Quote of the Day

Here is a snippet from the book Debt: The First 5,000 Years by David Graeber, a book with an endlessly fascinating take on money, debt, and markets over the long history of civilization:

Another way to look at this might be to say that the new age [1450-1971, the Age of Great Capitalist Empires] came to be increasingly uncomfortable with the political nature of money. Politics, after all, is the art of persuasion; the political is that dimension of social life in which things really do become true if enough people believe them. The problem is that in order to play the game effectively, one can never acknowledge this: it may be true that, if I could convince everyone in the world that I was the King of France, I would in fact become the King of France; but it would never work if I were to admit that this was the only basis of my claim. In this sense, politics is very similar to magic -- one reason both politics and magic tend, just ab out everywhere, to be surrounded by a certain halo of fraud

I highly recommend Graeber's book for an alternative analysis of money, debt, and markets. You may not agree with his analysis, but he will help you broaden your understanding through his deep understanding of anthropology/history deeply rooted in 5,000 years of human civilization.

Willful Ignorance

Here is a bit from a NY Times op-ed by Paul Krugman that slams what he calls "the serious people", the ideological right, that has called for austerity as the magic elixir for recovering from the worldwide George Bush-induced Depression:

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

The tragedy is that policy makers and right wing economists prefer lies and "the confidence fairy" more than the simple truth and hard won economic truths. The economics profession has shown itself to be in the hands of charlatans who are willing to corrupt truths won from the Great Depression experience in order to push a political agenda. Tragic!

As always it is the bottom 99% who die when the 1% "generals" order a charge into an open field where they are gunned down by withering machine gun fire (aka reality). But the generals blame the troops and order up another charge. The 99% are expendable. Everybody knows that the 1% are the "cream of society" and must be protected in their ideological bubble at all costs.

Misrepresenting Debt

Here is a bit from a NY Times op-ed by Paul Krugman that tries to explain why the political right's obsession with deficits and debt is wrong-headed:

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.

So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

It is utterly amazing how many times Krugman has made this point and those on the political right simply ignore him and continue with their lies and deceits. The media never call the Republicans to task for their lies. The poor people of America live in an intellectual ghetto because powerful forces conspire to treat them like mushrooms: keep them in the dark and feed them shit.

Thinking about Debt

Here is a key bit from a post by Paul Krugman on his NY Times blog:

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.

The political right has made a career out of packaging up bad politics as reasonable sounding phrases which don't hold up to scrutiny:

• running government is just like running a business, so the country needs a CEO not a politician


• government is not the solution, government is the problem


• the need to put "God back into the nation's schools", and they don't mean the loving Jesus, or Krishna, Odin, or Moloch, they know that God is that white haired old man sitting on a throne up there in the air somewhere, the avenger of the Old Testament, the guy who is the fixer of the political right


• what America needs is "family values" as laid down by the womanizing, sex-crazed, power hungry politicians of the political right who find time to sit in Congress between screwing their secretaries and divorcing the wives and refusing to pay child support


• get government off our backs by bringing back Joe McCarthy with his demand of "loyalty oaths", or Goldwater with his decision to bomb Vietnam back to the Stone Age with nukes, or Reagan who wanted to stop the limousine liberals from giving money to welfare queens by putting up layer after layer of bureaucratic restriction of aiding the poor while ranting that the problem with government was that it needed to "cut regulations", or the 2000 George Bush who ranted that government had to get out of the business of "nation building" and then he started a couple of trillion dollar wars to bring "democarcy" and "good government" to Afghanistan and Iraq

Debt as a public policy is something that the economists understand but which gets twisted and distorted by right wing politicians into a lie on the same level as the 50 year lie that the United Nations was a front for Communism and that the US should "get out of the UN".

The Case Against Copyright

Here is a brief summary of why SOPA and similar copyright laws are bad for people and bad for the economy. This is a bit from a post by Dean Baker on his Beat the Press blog:

Standard economic models show that tariffs cost jobs. The reason is that they make consumers pay more money for the protected product. This pulls money away that could be spent in other areas. If the spending took place elsewhere, it would create more jobs than the additional money earned by the protected industry.

The same logic applies to increasingly stringent protections for copyright, except the economic waste and resulting job loss is likely to be much larger. Tariffs rarely raise the price of products by more than 15-20 percent. Copyright can make items very costly that could otherwise be available for free or nearly free. This implies a tariff of several thousand percent or higher.

In addition, there are enormous costs associated with copyright enforcement, with both the public and private sector required to make substantial expenditures to prevent unauthorized copies of copyrighted material from being circulated. This amounts to a waste of resources that could instead go to productive activity.

Copyright and its enforcement can be thought of as being analogous to toll booths, which can be used as a way to finance road construction. If the only way we have to finance road construction is toll booths, then we absolutely need toll booths to pay the road-builders.

