I’d call economics’ “unjustified claims about reality” more than a blind spot, perhaps more like a fatal flaw, but still worth reading.
My friend Gregor and I often talk at length about the idea of “normalcy bias”. It describes our collective fondness for believing that All Things Economic will swing back to “normal”, given time and less screwing around by governments and others. It applies to everything from oil prices, to job creation.
It is, of course, right, up until it’s wrong. There is no law of nature that says things related to recent human economic activity need to return to their recent state, let alone that that state was in any sense normal. There is no normal; there are only transient equilibria, some of which last longer than others, but all of which we pattern-loving humans project forward into forever.
Bill Gross makes a similar point more politically in his latest PIMCO missive, which is worth reading in its entirety. Here, however, is a relevant excerpt:
It is clear, however, that neither party has an awareness of the why or the wherefores of how to put America back to work again. Few economic advisors from either party ever mention structural long-term disconnects in employment – a recognition that cyclical influences will no longer dominate the U.S. labor market. Manufacturing and goods exports have ceded enormous ground to China and other developing labor markets, as America’s reliance on services and high tech innovation has exposed gaping holes in an historically successful model. Almost any industry dominated or significantly connected to finance and financial leverage has hit the canvas and stayed down in the aftermath of Lehman 2008. Housing construction, real estate brokerage, banking and consumer retail employment will likely never come back to levels dominated by our prior decade’s excessive leverage and its abuse leading to overconsumption. Because of that focus, a “shovel-ready,” vigorous manufacturing sector is not there to pick up the slack.
Similarly, the high tech paragons of the 21st century – Apple, Microsoft, Google, Facebook et al. – never were employers of high school or B.A. college graduates in significant numbers. Production of hardware, to the extent that any was needed, quickly gravitated to foreign ports of call where workers were willing to produce an excellent product for 1/10th of the U.S. wage. The past several decades have witnessed an erosion of our manufacturing base in exchange for a reliance on wealth creation via financial assets. Now, as that road approaches a dead-end cul-de-sac via interest rates that can go no lower, we are left untrained, underinvested and overindebted relative to our global competitors. The precipitating cause of our structural employment break is both internal neglect and external competition. Blame us. Blame them. There’s plenty of blame to go around.
Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea. While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare. Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.
I’m admittedly obsessive about this, but still … interesting stuff on hacking your desk posture.
On forgetting, Keynes, and the current economy, from Paul Krugman at Voxeu.
Keynes’ General Theory is 75 years old. In this column, Paul Krugman argues that many of its insights and lessons are still relevant today, but many have been forgotten. A broad swath of macroeconomists and policymakers are applying old fallacies to today’s crisis. As the nostrums being applied by the “pain caucus” are visibly failing, Keynesian ideas may yet make a comeback.
It’s a great honour to be asked to give this talk, especially because I’m arguably not qualified to do so. I am, after all, not a Keynes scholar, nor any kind of serious intellectual historian. Nor have I spent most of my career doing macroeconomics. Until the late 1990s my contributions to that field were limited to international issues; although I kept up with macro research, I avoided getting into the frontline theoretical and empirical disputes. By contrast I probably do have a better sense than most technically competent economists of the arguments that actually drive political discourse and policy. And this discourse currently involves many of the same issues Keynes grappled with 75 years ago. We are – frustratingly – retracing much of the same ground covered in the 1930s. The Treasury view is back; liquidationism is once again in full flower. We’re having to relearn the seeming paradox of liquidity-preference versus loanable-funds models of interest rates.
What I want to do in this lecture is talk first, briefly, about how to read Keynes – or rather about how I like to read him. I’ll talk next about what Keynes accomplished in The General Theory, and how some current disputes recapitulate old arguments that Keynes actually settled. I’ll follow with a discussion of some crucial aspects of our situation now – and arguably our situation 75 years ago – that are not in the General Theory, or at least barely mentioned. And finally, I’ll reflect on the troubled path that has led us to forget so much of what Keynes taught us.
I’m entirely with Brad on this. I get this all the time lately, and the closing media/diligence “Is there anything I didn’t ask you”? question irritates the crap out of me.
Here’s why I think it’s a stupid question. You are calling me for diligence on someone. Presumably you have specific things you are interested in. You’ve either done research on our previous relationship or you want me to fill you in on that. You then use this to pursue whatever line of questioning you have. If you are inquisitive and capable of reasoning, my answers will open up more questions. Eventually you will have enough information or will have reached a conclusion. If I’ve been doing my job I’ve been concentrating on answering your questions, not trying to follow your path of inquiry.
Now, while we are at the end of the inquiry, you ask me an open ended question in search of something magical. Maybe I’ll finally tell you the deep, dark, negative secret about the person that I’ve been withholding. Or I’ll come up with some incredible insight about the person that hadn’t come out in your previous line of questioning. I suppose this happens occasionally, and maybe it’s worth asking the question just on the off chance that something yummy will pop out. But I just find this an annoying way to end the conversion, so my answer from here on out is “nope.”
In modern Western Society where we hide our sick and dying in hospitals or similar institutions, we cannot even begin to comprehend the impact of [the Black Death] to a society, such as that of the Middle Ages, where squalor, poverty and disease were part of the quotidian patterns of life.
Source: Ruiz TF. The Terror of History: On the Uncertainties of Life in Western Civilization. Princeton University Press; 2011:232. Available at: http://www.amazon.com/Terror-History-Uncertainties-Western-Civilization/dp/0691124132