Tuesday, April 29, 2014

Are We Ruled by Economists?

Should academic economists be running the nation’s economy? Should we just hand it all over to Paul Krugman and await further developments?

Then again, is Paul Krugman still an economist?

Would it be better if, instead of having capitalists allocate capital, we allowed politicians and bureaucrats do the job? And, what if these politicians and bureaucrats were following playbooks written by the world’s leading economists, men like Thomas Piketty?

In an impassioned screed against economists, John Tamny argues that government spending does not really promote economic growth and wealth creation:

… government spending on its very best day merely facilitates growth through enforcement of property rights, but otherwise spending subtracts from it. By definition. If readers doubt this, then they must explain how it is that John Boehner, Nancy Pelosi, Harry Reid, and Mitch McConnell are better allocators of capital than are Warren Buffett, Ken Fisher, Paul Tudor Jones, and Peter Lynch. The economics profession actually believes politicians are good capital allocators, but that just speaks to why we should tune so many economists out. 

Tamny’s point is well taken, but he is exaggerating if he believes that all economists favor higher taxes and excessive regulations. Many reputable and even a few disreputable economists know very well that government spending does not grow the economy. The arguments for free market solutions to economic problems were formulated by… economists.

Tamny detracts even further by treating Henry Paulson as an economist. To his credit or discredit, former banker and treasury secretary Paulson was never an economist.

In a larger sense Tamny wants to analyze modern China’s extraordinary economic resurgence. He does so to submit some modern economic theories to a reality test.

Take the importance of education. Many economists believe that if only America can improve educational opportunity, the economy would naturally benefit.

Tamny writes:

In a Wall Street Journal op-ed from last year titled "The Vital Link of Education and Prosperity," scholars Paul E. Peterson and Eric A. Hamushek attempted to prove this widely held belief. As they remarkably put it, "raising student test scores in this country up to the level in Canada would dramatically increase economic growth." Their view was that "long-run growth rates are mainly accounted for by differences in cognitive skills as measured" by "standardized tests of math and science such as PISA and NAEP." 

China appears to be telling a different story. Tamny points out that in the early 1980s, when China started to boom, it was suffering from an educational deficiency:

So while most in China by the early ‘80s had no access to college-level instruction, [Fox] Butterfield found that 35 percent of 18-21 year-old Americans were in college, 23 percent of Soviets were, and even the Philippines, despite a population that was a fraction of China's, could claim more college students "than in all of China." Not a country known for a media that was or could be honest about its presumed weaknesses, Butterfield wrote about how the Guanming Daily "groused that China ranked 113 out of a list of 141 countries in the world in percentage of its young people who get a post-secondary education."

True enough. Yet, we must also add that, as China has grown and prospered, its educational system has improved vastly.

When China began its economic revival over 80% of the people were living in extreme poverty. Given the primitive nature of economic activity, an educated workforce was not necessary. Today, with China booming, highly skilled and highly educated employees are becoming far more important.

We can also be fairly confident, to Tamny’s point, that today’s Chinese college students are not studying political correctness, critical theory and deconstruction. Even when they attend American universities they are more likely drawn to majors like science and engineering.

Tamny is on more solid ground when he examines the excuses that pundits and economists have been giving for America’s anemic, Obama-led economic recovery.

In his words:

Considering job opportunities and a limp "new normal" when it comes to the creation of work, Keynesian economist Robert Samuelson recently wrote about the relatively weak U.S. economy that you might compare it "to someone who's recovering from a serious illness. At first, everyone hopes the patient will return to normal. Then it's gradually realized that the patient suffered permanent damage and will never be the same. So, perhaps, with the economy." 

Tamny challenges the argument by pointing out that China was in far worse conditions after Mao:

Whatever damage the Bush and Obama administrations have done to the U.S. economy, no reasonable person would compare the ineptitude they foisted on Americans to what Chinese leaders did to their own people. If the individuals who comprise China's economy can recover from the brutal horrors of communism, surely we Americans can bounce back from the softer idiocy of our own leadership.

