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COVID-19: The Economists’ Perspective
By Shlomo Maital
As readers know, I am an economist and have been super-critical of my fellow economists; I believe our prescriptions have done massive damage to the world, including the free-market greed-is-good credo that led to 2007/8. But in the current pandemic, I am hearing words of wisdom from brilliant economists like Nobel Laureate Paul Krugman, a New York Times columnist.
In his latest Op-Ed, in the New York Times (April 1) Krugman brings some serious wisdom. Let me summarize what he says.
“To simplify things, think of the economy as consisting of two sectors, nonessential services (N) that we can shut down to limit human interactions and hence the spread of the disease, and essential services (E) that we can’t (or perhaps don’t need to, because they don’t involve personal interaction.) We can and should close down the N sector until some combination of growing immunity, widespread testing to quickly find and isolate cases, and, if we’re very lucky, a vaccine let us return to normal life.
“For those (like me) still receiving their regular paychecks, this period of shutdown — call it the coronacoma — will be annoying but not serious. I miss coffee shops and concerts, but can live without them for however long it takes.
“Things will, however, be very different and dire for those who are deprived of their regular income while the coronacoma lasts. This group includes many workers and small businesses; it also includes state and local governments, which are required to balance their budgets but are seeing revenues collapse and expenses soar.
“How big is the N sector? Miguel Faria-e-Castro of the St. Louis Fed summarizes estimates that are as good as any: 27 to 67 million people, [for the United States], which he averages to 47 million. That’s a lot; we could be looking at a temporary decline in real GDP of 30 percent or more. But that GDP decline isn’t the problem, since it’s a necessary counterpart of the social distancing we need to be doing. The problem instead is how to limit the hardships facing those whose normal income has been cut off.
“What can be done to help those cut off from their normal incomes during this period of national lockdown? They don’t need jobs — we don’t want them working at a time when normal work routines can spread a deadly disease. What they need, instead, is money. That is, what’s needed now is disaster relief, not economic stimulus.”
So many ‘experts’ who tell us what should be done, are sitting pretty with large bank accounts and salaries that continue to flow. Krugman’s empathy for those without income – many many millions – is exemplary. THEY are the ones we need to worry about most.
So, as I’ve written elsewhere: Save Lives, yes…and save jobs, too, by writing checks. If needed, pay the salaries and wages of workers for businesses, to keep them afloat. Disaster relief…as Krugman says.
Testing holds the key. Why? Using Krugman’s terminology: Suppose we had sufficient tests, deployed rapidly, with quick results, to know if EVERY working person had COVID-19. Divide the populace into N (non-essential, or infected) and E (essential and clean). If you shut down N+E together, everyone, you lose output and jobs – you lose E times (average output or income of E), which is huge and unnecessary. If you shut down only N, you get all the jobs and output of E, and income. And you can use it to help pay survival incomes to the N.
This makes sense, right? And we CAN get those quick automated tests out the door if they are given priority.
Will Economists Say They’re Sorry? Don’t Hold Your Breath
By Shlomo Maital
In Erich Segal’s gushy novel Love Story, and later in the 1970 film starring Ryan O’Neal and Ali McGraw, you hear this line twice: Love means never having to say you’re sorry.
Really? I thought that when you truly love someone and hurt them, you always always say you’re sorry and try to make amends. And if you don’t? Well, where’s the love?
I am an economist. Led by Milton Friedman, we gave the world unfettered free markets, that in 2008 nearly destroyed the world economy – we’re still repairing the damage. We gave the world supply-side economics (cut taxes on the rich and you get a cornucopia of investment spending!) and the Laffer curve (cut taxes and you get more revenues than before). We gave the world the idea that senior management is responsible only to shareholders, for maximizing profit – an idea business schools set in stone. Professor Friedman said it was wrong for corporations to give money to charity, for worthy causes, because the money belonged to the shareholders, it should be given to them.
If you don’t believe me, read Binyamin Appelbaum’s recent book, The Economists’ Hour, a slashing indictment of all the false theories we economists dumped on a naïve, believing world. Appelbaum’s day job is writing editorials for The New York Times.
The world right now is in a mess. It’s not solely us economists’ fault, but much is.
And it’s time to say we’re sorry. No, love is NOT not having to say you’re sorry. Double negative.
Are economists sorry? I don’t hear a whole lot of apologies or even mild recognition of the damage we’ve done. And this is no Love Story.
