Friday, September 10, 2010

The Economy Is Not The Weather

The economy is not like the weather, not a natural phenomenon. People may complain about the weather, but there is little one can do about the weather other than enjoy it when it is nice, or seek shelter from it when it is less than nice. The economy is derived from people's individual and collective actions and commerce. Therefore, people control the economy either directly or indirectly. When an investment banker states that financial crises happen every 5-10 years, he's lying. Policymakers are supposed to regulate markets to prevent such man made disasters, and that is their function by law. When politicians say that there is nothing they can do to fix the economy, they are lying. All our politicians have done thus far is throw money at the problem of insolvent banks. They have not fixed the underlying problem which is that the banks are broke. They know that the government has the means and ability to put people back to work, help them stay fed, and keep them in their homes, but there is no political will to do so just like there was no political will to fix Wall Street. There is no political will to reign in defense spending, healthcare costs, drug costs, insurance costs, an unfair tax code full of loop holes, or lax trade policies that allow jobs to go overseas resulting in lost income, revenue, and taxes for American workers, businesses, and governments. There is no will to fix the economics profession as well which supplies the majority of advisors and policymakers to government and business. So Americans will still be receiving bad at best, and deceitful at worst, advice from a profession that is supposed to be able to predict economic trends and advise economic solutions to problems. Instead, many economists and politicians act and sound like TV weathermen. The few economists and other professionals who do recommend solutions are pretty much either marginalized, derided, ignored, or their ideas watered down to be effectively useless. This situation can not go on. Either the Middle Class collapses and we all join the ranks of the Poor, and the country collapses in a state of chaos, or we pull together and fix the nation, and lift all boats, not just the boats of the well connected and the wealthy.

If you think the GOP will come to the rescue this November, better think again. The GOP helped cause this mess. The GOP ran Congress from 1994-2006. They had control of the Executive Branch from 2000-2008, and the Judicial Branch from 2000 onwards. Most Federal Reserve governors are Republicans. Many administration officials are leftovers from the Bush Administration. The Democrats are not blameless, either, but they weren't a major contributor to the mess we are in. Unfortunately, the Democrats seem to be a party divided, and the Obama Administration is itself divided. The Democratic Party's solutions have been weak or ineffective at best. Jon Stewart sums the current situation up this way:"What the Democrats do, doesn't matter!"
When Treasury fights for Wall Street which means the regulators are effectively lobbying for those they are supposed to regulate, government is divided and at odds with itself, and likely compromised, if not corrupted.

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Comments:
Hello again, Moore.

"When politicians say that there is nothing they can do to fix the economy, they are lying."

Oh, you have a high opinion of what politicians are capable of! As for myself, I think they don't have a clue how to fix the economy. So I'd have to think they're telling the truth.

Art
 
Art,

If they were truthful, they'd be either admitting their ignorance in governance, or ignorance in picking capable economic advisers, but stating that solutions were on the way. Since they've done neither and their solutions are not really solving anything, they are likely lying to cover up their incompetence, negligence, ignorance, or all three, which is even worse.
 
"When politicians say that there is nothing they can do to fix the economy," they ARE "admitting their ignorance" !!

Maybe they lie all the time. "Everybody lies." That's not my focus. I'm concerned about the "fix the economy" thing. I think if we (or, "they") knew how to fix it, it would be fixed by now.

I think some people know they don't know how to fix it, and the rest don't know they don't know how to fix it. None of them can fix it. As you put it: "their solutions are not really solving anything."

My earlier comment did take you out of context, unfairly I think... You also said in the post: "Policymakers are supposed to regulate markets to prevent such man made disasters, and that is their function by law." (Man-made disasters, i.e., "The Economy Is Not The Weather.")

Agreed. But since the time of Reagan, or Carter maybe, we've been DE-regulating, and this was our *solution* to the problem. This solution "didn't really solve anything" (to use your phrasing).

If deregulation didn't solve the problem, then we may conclude that regulation was not the problem.

If regulation is not the problem, then we must stop, regroup, and figure out what the problem really is, before we go "fixing" things again.

But I have used too many words already today. Thank you, sir.

