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Thursday, July 23, 2009

(post by Roy Rodgers)

I’m sure macroeconomists are very nice people its just that I’m starting to think that the economics they are proffering may be pure snake oil. The stinky slimy kind of snake oil.

What they taught us in school

I sat through the macro lectures at uni and even managed to get pretty good grades. But all I can remember from undergrad is some overly simplified flow charts that somehow magically added up to GDP and aggregate demand and supply curves with some sort of pretence to grandness … the all important ISLM.

What I do remember quite clearly was macro at honours where we were duly informed that all the hours spent learning this ISLM framework were a great big conspiracy. Apparently it had been abandoned long ago by all self respecting economists. We were duly informed not to be too cranky for although it was all rubbish, apparently we were all the better for it, better intellectually for having sat through three years of the crap.

And then there was postgrad ...

Well, I don’t know about you, but post grad macro for me was two models a lecture, two lectures a week over 14 weeks and a final exam that covered all of the models. That’s 56 models that our sadistic bastard of a lecturer required us to memorise. When queried on the educational value of such an approach his response was “I spent my post grad crying myself to sleep, and I’m a better man for it, so you will be too”.

This particularly loathsome human being prepped us for our final exam with the following statement “the exam is composed of three questions, don’t read the third until you’ve completed the first two. I have set the question so that it’s impossible for anyone in this theatre to answer and if you read it before you complete the other two you will most likely freak out and not be able to complete the exam at all”. When queried how he intended to grade us if the test was set so that we could only achieve a maximum of 66% he responded with “don’t worry … the bulk of you will actually fail the exam … and I’ll have to adjust you all upwards anyway”. There is a special room in hell put aside for this arsehole, a bare cold room where he has to spend all eternity being examined on stuff he can’t possibly answer … again and again.

That was the mandatory macro postgrad component, needless to say I stayed the hell away from anything remotely macro in the electives. By the way I got a distinction for postgrad advanced macro (despite the fact that I’m pretty sure I only got 40/100 for the final) and to this day I have absolutely no idea what he was trying to teach us other than how to do calculus. All I know is that I never want to see another Hamiltonian in my life.

Are we picking up on a bit of a theme in Australian tertiary education? Paternalism as a mask for sadism or paternalism as a mask for lazy teaching … take your pick.

Trust me… I am a macroeconomist and I’m here to help….

This brush with macroeconomics has left me with a deep rooted distrust. I don’t trust macroeconomics, its theories, its models or its policy prescriptions. And given the policy responses to the global credit crisis … I’m starting to believe its pure snake oil.

On what planet does it make sense to squander money on purely consumptive rubbish when your smack bang in the middle of a recession? If you ran a business and you started to experience a contraction in revenue, would you think to yourself, ‘now would be a good time to spend a couple hundred thousand on that feng shui consultant’. No of course not! Collectively our nation’s macroeconomists seem to be advocating history’s most massive spendathon and none of them to date seem to have registered any concern for what this will do at the microeconomic level.

At the end of the day it doesn’t matter what a macroeconomist says, the truth is that all economies are driven by their microeconomic health. If you want to increase income then you have to increase productivity … and this is well and truly in the domain of microeconomics. But these macro guys just don’t seem to care about the micro.

Macro vs Micro

The vast bulk of economics falls under the category of microeconomics. Micro is your basic classical liberal economic approach. Most microeconomists tend to agree on all the important issues. All of the fundamental theorems are readily observable in everyday data, and we know that its policy prescriptions by and large work to the betterment of an economy. Microeconomics has been tried and tested.

Macro on the other hand is a small sub branch of economics whose participants don’t seem to be able to agree on anything. Its theories and hypothesis are not readily observable in the data, in fact in some instances they are non testable. All a macroeconomist has to do is admit that there is no humanly possible way to model the actual complexity of an economy and they have a get out of jail free card. After all, you can’t prove my theory false if you lack the statistical sophistication to adequately test it (then again, you can’t really prove it to be true can you?).

10 reasons to feel a bit uneasy

There are a couple of basic fundamental characteristics of macro that really get under the skin. Given my general level of ignorance on the subject I could be totally wrong on this, but I suspect not.

1. In Macro, there seems to be a universally held belief that people are stupid. I don’t know how else to explain their dogged determinacy that you can fool people into thinking that consumption resulting from a government pork barrelling stimulus actually represent real demand. Our macro colleagues ask us to believe, ‘Hey, if I owned a factory producing widgets and gadgets I would have just bought four new expensive widget machines because of that unanticipated percentage point increase in demand over Christmas.’ Who are they kidding? Mr Widget knows Christmas was a big kev special and most likely a one off. The other thing is that stimulus are founded on the assumption that you are so dumb you won’t realise that although the government is giving you money now, at some point someone has to pay, and given that the governments main source (only source) of income is taxation that means you are going to have to pay for it at some point in the future.