However, once we have roads that are financed through other mechanisms (e.g. government funding), then it becomes increasingly difficult to collect money at the tollbooths since people will opt to use the free roads. We could go the route that many in Congress want to take with the Stop Online Piracy Act (SOPA), which effectively amounts to building toll booths that are harder to get around and imposing tough penalties on those who try to take free roads.

This gets more money for the people who build and operate toll booths, but may not do very much to help the people who build roads. Alternatively, we could try to find ways to get more money directly to the road-builders without spending vast sums erecting bigger more expensive toll booths and being more punitive to those who use free roads.

Understanding the Great Recession

Here is a short summary of a proposed explanation of the current economic collapse. This is a bit from a post by UC Berkeley economist Brad DeLong:

As I understand the Greenwald-Stiglitz hypothesis--about the Great Depression as applied to agriculture and about today as applied to manufacturing--it goes like this:

1. Rapid technological progress in a very large economic sector (agriculture then, manufacturing now) leads to oversupply and steep declines in the sector's prices. Poorer producers have less income. They come under pressure to cut back their spending. Others--consumers--are now richer because they are paying less for their food (or their manufactures), but their propensity to spend is lower than that of the stressed farmers or ex-manufacturing workers.


2. Moreover, the oversupply of agricultural commodities (or manufactured goods) means that only an idiot would invest at their normal pace in those sectors. To the shortfall in consumption spending is added a shortfall in investment spending as well.


3. Thus we have systematic pressures pushing spending down below economy-wide income. These aren't going to go away until the declining sector (agriculture then, manufacturing now) is no longer large enough to be macroeconomically significant.


4. Macroeconomic balance requires that the economy generate offsetting pressures pushing spending up. What might they be?


5. For a while, those receiving the income that farmers (or ex-manufacturing workers) have lost and those who use to invest in the declining sectors can lend it to the farmers (or ex-manufacturing workers) so that they can keep up with the Joneses. But lending more and more to poorer and poorer debtors is, like lawn darts, only all fun-and-games until somebody loses an eye.


6. An alternative possibility is to switch investment away from the farm value-chain complex (or the manufacturing value-chain complex) to something else. But what? Nobody really knows. The future is uncertain. Other investments are clearly riskier then funneling money into the old channels of boosting the capital of the farm value-chain complex (or the manufacturing value-chain complex) had been. Given the extra risks, this pressure can only manifest itself if the cost of capital falls. But here we hit the zero lower bound on interest rates. And we are off to the secular liquidity-trap races. This won't work either.

A very readable presentation of the thesis is in a Vanity Fair article by Nobel prize-winning economist Joseph Stiglitz.

Stiglitz on the Great Recession

Here is a bit from an article in Vanity Fair by Nobel prizing-winning economist Joseph Stiglitz looking at the similarity between now and the 1930s. It is dismal reading:

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.

...

The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.

Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.

...

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

...

Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.

The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation?

...

Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.

Shocking that greater productivity can cause an economic disaster. It should mean more goodies for everyone. But if you can't organize economic life in a way that everybody gets a fair share and decent opportunity, you are asking for a broken system that collapses around you. The Republicans and Democrats fail to address the fundamental problems of the current situation. Obama, the great hope of 2008, has been a complete bust, a flailing, useless, clueless fool who self-satisfiedly claimed he had done a "just right" stimulus as the economy flat-lined.

These are historic times and they require radical solutions under a leader of vision. Sadly the US has the oddly impassive Obama and the clearly incompetent and clueless Republican presidential candidates as the possible leaders after 2012. This says only one thing: the future will be incredibly bleak. There is a desperate need for a visionary leader with an understanding of economics and instead the US is stuck with buffoons and timid pretenders.

Failure at the Top and Failing to Admit It

Paul Krugman nails the incompetence of the political right with its continued misdiagnosis of the economy and the ever continuing attempt to administer noxious nostrums to "fix" the economy. From his NY Times blog:

Hmm. I was looking at the Thomson Reuters/Jefferies commodity price index, which has been trending down since the spring:

Click to Enlarge
And I found myself thinking about the hearing last February in which Paul Ryan accused Ben Bernanke of debasing the currency, using rising commodity prices to argue that dangerous inflation lurked just around the corner.

So, will Ryan demand more expansionary policies from the Fed given the sharp fall in commodity prices this year?

Truly, it is amazing how our political landscape continues to be dominated by people who have been wrong about everything for years.

There will never be an admission from the political right that they are wrong. Just as the political right plotted and maneuvered during the 1930s to "fix" the ailing Germany politics and economics, the present day right is painting us into a corner. Read Krugman's NY Times op-ed to understand the implications of these failings.

Financial Magic

Magic can work. Here is a bit from Paul Krugman on the strategy of "inflating your way to prosperity". From his NY Times blog:

One thing I often see in comments is people attributing to me, or to others, the notion that you can inflate your way to prosperity — which is presented as self-evidently absurd.

Well, if you think that it’s self-evidently absurd, you’ve been listening to the wrong people.

