ad hoc hypothesis

An ad hoc hypothesis is one created to explain away facts that seem to refute one’s theory.

... Ad hoc hypotheses are common in defense of the pseudoscientific theory known as biorhythm theory. For example, there are very many people who do not fit the predicted patterns of biorhythm theory. Rather than accept this fact as refuting evidence of the theory, a new category of people is created: the arrhythmic. In short, whenever the theory does not seem to work, the contrary evidence is systematically discounted...

...Astrologers are often fond of using statistical data and analysis to impress us with the scientific nature of astrology. Of course, a scientific analysis of the statistical data does not always pan out for the astrologer. In those cases, the astrologer can make the data fit the astrological paradigm by the ad hoc hypothesis that those who do not fit the mold have other, unknown influences that counteract the influence of the dominant planets.

Dani Rodrik's weblog More on math and economic development contains interesting comments of the validity of economic models:

My previous post on this subject was not met with the warmest reception. Curiously those who liked it chose to send me a private e-mail, while the vast majority of the respondents on the blog itself were at best skeptical and at worst derisive. Being the sucker for punishment that I am, I take this as an opportunity to expand on the original theme. Let me do this by way of responding to some of the comments. First let me agree with Robert Feynman, who writes:

It appears that many model makers aren't interested in validating their models with data. This is sort of like what happens in physics (my field) the theorists make up the theories and the experimentalists test them.

I'm afraid that I feel that much of the more abstruse mathematical models used in economics are just academic window dressing. Cloistered fields can become quite introspective, one only has to look at English literature criticism to see the effect.

"Academic window dressing" indeed. God knows there is enough of that going on. But I think one very encouraging trends in economics in the last 15 years or so is that the discipline has become much, much more empirical. I discussed this trend in an earlier post.

I also agree with Gabriel who says

I am not supportive of economists who then forget that they have a "model", an abstraction of the world, and begin to believe that their model is the world. I find very few economists that are humble enough to admit that about their analysis.

I share Keynes belief is that ideas (and by extension models) are really powerful. And that means that skepticism should play more prominent role in economics: the role of economics is less about inventing new ideas (or, God forbid, new derivatives :-) but more to serve as a watchdog to filter out bad ideas and prevent their coming back (nothing is new under the sun). The fact the supply side economics is considered by some to be a valid economic view is the powerful testament of a severe crisis of economics as science. Notwithstanding academic freedom issues this looks like Lysenkoism in another skin, the symptom of deep crisis of the profession and the same way as neo-conservatism in politics.

In economics by definition there are more bad ideas and more avid promoters of bad ideas than in other areas. In Yeats's words, "The best [usually] lack all conviction, while the worst are full of passionate intensity." That's why skepticism is extremely important...

Due to my own incompetence I usually have more questions that answers when I read market noise. I am not an expert or a scholar or an activist. I am more of an eye-witness. The function of the page is to question the conventional wisdom, especially when just too one sided.

Old News

Economics as science? No chance.

Lifted directly from comments by cactus from the open thread:
 
Economics is not a science. Physics wouldn't be a science either if esteemed members of that profession who got prestigious jobs running the country were willing to make statements that contradict all known facts. But here's the thing - if the administration's position is that you can use gravel as fuel in a nuclear power plant (a convenient position give that gravel is so much cheaper than uranium), they're going to have a hard time finding eminent physicists willing to agree with that position, and any physicists that did agree would quickly cease to be eminent physicists.

But consider an equivalent economic position. In 2001 told us we were going to get tax cuts, resulting in a rapidly growing economy leading to debt falling to 7% of GDP in 2011. This is extremely similar to the promising you will get electricity from a pile of gravel. But, there was no shortage of well-known economists willing to explain why that plan was, indeed, going to work. And they explained it over and over. Since then, they have gone to explain to us why things haven't worked out as planned... and wouldn't you know it, it has nothing to do with the fact that they used gravel to try to run a nuclear power plant. Instead, the problem seems to be that some terrorists slammed some planes into the WTC.