2. The seeming indifference between government spending and private spending. Just because you have some crappy formula stating income equals the sum of investment, consumption, net exports and government expenditure, doesn’t mean a dollar spent by big kev is the equivalent of a dollar spent by your local entrepreneur. When big kev spends money its called pork barrelling, it goes to his mates or his mate’s mates. Not every one got a big kev Christmas bonus … I certainly didn’t. But big kev made sure the traditional labour party base got their goodies. In the same vain it also appears that a major requirement for a bailout package is that your industry be heavily unionised, cars get money but hospitality gets to suck its thumb. Not only does big kev lack the proper commercial incentive for investment he also lacks a base respect for money. Big kev doesn’t have to make money, he takes money and he takes it for free without asking … at the end of the day he doesn’t care if it’s well spent… after all, he can always just take a bit more. Your local entrepreneur on the other hand is usually living off the skin of his arse, respects money like you wouldn’t believe and only invests in things that people actually want and will voluntarily pay for … unlike big kev he/she has no power to take. So on average, a dollar spent by an entrepreneur is most likely to go towards something much more meaningful than a dollar spent by a bureaucrats.

A perfect example of this is the June government spending rush. At around June every year, whether you know it or not, busy little bureaucrats all over the country are trying to spend as much money as they can to ensure they make budget. You see… the incentive structure for government isn’t to do what you do as cheap as you can, it’s to make darn sure you spend every last dollar of your budget before the end of the year. Other wise Treasury is going to take it away from you next year. Law firms with government clients love this time of year, all of a sudden bureaucrats are seeking legal opinion on just about anything they can.

3. There doesn’t seem to be an explicit recognition that all economies are primarily driven by microeconomics. Macro is only good for the short term and I’ve got to say, as a microeconomist, after you consider all the market distortions resulting from subsidies grants and bailouts, any macro gain we get comes at a not insubstantial micro cost. You get the feeling that we may be cutting our own nose off to spite our face.

4. The science of it seems to be driven by political agendas not by scientific inquiry. Guys like Krugmen and Stiglitz are undeniably political.

5. They don’t seem to be able to cobble together a reliable model. One of the oldest running jokes is that economics has come so far its been able to predict nine of the last two recessions. Coupled with this failure at producing reliable models is a bizarre faith that modelling is the answer to everything and the more complex the model the better it is. Macroeconomists appear fully committed to the idea that you can engineer an economy, they actually appear to have whole heartedly swallowed that philosopher king rubbish.

6. Other than agreement on their own importance, macroeconomists don’t seem to be able to agree on much else. Of course the proposition that consensus is necessary in science is fallacious, but these guys have been at it a fair while and you would think that if they had uncovered any fundamental truths that there would be some level of agreement. This bunch of slippery buggers can’t even agree on a definition for what constitutes a recession. Are we having one or aren’t we, is it real or not blah blah blah.

7. Macroeconomics seems hell bent on promoting intervention. Any good economist should have a healthy dislike for government intervention. We know that time and time again the government with all its good intentions invariably stuffs things up. With this in mind, it’s quite alarming to encounter a stream of thought that holds intervention as one of its basic foundational building stones. Where are the macroeconomists that believe less is more?

8. Macroeconomics doesn’t seem to want to allow markets to operate. Most, if not all, macro policy prescriptions are aimed at softening the blow, protecting people from the downturn etc etc…. Well that’s all fine and dandy but what if the down turn is the market seeking to correct. By blocking the correction you become part of the problem not the solution (see FDR and the new deal). It was Joseph Schumpeter that said “Gentlemen, a depression is for capitalism like a good, cold douche.”

9. The consequences of their actions are so large they are downright scary. The scale of the stuff they are working on is so large that the risk associated with their failure makes the hair on the back of your neck stand up. It sometimes looks like they lack the humility you would expect of someone whose advice has the potential to not only effect one firm or an industry but an entire country. You would expect some of this humility to come through when you consider that to date this approach of kick starting an economy through stimulus packages has met with universal failure. Stimulus packages have not helped Japan, they did nothing for Germany post unification and the current consensus amongst economists is that they played a large part in putting the great in the great depression. By and large history has shown that the best you get from a Keynesian stimulus package is a short temporary burst in consumption.

10. I’m sick of people at BBQs asking me what’s going to happen to the interest rate. Most if not all non-economists think macroeconomics is economics … so I worry that when everyone wakes up from the heady intoxication of spending money they didn’t earn and realise that the only outcome from the latest round of stimulus is a deep and long lasting state of perpetual debt and higher taxation, my problem at BBQs will not be trying to explain how I’m an economist with no idea what is going to happen to interest rates, rather it will be trying to dodge the fist of the hairy ape that thinks I’m just another snake oil salesman.


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