Nobody thinks that an economy operating somewhere near full employment can inflate its way to higher output. But under depression conditions — which is what we have now — inflation is very much a positive thing.

Here’s a quick example from Eichengreen and Sachs showing changes in the gold value of currencies 1929-35 versus changes in industrial production; the devaluation of currencies against gold was closely related to the changes in their overall price level:

Click to Enlarge
Yep, countries were able to inflate their way to prosperity. And you get an immediate failing grade if you start ranting about Zimbabwe or Weimar.

If you have ever seen a magician do sleight of hand, it looks impossible. But the magic works. He does a real illusion by manipulating weaknesses in our psychology. To ignore the power of placebos or magic by being an economic "fundamentalist" is as nutty as being a religious fundamentalist. In the real world you should seize and use whatever real effects that are out there. Even if they are "magic" and depend on strange attributes of humans and their psychological make-up.

A Rationalist in an Irrational World

Here is poor Paul Krugman taking on his enemies one more time. Sadly, they don't want to listen. Politics in the US is a dialog of the deaf:

Why did I criticize Bush’s deficit-increasing policies, then call for more deficit-increasing policies from Obama?

Part of the answer is the difference in economic conditions. Deficit spending is expansionary when the economy is in a liquidity trap; it does nothing but crowd out other spending when you’re not up against the zero lower bound, and the Fed will just raise rates to offset fiscal expansion.

The other part of the answer is that although the Bushies were happy to use Keynesian arguments to justify their tax cuts, those cuts were all designed to be permanent — that is, they were irresponsible precisely because they weren’t temporary. None of what Obama has done commits that sin: his long-term spending, basically on health reform, is paid for, and everything else, like aid to state and local governments or expansion of unemployment benefits, was both designed to be temporary and has proved temporary in reality.

Ah well — just another day in political Bizzaroworld.

Tim Harford Exposes Screwy Reasoning

Here is an excellent post by the economist Tim Harford. It takes to task the ridiculous right with their simplistic "arguments" about the public sector being parasites on the private sector:

“We will set public sector pay awards at an average of 1 per cent for each of the two years after the pay freeze ends . . . while I accept that a 1 per cent average rise is tough, it is also fair to those who work to pay the taxes that will fund it.”

... the chancellor’s autumn statement

“Did you hear about that 1 per cent pay rise?”

“I did. Tough but fair, if you ask me.”

“Why’s that?”

“Well, we in the private sector have to work to pay for you in the public sector. It’s only fair that you show some restraint.”

“Well, ‘show some restraint’ is not quite the phrase, is it? It’s not as if I’m choosing my own pay. You must be confusing me with the chief executive of a major PLC. No need for me to show any restraint; George Osborne is quite capable of showing restraint on my behalf, thank you very much.”

“Good job he is, too. I’m paying for your salary.”

“Is this the ‘hard-working private sector funds the bloated public sector’ line?”

“Funny you should mention that, I guess it is.”

“I’ve never understood that. I’ll admit that you pay for my salary, but I pay for your salary too.”

“How’s that?”

“You work in sales for a mobile phone company. I work as a teacher.”

“Yes, my taxes pay for your salary.”

“But my mobile phone bill pays for your salary. If the government nationalised Vodafone – stranger things have happened – and privatised the school system, my taxes would be paying for your salary while my employer would be sending you a bill for my teaching of your children. But we’d still be paying each other. This is a modern economy. Everybody pays for everybody else’s salary, except the subsistence farmers and survivalists, who look after themselves.”

“But…”

“Look, communism didn’t collapse because there wasn’t any private sector to pay for the public sector. It collapsed because the incentives were thoroughly screwed up. There’s no logical reason why an economy couldn’t be 100 per cent public sector. You’re making it sound like that’s impossible as a matter of simple arithmetic.”

“Still, communism is hardly an advertisement for the public sector, is it? The private sector creates wealth.”

“No, individual technologists, managers, scientists and entrepreneurs create wealth. Their natural home might well be the private sector but there’s no logical reason why they can’t be employed in the public sector. Tim Berners-Lee invented the World Wide Web while he was working in the public sector.”

“He’s not exactly representative of the public sector.”

“Sure, but Steve Jobs isn’t exactly representative of the private sector either. There are remarkable individuals who do remarkable things, and I’m happy to acknowledge that the private sector is usually the place where those remarkable things have space to grow. But the private sector as a whole is doing something more pedestrian: it’s providing goods and services. And so is the public sector. To suggest that some of these goods and services count as ‘creating wealth’ and others don’t, purely because some are paid for out of taxes and others are paid for in the marketplace, doesn’t make any sense.”

“Still, Osborne was right: we need to make savings. Public sector workers have to do their bit.”

“That’s a fallacious line of reasoning: it assumes that the public sector workers of yesterday are going to be the same people as the public sector workers of tomorrow, after several years of chipping away at their real incomes. They might not be. I might decide to become a mobile phone salesman instead of an economics teacher.”