And the part that hurts me most? Economists built their free-market ideology on one book, Adam Smith’s 1776 Wealth of Nations. The book was pushed to the ultimate absurd, “greed is good” (George Gilder). But Smith was really NOT an economist, he was a moral philosopher, and his greatest book was Theory of Moral Sentiments (1759), where he said people seek the esteem of their peers, by doing good deeds. Which IS true! And which is also a good prescription for finding meaning in life. And no, greed really is not good. It’s terrible.
What if economists had built their discipline on THAT principle, earning our peers’ esteem, and not on free-market bottom-line unfettered capitalism?
When the Soviet Union dissolved in 1991, Sovietology departments in universities all over the world shut down. Why? They got it wrong. They had not foreseen this startling development. They were utterly discredited.
Perhaps then economics departments should shut down. As a way of saying, I’m sorry.
According to the Washington Post, “A great migration is happening on U.S. college campuses, English majors are down more than a quarter (25.5 percent) since the Great Recession, according to data compiled by the National Center for Education Statistics. It’s the biggest drop for any major tracked by the center in its annual data and is quite startling, given that college enrollment has jumped in the past decade.”
Same holds for philosophy majors. So we will have a world of lawyers, and economists – who are ignorant of critical thinking and great literature? If we ever impeach economists, perhaps one of the charges will not only be laying the foundations for the Great 2008 Recession – but driving innocent students away from studying subjects that are truly important.
US GDP Growth: NOT What It Seems!
By Shlomo Maital
I recently wrote a column titled: Why Can’t Economists Talk Straight?, in the Jerusalem Report. It was a book review of a book by a friend, an expert on behavioral economics. It explains why economists befuddle, use impenetrable jargon, and in general confuse and obfuscate.
Here is a recent example. US First Quarter GDP figures were headlined as: US economy growth surprises! 3.2% growth. Way above what was expected. It was predicted that a recession was on the way. But it’s not! Yeeayyy! This is what journalists wrote. I can understand that. They are not trained to read the economic X-Ray data. But economists? Where ARE they? Nowhere.
The first quarter GDP news is BAD BAD BAD! Not good. Here is why.
A large part of that 3.2% growth was “inventories”. Nearly a quarter. Without that, growth would have been 2.5%. Much worse ….. But what IS that inventory thing???
Here is the straight talk. GDP growth reflects what is PRODUCED — not what is SOLD. Some of GDP is sold. Some is NOT. So it is put into warehouses. This is then called ‘inventories’ or ‘inventory change’.
A whole lot of stuff was produced in the first quarter – but companies couldn’t sell it. So cars, fridges, computers, motorcycles, appliances, etc. went into warehouses.
That is bad news. Because in the 2nd quarter, companies will sell off that inventory rather than produce new stuff. That will greatly reduce GDP growth rate. In 2nd quarter, we will see numbers that begin to herald a recession. Trust me. Set aside some money – we ARE heading for a slowdown.
Now, is that bad news? Or good? As we head toward elections in November 2020, a recession will help defeat Donald Trump. People DO vote their pockets, to some degree. And the likely Democratic candidate Joe Biden is running a campaign to enlist support of working people. Trump has not even begun to deliver on his promises to them. And they are beginning to get it. Moreover, Biden has pulled Trump’s chain, and got Trump to attack unions (dues-sucking!).
So bottom line: NOT 3.2% growth, but 2.5% growth (subtracting inventories), to reflect what people actually BOUGHT. They are buying less. This is a slowdown signal. I can find nowhere where this is widely and clearly reported. A great shame.
One-Armed Nobel Candidate Economist Is Fired
By Shlomo Maital
Paul Romer Paul Krugman
Every day, members of my profession, economists, find new ways to make me deeply regret I ever became one. The latest episode is a story of two economists named Paul.
President Harry Truman, the US President who suddenly and unexpectedly took office when President Roosevelt died in 1944, once said famously: “Give me a one-handed economist! All my economists say, ‘on the one hand…and, on the other’”.
Economists respond: “Give me a break, Truman! We are objective professionals. Our job is to offer alternatives and explain the implications of each. YOU are an elected official. We are your servants. YOU are the one elected by the democratic process to choose and decide, not us! We simply show you the choices.”
I myself used to repeat that mantra, during a year as head of an Israeli government planning body. But I soon learned – reality is different. When economics is a value-free zone, it is useless to political leaders. State your values, state your position, clean up the jargon, speak in ordinary language, and keep one hand anchored deeply in your pocket.
The Guardian now brings us a shocking, infuriating episode in which a future Nobel economist is fired for demanding clarity and truth. The economist is Paul Romer. In his Ph.D. dissertation, he built a powerful new theory now widely accepted, called “endogenous growth theory”. But another Paul, Paul Krugman, a Nobel laureate, has for over two decades been a beacon of clarity and one-armed economics.