Which brings us to, well us. See, its our fault that economics is not a science. The folks who peddled this line of bs to us, the folks who promised that gravel was going to produce electricity and have since been making all sorts of excuses and promises that it really will work the next time its tried, are still around, and still held in high esteem. The Harvard Professor, the governor, the ivy league business school dean, and the rest of that crowd don't feel a need to hide their faces in shame the way their counterparts in physics would.

No, they've been well rewarded for their actions, and still continue to be honored by others in the profession they so badly denigrated. So the lesson is clear - this is the most lucrative way to behave. By sending this message, we have dishonored ourselves, and we have paved the way for the next Harvard professor, the next governor, and the next business school dean.

----------------------
Lifted from comments by cactus

 

 

Sea Change in Japan? Western Market Fundamentalism Denouncing Opposition PM Candidate Leads Polls

 Japan may be on the verge of some major shifts, The fact that what amounts to one-party rule in Japan appears at an end ought to be significant, but the proof will be in the pudding. The island nation has been ruled by the Liberal Democratic Party for virtually the entire postwar period, with politics consisting of fights among various party factions.

But Yukio Hatoyama, leader of the opposition Democratic Party of Japan, appears slated to become Prime Minister next month. And, at least on paper, he is firmly renouncing "market fundamentalism" and placing higher priority on social values.

Even more so than in English, it is possible to give speeches in Japanese that sound great but are devoid of content, so the lack of clarity on policies is not surprising. But one has to wonder if this might mean less willingness to accede to US demands. For instance, Japan has quietly playing both sided of the street, aligning with American or China on various issues while taking care not to alienate either party.

But US influence is waning. Japan wanted to sponsor Asian-led rescued during the 1997 Asian crisis, but the IMF and US Treasury aggressively beat back the measures. Some of the economies, South Korea in particular, were forced to remake themselves on Western lines. Plans are now moving forward to develop a fund to facilitate salvage operations in the region, If nothing else, if Hatoyama wins and can implement its vision, Japan may become more willing to distance itself from US initiatives and stand with its region.

But many Americans are not willing to see the US as a fading power.

From the Financial Times:

Yukio Hatoyama, the leader of Japan's opposition Democratic party who is strongly placed to become prime minister after elections this month, has condemned “US-led market fundamentalism” and vowed to shield his nation from the effects of untrammelled globalisation.

With the era of US unilateralism ending and worries about the dollar’s future role growing, Japan should also work towards regional currency union and political integration in an “East Asian Community”, ...

Mr Hatoyama offered a robust defence of his political philosophy of yuai – fraternity – which critics have derided as wishy-washy wishful thinking, but which he declared a “strong, combative concept” and “banner of revolution”....

A poll released by the Kyodo news agency on Monday found nearly half the respondents thought Mr Hatoyama most suited to be prime minister, compared with 20 per cent for Taro Aso, the LDP incumbent.

In his essay, Mr Hatoyama said the global economy had “damaged traditional economic activities” while market fundamentalism had destroyed “local communities”...

“Under the principle of fraternity, we will not implement policies that leave economic activities in areas relating to human lives and safety, such as agriculture, the environment and medicine, at the mercy of the tides of globalism,” Mr Hatoyama wrote.

Analysts say that wide policy differences within the often fractious DPJ make it difficult to predict how such statements of principle might be put into practice. Mr Hatoyama highlighted the need for better welfare, more child support and wealth redistribution.

He made clear that while security ties with the US would remain a “diplomatic cornerstone”, Japan must do much more to tighten links with Asian neighbours such as China and South Korea.

“As a result of the failure of the Iraq war and the financial crisis, the era of the US-led globalism is coming to an end and …we are moving away from a unipolar world led by the US towards an era of multipolarity,” the DPJ leader said, adding that fears about China's military rise were a big factor in “accelerating regional integration”.