Art
 
Art,

I disagree. Saying you can't fix a human made system is admitting helplessness rather than just ignorance. I can't fix my car, but I know experts who can fix it. So, I can admit my ignorance about car repairs, but that doesn't mean I can't solve the problem and that the problem isn't solvable by any human being. Regulation is seldom the problem. It may cause inefficiencies, but that is a small price to pay to prevent fraud and abuse. However, if a law is never enforced, then it is effectively null and void. We have many different kinds of economies all over the globe to study. We supposedly have many smart and brilliant economists who understand what needs to be done and we have the solutions to The Great Depression and Japan's lingering depression as guides. The Japanese told us not to make their mistake and we did anyway. They specifically told us to put our banks in receivership and wipe out their debts which we did not do. It's not that we don't know how to "fix" things, but that there is no political will to "fix" things. Policy makers are just throwing money at the problem which is the easiest solution and covering up the fraud and abuse in the process. It's a very human thing to do to try the simple solution first. But you don't stop there if it doesn't work. It's okay to try other solutions. It's likely that you won't make things any worse than they already are. Trial and error is an acceptable process to discover solutions. What we are seeing though is paralysis. The Fed doesn't think it needs to do much more and the government doesn't want to do much more even though Fed policy and government policy have thus far been proven by events to be rather ineffective. This is like a doctor putting a band aid on a bleeding artery, telling the patient he's fine, that there's nothing more the doctor can do, and the hospital agreeing with the incompetent doctor and discharging the patient who is still bleeding, in danger of passing out, and possibly dying. My argument is that policy makers can do better than make lame excuses to the public. They do not have the excuse of the weatherman who really is helpless due to forces beyond his control. But that is what we are being told by people who know better.

John
 
"We supposedly have many smart and brilliant economists who understand what needs to be done"

Supposedly.

"It's a very human thing to do to try the simple solution first. But you don't stop there if it doesn't work. It's okay to try other solutions. It's likely that you won't make things any worse than they already are. Trial and error is an acceptable process to discover solutions."

This is what I mean when I say, "I think they don't have a clue how to fix the economy," and when I say, "I think if we (or, "they") knew how to fix it, it would be fixed by now." Trial and error is not the same as knowing the solution. I prefer economic analysis, myself.

Oh, and for example: The past 30 years of trial and error policy made things worse.

"My argument is that policy makers can do better than make lame excuses to the public."

Your argument presupposes they can guess a policy that will make things better.

My argument is that when the problem is correctly understood, the solution will be obvious.

Art
 
It is difficult to get a man to understand something when his job depends on not understanding it.

Upton Sinclair

Art,

The quote above applies to economists. The problem is correctly understood. Before the American housing bubble blew up, the Japanese Real Estate bubble blew up 20 years ago. This problem and this solution have been seen and tried before by the Japanese and it did not work unless you define success as not falling into a depression, but staying in a lingering recession like the Japanese economy. American policy makers deluded themselves that America was different from Japan and are still deluding themselves. There are economists who know what they are talking about and there is software that allows them to test their models and do what-if scenarios before they try them in the real world. For instance, we are in a debt deflationary spiral. Inflation is nonexistent even though the money supply has been doubled. If you want inflation, increase workers' wages and let the firms pass the costs onto consumers. Labor is about 10% of total overhead costs of production, so inflation would increase by some small fraction, but it would let workers pay down their debts and help the economy revive. But that is heresy to economists as Steve Keen says. Economists always try to lower worker's wages. But workers who are the majority of taxpayers are paying for the bailouts and the bankers' mistakes either directly or indirectly through taxes and other government subsidies to banks and mortgage lenders.

John
 
"Labor is about 10% of total overhead costs of production, so inflation would increase by some small fraction, but it would let workers pay down their debts and help the economy revive."

I know, labor is a small part of total cost. This is important, and also overlooked. But I don't think the "some small fraction" argument stands up to scrutiny.

Price increases get passed along to customers. Often, those customers are other businesses that must pass those price increases along, too, plus add in their own higher labor costs. The costs accumulate, and price hikes become bigger than we hope.

However, I do think we can offset higher labor costs with lower borrowing costs, if the reliance on credit is reduced. Note that this offsetting plan attacks the problem from both ends, increasing workers' pay and reducing total debt at the same time.

I mulled this over in four posts beginning here.

Art
 
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