“The way this conversation is going I wish you’d made that choice a while ago.”

“The question is where you want the best people. Trimming public sector wages might harm current public sector workers, or it might just persuade them to seek new pastures, to be replaced by over-promoted junior staff – or mobile phone salesmen who were sacked because of a sudden influx of better-qualified people who could do their job. It may well be reasonable for Osborne to squeeze public sector pay, but if he does, private sector workers will suffer consequences too. Sometimes when he says that we’re all in this together, he’s right – if only by accident.”

It is always easy to blame "the other fellow" for our problems. But with some hard reasoning we realize that public & private sector employees are all in the same pot. Their salaries are set by others. All contribute to a better society if they work hard at their jobs. To attack one is to attack all. This is a "divide and rule" strategy of the political right.

The "Accepted" Wisdom

Sadly, what passes for wisdom in politics and economics is handled by a class of people who simply don't understand the fundamentals of economics. They've managed to screw things up badly, but they will never admit it. They make their living out of "advising" people, so they continue to advise even when the advice is contradictory and shows the bankruptcy of their ideas.

Here is the relevant bit from a post by Paul Krugman on his NY Times blog:

Today, the OECD warns that things are looking vewy, vewy bad:

Decisive policies must be urgently put in place to stop the euro area sovereign debt crisis from spreading and to put weakening global activity back on track, says the OECD’s latest Economic Outlook.

The euro area crisis remains the key risk to the world economy, the Outlook says. Concerns about sovereign debt sustainability are becoming increasingly widespread. If not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch.

Another serious downside risk is that no action would be agreed to offset the large degree of fiscal tightening implied by current law in the United States. This could tip the economy into a recession that monetary policy could do little to counter.

That’s all perfectly sensible. But how did we get here? In large part, by listening to people like … the OECD, which demanded both fiscal austerity and interest rate hikes back in early 2010. And yes, it was the same people now running scared of the consequences of those spending cuts and rate hikes.

Maybe a little soul-searching might be in order?

To be fair, though, it wasn’t just the OECD. Future historians will look back in astonishment at the Great Pivot of 2010, in which all the Very Serious People on both sides of the Atlantic– and, sad to say, in both parties in the United States — decided that in the face of high unemployment, weak growth, and low inflation, what the world really needed was austerity.

I’m actually having trouble writing about all this; it’s just too depressing.

For the bottom 99% when you make a serious error, you pay through loss of job or serious jail time. For the elite, a serious error is simply ignored and you continue to blather with your pithy statements of false platitudes. You are secure because you "own" you position in society. You don't have to work for it.

The European Crisis

Here is a post by Paul Krugman on his NY Times blog. It is the latest in many attempts by him to get the European authorities to be sensible and do what economics requires rather than follow their emotions or "morality play" with counter-productive policies. Sadly, the Europeans are not listening:

Death By Hawkery

What the world needed in this global deleveraging crisis was deficit spending and higher inflation targets. What it got was fiscal austerity and obsessive concern with inflation risks that weren’t real. Hence the catastrophe now unfolding.

Judging from recent comments, many readers missed my earlier analyses on these issues — I’m still getting the “You idiot, debt got us into this mess, how can debt get us out?” type of comment. So let me re-repost my discussion of this whole issue in full, followed by a couple of brief notes on the European situation.

The original post:

Sam, Janet, and Fiscal Policy

One of the common arguments against fiscal policy in the current situation – one that sounds sensible – is that debt is the problem, so how can debt be the solution? Households borrowed too much; now you want the government to borrow even more?

What’s wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all, to a first approximation debt is money we owe to ourselves – yes, the US has debt to China etc., but that’s not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset.

It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.

To see my point, imagine first a world in which there are only two kinds of people: Spendthrift Sams and Judicious Janets. (Sam and Janet who? If you’d grown up in my place and time, you’d know the answer: Sam and Janet evening / You will see a stranger … But actually, I’m thinking of the two kinds of agent in the Kiyotaki-Moore model.)

In this world, we’ll assume that no real investment is possible, so that loans are made only to finance consumption in excess of income. Specifically, in the past the Sams have borrowed from the Janets to pay for consumption. But now something has happened – say, the collapse of a land bubble – that has forced the Sams to stop borrowing, and indeed to pay down their debt.

For the Sams to do this, of course, the Janets must be prepared to dissave, to run down their assets. What would give them an incentive to do this? The answer is a fall in interest rates. So the normal way the economy would cope with the balance sheet problems of the Sams is through a period of low rates.

But – you probably guessed where I’m going – what if even a zero rate isn’t low enough; that is, low enough to induce enough dissaving on the part of the Janets to match the savings of the Sams? Then we have a problem. I haven’t specified the underlying macroeconomic model, but it seems safe to say that we’d be looking at a depressed real economy and deflationary pressures. And this will be destructive; not only will output be below potential, but depressed incomes and deflation will make it harder for the Sams to pay down their debt.