Japan should "aspire to the move towards regional currency integration" and "spare no effort" in building the security frameworks needed to make union possible, he wrote, adding that the example of European Union showed that integration itself could be the best way of defusing territorial disputes often seen as an impediment to closer ties.
 

 

The Twilight of Free-Market Ideology

by Charles Wheelan, Ph.D.

October 24, 2008

When I heard Alan Greenspan's testimony before Congress last Thursday, I had one immediate thought: This is the beginning of the end for the free-market ideologues.

According to press reports of the testimony, Greenspan told Congress that he "had put too much faith in the self-correcting power of free markets." That's no small statement.

In fact, it struck me that if 1989 was the year when no reasonable person could still believe in communism (or any of its government-intensive relatives), then 2008 will go down in history as the year in which the free-market zealots saw their "wall" come crumbling down.

Too Free to Last

You don't have to take it from me. Just look around. One by one, the economic meltdown is slaying one shibboleth of the uber-free-market camp after another.

Here are some of the inflexible, hardcore beliefs that are crashing along with the stock market:

• Individuals always know best

Not so much, it turns out. The whole financial crisis is rooted in irrational personal decisions. Consumers borrowed more than they could afford based on the naive assumption that housing prices would always go up. Not just a few people -- lots and lots of them.

• Firms always manage resources better than government

Let's take a poll of Lehman Brothers shareholders to see how they feel about that statement. One of the most remarkable things about the whole crisis is the amount of wealth destroyed by private firms. The shareholders and managers of firms like Bear Stearns, Lehman, AIG, Countrywide, and others destroyed themselves.

That can't be blamed on flawed regulation. No matter how bad the regulatory scheme, it's never rational for private firms to destroy themselves along with all of the wealth of their shareholders.

It's definitely true that government incompetence deserves a share of the blame (e.g., Fannie and Freddie, or the push to put low-income citizens in homes they couldn't afford), but that doesn't make blindly eliminating regulations the answer. Deregulation and sensible regulation are not synonymous.

• Tax cuts are an economic miracle balm

I suppose one could argue that the economy would be in even worse shape right now without the Bush tax cuts -- but that's pretty thin gruel. The more reasonable argument is that the deficits that have accumulated over the last eight years -- during relatively good economic times -- are a hugely destabilizing force going forward. Everything happening right now is made much worse by the fact that the United States is highly indebted to the rest of the world. The ideologues pushed tax cuts without demanding corresponding spending cuts, and that's just plain irresponsible.

Three entities borrowed recklessly over the past decade: homeowners, Wall Street, and the U.S. government. So far, only two of them have had their reckoning.

• Less government is always better

I don't think most Americans are prepared to tell Hank Paulson and Ben Bernanke to leave the markets alone right now. Nor are they pushing for the FDIC to scrap the insurance on bank deposits. And many of us are wondering: 1) What is a credit default swap? 2) How could something I've never heard of be destabilizing the economy? and 3) Why didn't someone do something about this?

Does all of this mean that economics books should be burned and Nobel Prizes returned to Stockholm? Absolutely not. The free-market zealots were never right in the first place; they twisted, bastardized, and oversimplified conventional economic thinking. They saw simplicity where the bulk of economists saw tradeoffs and qualifications. They clung to simple and elegant views despite all evidence to the contrary -- and the analysis in the first 10 chapters of any basic microeconomics text.

A colleague of mine, who worked in (and was frustrated by) the George W. Bush administration, coined a term that summarizes it best: faith-based economics. That's not supposed to be how it works.

• Mainstream economists have a profound belief in markets

But they also understand that markets fail in some cases. And they recognize that most markets work better with some government infrastructure, whether it's information, modest regulation, or just a place to sue someone who cheats you.

Mainstream economists recognize the costs of taxation; taxes take money out of people's pockets and distort behavior in ways that can have serious economic costs. But the non-ideologues also recognize that tax revenues can be used to provide government services that make people better off. Good policy is about managing that messy tradeoff.