In brief: Since MIT economist Robert Solow, we’ve known that half or more of all economic growth is caused by technological change. But Solow treated it as ‘exogenous’, outside the system. Romer observed that technological change is endogenous – it is created by what we do, in education, innovation, and R&D, etc. His two Journal of Political Economy articles published in 1986 and 1990, respectively, started endogenous growth theory and changed the world. He will win a Nobel Prize soon for this. It has changed the way everyone thinks about pro-growth policies and plans.
The Guardian: “The chief economist at the World Bank has stepped down from its research arm after staff were vexed by demands to write succinctly, including cutting superfluous uses of the word “and” in reports or emails. Paul Romer, 61, will leave the Development Economics Group (DEC), according to a staff announcement reported by Bloomberg. He had asked for shorter emails, while also cutting staff off if they talked for too long during presentations, it said. In response to press inquiries about internal “objections to my insistence on clearer writing,” Romer published writing guidance he had issued to DEC staff on a blog on Thursday. He said he suffered from dyslexia, making writing hard, but added “everyone in the Bank should work toward producing prose that is clear and concise. This will save time and effort for a reader. Thinking about the reader is an example of what I mean when I say that we should develop our sense of empathy.” Romer cut more US$1 million in annual expenses from the DEC budget, a body of more than 600 economists. But it appeared to be his attacks on convoluted, lengthy reports of that researchers took cause with. In an email to staff, Romer argued that the bank’s flagship publication, World Development Report, would not be published “if the frequency of ‘and’ exceeds 2.6 percent,” according to Bloomberg. He reportedly cancelled a regular publication that did not have a clear purpose.”
“Romer is credited with the quote “A crisis is a terrible thing to waste,” which he said during a November 2004 venture-capitalist meeting in California. Although he was referring to the rapidly rising education levels in other countries compared to the United States, the quote became a sounding horn by economists and consultants looking for a positive take away from the economic downturn of 2007–2009.”
Paul Romer wanted one-handed economists, who speak clearly, and paid the price. But is there a role-model for clear-thinking clear-speaking economics? There is. New York Times columnist Paul Krugman.
The Economist: “From a mono-manual perspective, at least, Harry Truman would have loved Paul Krugman, an economist who rarely hesitates to take a bold position—even when the subject is himself. In recounting the transformation of his twice-weekly New York Times column from a genial discussion of the “New Economy” into a widely read broadside against the Bush administration, the Princeton professor recently described himself as “a lonely voice of truth in a sea of corruption.”
Krugman has blasted Trump and the Republicans, and identified their scorn for economic truth.
In the 1930’s economics took a wrong turn. Influenced by the London School of Economics, economists decided to become like physicists and deal with only ‘pure science’, without ethical value judgments. At that moment, economics became irrelevant. And it remains so.
I hope Romer wins the Nobel Prize later this year. In his acceptance speech, I hope he tears several strips off the moribund walking-zombie economists there, hundreds of them, a whole building full of them at 1818 H Street in downtown Washington. That building is a wasteland desert, even though it is in the heart of Washington.
Paul Krugman: How Economists Got It VERY Wrong
By Shlomo Maital
Paul Samuelson was arguably the great economist of the 20th C., and certainly one of the greatest of all time. He was a professor at MIT, where I taught for 20 summers, and invariably could be found on weekends working away in his office, even after officially retiring. His book Foundations of Economic Analysis (1947) (his Ph.D. thesis) reconstructed economic theory, using clever mathematics. But Samuelson was not deceived by his keen mathematical skill. “Elegance is for tailors”, he once said, in describing elegant, but empty, economic theories.
Alas the Economics profession did not heed him. UK Economist Geoffrey Hodgson reminds us of Paul Krugman’s 2009 New York Times article, analysing where economists went wrong in missing the 2007-8 financial collapse, and in some ways actually causing it with their gung-ho free market enthusiasm.
At that time, Krugman (a Nobel Prize winner, it should be recalled) wrote:
“As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.” …..the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. ”
I feel a personal sense of loss and defeat as I read those words. I chose by mistake to study economics. I never did have the mathematical ability to excel in research. But I did have an insight, that behaviour was more important than math, in understanding how people choose and decide. But that idea was like aging wine, ‘before its time’. Behavioral economics has now replaced math as mainstream, helped by the tailwind of economics’ massive failure in 2007/8.
Will this help economists avoid culpability in the next financial crisis?
TIMnovate 