What can be done? One answer is inflation, if you can get it, which will do two things: it will make it possible to have a negative real interest rate, and it will in itself erode the debt of the Sams. Yes, that will in a way be rewarding their past excesses – but economics is not a morality play.

Oh, and just to go back for a moment to my point about debt not being all the same: yes, inflation erodes the assets of the Janets at the same time, and by the same amount, as it erodes the debt of the Sams. But the Sams are balance-sheet constrained, while the Janets aren’t, so this is a net positive for aggregate demand.

But what if inflation can’t or won’t be delivered?

Well, suppose a third character can come in: Government Gus. Suppose that he can borrow for a while, using the borrowed money to buy useful things like rail tunnels under the Hudson. The true social cost of these things will be very low, because he’ll be putting resources that would otherwise be unemployed to work. And he’ll also make it easier for the Sams to pay down their debt; if he keeps it up long enough, he can bring them to the point where they’re no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment.

Yes, private debt will in part have been replaced by public debt – but the point is that debt will have been shifted away from severely balance-sheet-constrained players, so that the economy’s problems will have been reduced even if the overall level of debt hasn’t fallen.

The bottom line, then, is that the plausible-sounding argument that debt can’t cure debt is just wrong. On the contrary, it can – and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve.

European twists

The European mess is pretty well described by the story above, with the Sams mainly in the periphery and the Janets in the core; what we’re getting is forced austerity in the periphery with no offsetting expansion in the core, and now everyone is shocked, shocked that the whole continent seems headed for recession.

In Europe’s case, however, higher inflation is even more crucial than for the United States — because Europe also needs a large adjustment of relative prices that will be very hard if not impossible to achieve with low overall inflation.

So as of this morning, the 5-year German breakeven — an implicit forecast of inflation — is only 0.9%.

This is not going to work.

Sadly the American authorities are facing a similar deflationary situation and are just now embarking on the same idiocy as the Europeans: austerity. It will fail in the US just like it is failing in Europe. It is the standard "prescription" of the political right, but it is profoundly ignorant of economic reality and what is required. People will suffer and pay a very dear price for the idiocy of politicians. It is a lost decade just like the Japanese have suffered through. Tragic.

... and here is more despair by Krugman at the idiocy of the politicians (and the "serious people" in positions of authority like the Bank of England, the Federal Reserve, and the European Central Bank):

Death By Accounting Identity

Martin Wolf has a somewhat despairing-sounding column this morning, in effect pleading with the Cameron government to admit that the laws of arithmetic must apply. Good luck with that.

Martin writes,

If the private sector is seeking to run down its debts, it is hard for the government to do so, too, because everybody cannot spend less than their income. That is the “paradox of thrift”. No, it is not a novel idea.

Ah, but for the past two years leaders in the Eurozone, Britain, and the US Republican party have subscribed to the following plan:

1. Slash government spending

2. ??????

3. Prosperity!

For a while ???? was framed in terms of the doctrine of expansionary austerity: slash spending and the confidence fairy would make private-sector spending rise. At this point, however, few still believe in this doctrine. Also, in the euro area it was hard to see how things would work even if the confidence fairy made an appearance; how was that supposed to resolve the large payments imbalances between the core and the periphery?

But even as the intellectual foundations, such as they were, for the austerity plan have been demolished, the plan itself remains unchanged.

I never thought I would live such an era of unrelieved idiocy. But knowing a little history, I was foolish to think I could avoid it. In my young adulthood I watched the US condemn an entire generation of young men to a meaningless and unwinnable war in Vietnam simply because no president had the courage to admit that the war was a mistake and end it. In my early childhood I watch as nutty right wing politicians tore the US to pieces in a mad witch hunt of "communists". I saw sleazy people like Nixon build a career on this evil enterprise. In my working years I watched as people fell in love with the rich and flocked to watch Lifestyles of the Rich and Famous. These sad fools didn't realize they were idolizing the social parasites who were busy from 1980 until today sucking the life blood out of society so they could live a life of mad indulgence while the bottom 99% saw their lives stagnate, saw the economy enter a depression caused by fraud and criminality by the greed of bankers, and saw a hopeful new president be elected and fail to act because he too was madly in love with the rich and unable and unwilling to help the bottom 99%. My life has been lived in an unremitting horror story of cruelty, greed, fear, and ignorance. That is the history of humanity for the last 10,000 years. Tragic.

Getting to Know Paul Krugman

Here is a feature piece done by the EPI for its first Distinguished Economist Award given to Paul Krugman:

The Problem with "The Invisible Hand" of Right Wing Economics/Politics

Here is a bit from a post by Tim Harford in his blog:

[Robert] Frank has a particular Darwinian insight in mind: the idea that contra Smith’s “invisible hand”, individuals competing can produce results that are bad for society as a whole.