Mainstream economists recognize that individuals have a pretty good idea of what they want -- but that those same individuals sometimes make systematic errors of judgment, which can lead to things like bubbles and panics.

Mainstream economists recognize that too much regulation can harm innovation and diminish prosperity. But they also recognize that sensible regulation provides information and security, both of which make it much easier to do business with strangers. Regulation also protects third parties from market behavior that has negative spillovers, whether it's the guy who drinks too much at the bar before getting into his car or the paint factory that cuts costs by dumping lead in your drinking water.

A Monument to Self-Interest

There's now a museum in Berlin where visitors can go to see a remnant of the Berlin Wall and learn about the damage done by an overly rigid, poorly conceived ideology.

Maybe there should be some kind of 2008 Meltdown Museum. It would have a large subdivision of homes, all with "for sale" signs out in front. And there would be a quotation from Alan Greenspan inscribed over the arch at the entrance:

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."

 

Economist's View

"The Liberal Hour"

Permalink

Comments on this?:

The ’60s: Once Upon an Optimistic Time, by Barry Gewen, Book Review, NY Times: ...“The Liberal Hour” by G. Calvin Mackenzie and Robert Weisbrot ... [contends that t]oo many historians who write about the 1960s ... have focused on the decade’s very visible rebellions and disruptions — all that sex, all those drugs, all that rock ’n’ roll.

What is often ignored, they say, is the hard work of little-known politicians and bureaucrats who were methodically creating a ’60s revolution from within. ... Senators and congressmen ... were permanently transforming the country with a tsunami of social and economic legislation.

Granted, it’s more fun to read about Abbie Hoffman than about Edmund Muskie, but ... their overall argument is a valuable corrective to a lot of hackneyed thinking about the significance of the ’60s.

The “liberal hour” lasted only a few years, from 1963 to 1966, from the final days of John F. Kennedy’s presidency through the first three years of Lyndon B. Johnson’s, but in that brief period of time came two civil rights acts...; ...Medicare and Medicaid; pioneering environmental laws; education and immigration bills; stronger protections for consumers; a host of antipoverty programs, including food stamps and Head Start; new federal departments of transportation and housing and urban development; and other reform measures, literally hundreds. Washington hadn’t seen such legislative energy since the New Deal.

If it was poverty and want that drove the New Deal, it was prosperity that provided the momentum for the ’60s, and with it the confidence to take on any challenge. “In the early years of the 1960s,” Mr. Mackenzie and Mr. Weisbrot write, “national optimism reached epidemic levels.” Inspired by Kennedy’s rhetoric and Johnson’s acumen, hundreds of inside-the-Beltway role players set about to change their country and the world. ...

[I]t seemed that liberals would be on top for a very long time..., even a liberal century. Yet their moment quickly passed. ... What happened?

It’s not a question that lends itself to easy answers, but ... they come up with a powerful one: liberal overreaching. During the ’60s liberals were certain they could solve any problem — at home or abroad — with the right expertise, appropriate government policies, the application of reason and gobs of money.

“Do we have or can we develop a knowledge of human social relations that can serve as the basis of rational, ‘engineering’ control?” the eminent sociologist Talcott Parsons asked. “The answer is unequivocally affirmative.” Officials puffed up with a sense of their own omnipotence spoke of a “world New Deal.” Johnson himself exclaimed: “We’re the richest country in the world, the most powerful. We can do it all.”

Such arrogance led directly into the mire and jungles of Vietnam, the prime example of liberal overreaching... Suddenly, Americans were being called upon to make sacrifices, not only of money but also of blood, sacrifices that seemed endless.

It was little better at home. The legislation of the liberal hour was supposed to end poverty, heal racial divisions. Yet all at once, the cities were going up in flames. The primary beneficiaries of liberal largesse, it seemed, were ungrateful for the assistance, while Democratic leaders looked helpless in the face of riots and rising crime. Great Society solutions weren’t working, and so voters turned elsewhere.

“By 1966,” Mr. Mackenzie and Mr. Weisbrot report, “more than half of northern whites had come to believe that government was pushing too fast for integration.”

Johnson had come to grief because, to use Mr. Mackenzie and Mr. Weisbrot’s word, he had “overpromised.” Not every problem had a solution. Reasoning together didn’t work in the urban ghettos or the Mekong Delta. “The Liberal Hour” presents itself as a book about the brilliant legislative legacy of the ’60s, but by the end it has become a book about the legacy of the Johnson administration’s failings....

More optimistic than most of his optimistic countrymen, more confident and overbearing too, Johnson seemed incapable of understanding the virtues of skepticism and caution, the wisdom of pessimism. He never appreciated the limits of good intentions, especially his own. Like many a tragic hero, Johnson was brought down by hubris. And Democrats, Mr. Mackenzie and Mr. Weisbrot tell us, are still paying the price.

Have we just been through a period of "conservative overreaching"? Andrew Samwick quotes Warren Coats on the swing back to the left:

The Death of the Right?: As public sentiment swings back to the left what the public wants (domestically), I think, are largely free but better regulated markets and a better social safety net (health care and pensions). Those like me who think that too much regulation stifles beneficial market innovation and worry about the work incentive stiffing effects of excessive or poorly designed safety nets need to take note of these sentiments. The freedom for me to lead my life largely as I choose and to enjoy the fruits of my labor depends heavily on the willingness of my neighbors (fellow citizens and residents) to accept those rules of the game. Our society functions as it does because of a broad social consensus on the rules of public behavior. This consensus rests in part on each player’s confidence that if he fails there is a safety net that makes it worth his taking the risk of playing. We need to compromise what we consider first best for society (and Republicans and Democrats tend to differ on what this is) to the extent needed to preserve that broad consensus.

He goes on to say:

Congressman Barney Frank, Chairman of the House Financial Services Committee, epitomizes the best of the new left wing reaction to the Reagan Revolution. Frank is fully aware of the virtues of the market ... and the need to get the incentives right, but insists that market excesses and rough edges should be removed with limited and well focused regulation. His collaboration with Republican Treasury Secretary Henry Paulson to fashion a Housing Rescue and Foreclosure Prevention Law enjoyed sufficient bipartisan support to gain the President’s signature on July 30. The bill’s many provisions were generally sensitive to moral hazard problems and market incentives... There were things for both Republicans and Democrats to like and to dislike in this bill.[8]

Frank is a pragmatist who is willing to sacrifice his version of “the best” for “the good.” He sees a major victory for his preference for limited, market friendly regulations in the Federal Reserve’s new rules (Regulation Z – Truth in Lending) to prohibit “unfair, abusive or deceptive home mortgage lending practices.” ... These are not the sentiments of a wild eyed socialist and this is not a return to the heavy handed economic (as apposed to prudential) regulations of the 50s and 60s when government regulated, e.g., capital flows and interest rates on bank deposits. When asked why congress refuses to pass the no brainer free trade treaty with Columbia, which Frank has visited several times, he replied that “it has nothing to do with Columbia, nor the failure to recognize the benefits of trade. No trade liberalization deal will be passed by this Congress until more attention is given to compensating the losers. And don’t forget that today when someone losses their job, they also loss their health insurance.”[12]

For the next few years, maybe even a decade, until the next swing back in the political center, we can expect more regulation and more extensive safety nets. If we collaborate with market friendly Democrats like Frank, we can not only fix some of the genuine deficiencies with existing arrangements, but we can probably prevent some of the worst excesses of the over extension of government, until it is our turn again. ...

Would health care reform guaranteeing universal coverage be considered one of "the worst excesses of the over extension of government"? The "brilliant legislative legacy of the ’60s" produced important programs that are still with us today. If Obama wins the election, I'm not too worried about overreaching, I more worried about Democrats not reaching far enough.