Consider the vast antlers of the north American bull elk: they’re the result of sexual selection balanced by other selective pressures. Elks with big antlers win fights with other elks, and mate with multiple females. However, they also get hunted down and killed by packs of wolves. Elks as a whole would be better off if they could all agree to shrink their antlers by a factor of four or five: the males with the biggest antlers would still get the girls, while only the wolves could object to faster, more agile bull elks. Sadly for the elks and happily for the wolves, that’s not how sexual selection works.

In a new book, The Darwin Economy, Robert Frank sees elk antlers everywhere he looks in modern society. For example, when parents bid up the price of houses near good schools, they’re engaging in a wasteful arms race: children as a whole will be no better educated as a result, but vast sums are devoted to the quest for the right school district. My flashy car makes you less satisfied with your own; if I take ladies out to the opera and Michelin-starred restaurants, other men will no longer succeed by offering scampi and chips at the Romford dog track. In short, says Frank, my spending harms you as surely as I would harm others by standing up at a concert and forcing everybody behind me to stand up in turn.

Sometimes this dynamic is the result of envy; at other times it is genuine competition for scarce resources, such as beautiful partners or elite university places.

Elks cannot reach an agreement to trim their antlers, but humans can, and Professor Frank advocates a steeply progressive consumption tax to serve this purpose. In effect, the tax would be an income tax with an exemption for savings, encouraging investment but discouraging spending sprees. Frank argues that it should be progressive because the wasteful economic arms races are at their most grotesque at high consumption levels.

Harford goes on the quibble with Frank, but this is a very easy-to-understand critique of the political right's "cut taxes, cut taxes, cut taxes" agenda in support of their billionaire overlords.

Sylvia Nasar's "Grand Pursuit"

This book is an intellectual history of economics with a focus on a handful of names: Karl Marx, Alfred Marshall, Beatrice Webb, Irving Fisher, Joseph Schumpeter, John Maynard Keynes, Friedrich Hayek, Joan Robinson, Milton Friedman, Paul Samuelson, and Amartya Sen.

As you can see, those choices are idiosyncratic. Most modern economists would not include Marx, Webb, and Robinson since they are off in the dead end of Marxist "economics". But for me they are part of the spice of this book. This isn't a text to teach you economics. It is really more of a history of personalities and circumstances. The stories are delightful. The sketches of economics are thin gruel, so don't come here to understand economic theory. Come to savour history, personalities, and ideas.

What I found delightful is that the book reinforced my prejudices. Economics is not a "science". It is a liberal art with the pretension of science through its mathematicization of its arguments. The formalism doesn't make the models and arguments any more right. They do provide a bit more formal clarity but they also lead to obscurantism with dithering over details and ridiculous "simplifying" assumptions. I had a mathematician as a friend who made this point by arguing about cows by first stating "consider a sphere". Yep... mathematics does some wonderful leaps in simplification to make the mathematics "tractable".

Here are some snippets to give you a feel for the writing style:

Before resuming his journey north to the Scottish highlands, Alfred Marshall, a twenty-four-year-old mathematician and fellow of St. Hohn's College in Cambridge, spent hours walking through factory districts and the surrounding slums "looking into the faces of the poorest people." He was debating whether to make German philosophy or Austrian psychology his life's work. These were his first steps away from metaphysics and the beginning of a dogged pursuit of social reality. He later said that these walks forced him to consider the "justification of existing conditions of society."

In Manchester, Marshall found the smoky brown sky, muddy brown streets, and long piles of warehouses, cavernous mills, and insalubrious tenements -- all within a few hundred yards of glittering shops, gracious parks, and grand hotels -- that novels such as Elizabeth Gaskell's North and South had led him to expect. In the narrow backstreets he encountered sallow, undersized men and stunted, pale factory girls with thin shawls and hair flecked with wisps of cotton. The sight of "so much want" amid "so much wealth" prompted Marshall to ask whether the existence of a proletariat was indeed a "necessity of nature," as he had been taught to believe. "Why not make every man a gentleman?" he asked himself.

...

He took great pains to demolish Socialists' claim that but for oppression by the rich, the poor could live in "absolute luxury." England's annual income totaled about £900 million, he told the women. The wages paid to manual workers amounted to a total of £400 million. Most of the remaining £500 million, Marshall pointed out, represented the wages of workers who did not belong to the so-called working classes: semiskilled and skilled workers, government officials and military, professionals, and managers. In fact, an absolutely equal division of Britain's annual income would provide less than £37 per capita. Reducing poverty required expanding output and increasing efficiency; in other words, economic growth.

One of the points that Nasar makes is that modern societies organized around liberal economic principles has unleashed productivity and wealth. But as I read the above I keep picturing the billionaire tycoons on Wall Street and the masses in the street with their Occupy Wall Street protests. Sure there has been progress, but the economic injustice is still just as bad. The greed and indifference is there which exacerbates the pain. The fact that the billionaires can buy the politicians means that nothing will ever change. The fact that the rich are pushing to cut education and social services while cutting taxes on the rich as their "solution" to the current Lesser Depression is very depressing.