 

January 21, 2008 | NYT Paul Krugman

Historical narratives matter. That’s why conservatives are still writing books denouncing F.D.R. and the New Deal; they understand that the way Americans perceive bygone eras, even eras from the seemingly distant past, affects politics today.

And it’s also why the furor over Barack Obama’s praise for Ronald Reagan is not, as some think, overblown. The fact is that how we talk about the Reagan era still matters immensely for American politics.

Bill Clinton knew that in 1991, when he began his presidential campaign. “The Reagan-Bush years,” he declared, “have exalted private gain over public obligation, special interests over the common good, wealth and fame over work and family. The 1980s ushered in a Gilded Age of greed and selfishness, of irresponsibility and excess, and of neglect.”

Contrast that with Mr. Obama’s recent statement, in an interview with a Nevada newspaper, that Reagan offered a “sense of dynamism and entrepreneurship that had been missing.”

Maybe Mr. Obama was, as his supporters insist, simply praising Reagan’s political skills. (I think he was trying to curry favor with a conservative editorial board, which did in fact endorse him.) But where in his remarks was the clear declaration that Reaganomics failed?

For it did fail. The Reagan economy was a one-hit wonder. Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, there was little sustained economic improvement for most Americans. By the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.

When the inevitable recession arrived, people felt betrayed — a sense of betrayal that Mr. Clinton was able to ride into the White House.

Given that reality, what was Mr. Obama talking about? Some good things did eventually happen to the U.S. economy — but not on Reagan’s watch.

For example, I’m not sure what “dynamism” means, but if it means productivity growth, there wasn’t any resurgence in the Reagan years. Eventually productivity did take off — but even the Bush administration’s own Council of Economic Advisers dates the beginning of that takeoff to 1995.

Similarly, if a sense of entrepreneurship means having confidence in the talents of American business leaders, that didn’t happen in the 1980s, when all the business books seemed to have samurai warriors on their covers. Like productivity, American business prestige didn’t stage a comeback until the mid-1990s, when the U.S. began to reassert its technological and economic leadership.

I understand why conservatives want to rewrite history and pretend that these good things happened while a Republican was in office — or claim, implausibly, that the 1981 Reagan tax cut somehow deserves credit for positive economic developments that didn’t happen until 14 or more years had passed. (Does Richard Nixon get credit for “Morning in America”?)

But why would a self-proclaimed progressive say anything that lends credibility to this rewriting of history — particularly right now, when Reaganomics has just failed all over again?

Like Ronald Reagan, President Bush began his term in office with big tax cuts for the rich and promises that the benefits would trickle down to the middle class. Like Reagan, he also began his term with an economic slump, then claimed that the recovery from that slump proved the success of his policies.

And like Reaganomics — but more quickly — Bushonomics has ended in grief. The public mood today is as grim as it was in 1992. Wages are lagging behind inflation. Employment growth in the Bush years has been pathetic compared with job creation in the Clinton era. Even if we don’t have a formal recession — and the odds now are that we will — the optimism of the 1990s has evaporated.

This is, in short, a time when progressives ought to be driving home the idea that the right’s ideas don’t work, and never have.

It’s not just a matter of what happens in the next election. Mr. Clinton won his elections, but — as Mr. Obama correctly pointed out — he didn’t change America’s trajectory the way Reagan did. Why?

Well, I’d say that the great failure of the Clinton administration — more important even than its failure to achieve health care reform, though the two failures were closely related — was the fact that it didn’t change the narrative, a fact demonstrated by the way Republicans are still claiming to be the next Ronald Reagan.

Now progressives have been granted a second chance to argue that Reaganism is fundamentally wrong: once again, the vast majority of Americans think that the country is on the wrong track. But they won’t be able to make that argument if their political leaders, whatever they meant to convey, seem to be saying that Reagan had it right.

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