Sylvia Nasar's story points out that the same humbug and foot-dragging that blocked a real solution to the Great Depression was very, very similar to the humbug and foot-dragging of today:

Despite his financial straits, damaged reputation, and advancing age, the sixty-five-year-old Fisher seemed more energized than depressed by the economic calamity. In 1932 he published an extraordinary number of scientific papers and newspaper pieces. He bombarded the Hoover administration and the Federal Reserve with advice and organized other economists to do the same. His chief objective was to convince President Hoover to take the United States off the gold standard, if not de jure then de facto by having the Federal Reserve do nothing to prevent the foreign exchange value of the dollar from falling. He met with the bankers at the Federal Reserve to urge them to adopt an aggressive program to buy bonds from the banks and the public in order to pump money into the banking system. To his frustration, the "Federal Reserve men thought it would be 'safer' if they waited!" as he later complained. "That waiting, in my opinion, cost the country the major part of the depression."

In January 1932, Fisher attended a second meeting of monetary experts at the University of Chicago. This time, he organized a telegram urging the president to permit the federal budget deficit to rise, pump reserves into the crippled banking system, slash tariffs, and cancel inter-allied debts. Thirty-two prominent economists from Chicago, Wisconsin, and Harvard universities signed the statement, in which Fisher pointed out that Sweden, Japan, and Britain were recovering after going off gold the previous year. The signatories reflected the extent to which Fisher and Keynes's view of the crisis with its emphasis on its global nature, monetary causes, forecasts of its future course, and the need for concerted monetary intervention had gained adherents. On the other hand, theirs was still a minority view.

Sadly, today Obama ignores neo-Keynesian solutions. He shows himself to be uneducated about economics and has surrounded himself with the same fanatical deregulation libertarian economists who created this Lesser Depression. There has been absolutely no progress in economic "science" in 80 years. The same humbug and "morality play" rationalizing goes on to protect bondholders at the expense of the 25 million unemployed, the 10 million who are losing their homes, the youth who have given up on education because it is too expensive, and those nearing retirement who are desperate because their savings are exhausted. It is a social disaster, but Obama is acting like a modern Hoover and the 2012 Republican presidential candidates would make Hoover look like a bleeding-heart liberal. Tragic.

Sylvia Nasar traces out Keynes' thinking:

As the Great Depression dragged on, Keynes's faith in the effectiveness of monetary policy ebbed further. By the time A Treatise on Money appeared, he was beginning to pose a theory of the causes of unemployment. Cambridge undergraduates were his first audience. The nub of the new theory was that, as he put it in an article published in the American Economic Review in December 1933, "circumstances can arise, and have recently arisen, when neither control of the short-rate of interest nor control of the long-rate will be effective, with the result that direct stimulation of investment by government is a necessary means."

In a severe depression, prices fell even faster than interest rates. So reductions in nominal rates did not prevent real rates from climbing. Once nominal rates fell to zero, there was nothing further that the central bank could do to make borrowing cheaper or to ease debt burdens and thus to end the depression -- with incalculable political consequences, what Keynes called The Liquidity Trap. As he had once observed, "The inability of the interest rate to fall has brought down empires." Once monetary policy was rendered ineffectual, the only option for shoring up demand was getting money into the hands of those who could spend it.

...

As Herbert Stein, the economist, pointed out, Keynes asked a very different question from the one posed by Hayek and Schumpeter. In explaining depressions, in terms of the preceding booms, the Austrians were trying to figure out how the economy had gotten there. Keynes was less interested in the genesis of slumps than in the more basic puzzle of how high unemployment and slack capacity could persist for long in a free market economy with unrestricted competition.

...

Thus what made the General Theory so radical was Keynes' proof that it was possible for a free market economy to settle into states in which workers and machines remained idle for prolonged periods of time -- that there were depressions that, unlike the garden-variety ones, were not brief and didn't end of their own accord as a result of falling prices and interest rates, or, at an extreme, that free market economies tended naturally to stagnate even when there were idle workers and machines available. In such depressions, unfreezing credit flows through monetary policy didn't provide a sufficient stimulus, because even zero-percent interest rates could not tempt businesses to borrow while prices were falling and there was [no] reason to think that demand would recover. The only way to revive business confidence and get the private sector spending again was by cutting taxes and letting businesses and individuals keep more of their income so that they could spend it. Or, better yet, having the government spend more money directly, since that would guarantee that 100 percent of it would be spent rather than saved. If the private sector couldn't or wouldn't spend, then the government had to do it. For Keynes, the government had to be prepared to act as the spender of last resort, just as the central bank acted as the lender of last resort.

This is the same intellectual landscape that has policy makers hung up today. Bernanke and the Federal Reserve have been too timid in using monetary policy and now the only tool left is fiscal stimulus, but you have right wing nuts screaming about "inflation!" and "debt!". Obama is too timid to properly stimulate the economy and instead falls into the trap of Hoover and FDR in 1937 of worrying about deficits and debts. They ignore the ruined lives and the lost production that can never be retrieved while the country stays mired in a depression. The arguments of 80 years ago are lost to policy makers today because they are illiterate about history and economics. Oh, and they are blinded by their ideology, an ideology bought and paid for by the billionaire ultra-rich who are quite happy to leave the system just as it is, a system that has let them exploit it for billions in personal gain. This is a tragedy for the bottom 99%. The top 1% are laughing, but the bottom 1% are paying in ruined lives... and they will also pay through taxes to cover the lost monies and even provide the billionaire bonuses for the frauds and cheats who created the mess. Sorrows heaped on woes, and smothered with injustice.

This is a good read and it is highly relevant. This book will give you useful background to understand the economic arguments of today and the tragedy that today is a maddening repeat of the 1930s.

A Nobel Prize-Winning Economist Addresses the "Occupy Wall Street" Crowd

Here is Joseph Stiglitz talking to the Occupy Wall Street demonstrators:



Stiglitz is famous as a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is also the former Senior Vice President and Chief Economist of the World Bank. He is known for his critical view of the management of globalization, free-market economists (whom he calls "free market fundamentalists") and some international institutions like the International Monetary Fund and the World Bank.

The journalist beside Stiglitz is Jeff Madrick, a regular contributor to The New York Review of Books, and a former economics columnist for The New York Times. He has also contributed to online publications such as the Daily Beast and the Huffington Post.

Note: The "Occupy Wall Street" is the Arab Spring brought home to America as this picture shows...

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Economics as a Morality Play

Here is an excellent bit from a post by Paul Krugman on his NY Times blog:

And it has been an awesome spectacle watching the VSPs [Very Serious People] search, obsessively, for reasons not to fight mass unemployment. Fiscal policy must tighten to appease the invisible bond vigilantes and please the confidence fairy. Interest rates must rise because, well, um, inflation, well, no, low rates cause moral hazard — yes, that must be it.

And we’re not (just) talking about ignorant politicians. This stuff has been coming from the European Central Bank, the Organization for Economic Cooperation and Development, the Bank for International Settlements.

I don’t fully understand it. But a large part of it, it seems obvious, is the intense desire to see economics as a morality play of sin and punishment, where the sinners are, of course, workers and governments, not the bankers. Pain is not an unfortunate consequence of policies, it’s what is supposed to happen.

How obsessive are these people? So obsessive that when the financial doom they predict fails to materialize, they consider this a bad thing: punishment must be administered, so what are the markets waiting for? Here’s Alan Greenspan a while back:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

Gosh, it’s regrettable that the markets aren’t confirming my warnings! ...

Just to reiterate a point I’ve made before, none of this reflects actual economic theory. Throughout this crisis, people like Adam Posen and yours truly have been basing our arguments on standard textbook macroeconomics, whereas the Very Serious People have been making up stories on the fly to justify their calls for pain. As Wolf, who really seems to have eaten his Wheetabix, puts it,

The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.

And this cruelty rules our world.

As through all of history, it is the bottom 90% who pay the price for the idiocy of the top 1%. The know-it-alls at the top see the world through their ideological glasses that just happen to see things the way that suits them fine. That it hurts the bottom 90% doesn't bother them one whit.

David Orrell on the Art & Science of Forecasting

I love to read about "expert opinion" and "forecasting". One of my favourite reads is Dan Gardner's "Future Babble: Why Expert Predictions Fail - and Why We Believe Them Anyway". Here is the author's website for the book. And here is my comment on the book.

David Orrell has written a number of books on economics and in particular the failure of economic models to match reality. I especially enjoy his book Economyths. Here is the author's website and the (author's post on his book.

Here is a presentation by David Orrell for the International Institute of Forecasters entitled "Where's the Puck? 2500 Years of Forecasting". It is a nice survey of the history and failings of forecasting:

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Paul Krugman Despairs the Economics is Not a Science

Paul Krugman has devoted his career to economics and has won a Nobel Prize, but he fells that he is living through a "Dark Age" in which economics has unlearned the lessons of the past. He is really despondent. Here is the relevant piece from a post on his NY Times blog:

I’ve never liked the notion of talking about economic “science” — it’s much too raw and imperfect a discipline to be paired casually with things like chemistry or biology, and in general when someone talks about economics as a science I immediately suspect that I’m hearing someone who doesn’t know that models are only models. Still, when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.

The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.

I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies in the belief that they’re profound insights, because they’re ignorant of the hard-won insights of the past.

What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t.

And all this makes me wonder what kind of an enterprise I’ve devoted my life to.

I'm stunned that the field has shown itself that incompetent in the face of the 2008 financial crisis. But the academics fell in love with their models, the math, and the simplifying assumptions required to make the math and the models work. They took their eye off what is critical to any real science: the facts. They've turned economics into a branch of theology where the divines of the field debate the number of angels dancing on the head of a pin. They've gotten away from the hard insights of Keynes from the Great Depression. Tragic.