Taking this narrative further, economists like to talk about how long-term unemployment makes those who experience it unemployable for depriving them of modern work skills. It's an interesting idea, but one utterly devoid of reason. The Chinese were deprived of real work experience for over 30 years, but once their economy was freed of government meddling, its "unskilled" workers quickly adapted to the work norms of capitalism. Since the Chinese rapidly evolved, so can Americans put out of work by hubristic politicians quickly adapt to modern work standards once our political class gets out of the way.

China’s success vindicates those who believe in free markets and free enterprise. It does not vindicate those who believe in liberal democracy. Politically speaking, China continues to be a dictatorship. And, as Tamny notes, when bureaucrats are allowed to influence the economy, the results, either in America or in China, are rarely beneficial to anyone but the bureaucrats.

At the same time, the Chinese nomenklatura has known enough not to interfere in the economy.

China does not exemplify a small government. It does show what can happen when government officials are smart enough to allow the private economy to do what it does best-- to create wealth-- without interference.


Anonymous said...

Mao could do his Great Leap Forward and Cultural Revolution because he could impose his will at the end of a gun barrel. Businesspeople don't have such power. Governments do. All the communist Chinese have done is combine the two to build what Lenin called "the commanding heights" of the economy: big manufacturing industries, both state-sponsored and licensed foreign investment. This totalitarian puppetry on a huge population has created economic growth that can lift large numbers out of poverty, but cannot sustain rising incomes indefinitely. This approach can only go on for so long before it runs out of gas. Historical examples abound with centrally-planned modernization schemes.

China is not an unfettered free market. Please don't forget the massive Chinese housing bubble. Government control over the "commanding heights" includes commercial/residential housing construction. What China has effectively created is a bureaucracy-licensing plutocracy to fuel cross-industry growth: steel, electrical, mining, concrete, glazing, etc. Government officials (who own these production assets) are the plutocrats, and the bureaucracy and licensees feed the beast. But demand has dried up: they're now building all these vacant properties. What is one to do? You're screwed either way. China can't take its foot off the gas because of the construction jobs, and there's not enough demand for the units they're building. It's not a free economy.

China is a command-and-control economy for the vast majority of economic growth (the "commanding heights") and wealth accumulation (government officials). This is the path of least resistance for a country that wants to rapidly modernize, like the Soviets did in the 1930s. This is also true of the command-and-control economy's educational system, which must plan out human capital (engineers, chemists, etc.) to meet the economic plan. Right?

But once these big industries are well established, new realms of wealth-creation, like innovation and service entrepreneurs, have to be able to act. Otherwise, economic growth stagnates. While this follows a slowing of new manufacturing capacity (and scale of product production), this can be a new beginning of economic expansion that creates merit-based upward mobility. Increased growth is driven by creativity and radical new efficiencies, also driven by the entrepreneurial spirit of an innovative, ambitious middle class. Command-and-control doest work here, because creative people don't fit neatly into the central planning box.

An enterprising middle class that independently bears economic risk is going to demand increasing autonomy, commensurate with their economic contribution. They'll want to get rich because they created the value. Horrors!

This puts the emerging, independent entrepreneurial class in competition with big industries and bureaucrats for control over a new economy driven as much by robust microeconomics as it is macroeconomics. But bureaucrats don't have a sense of the dynamics of microeconomic growth. In fact, they are distrustful because it threatens their power, status and comfort. This pits government types against "pursuit of happiness" types. I don't think that's going to go well. It never does.

I'll leave it to you to decide who Tom Friedman and Paul Krugman side with. After all, look who they advise.

But yes, we are ruled by economists. The dismal science has pronounced a theoretical, dismal recovery. Talk to businesspeople and families trying to make budgets work with a 23% rise in food prices and $3.79/gallon gasoline. The "quants" are in charge, and their data sets give them predictions and recommendations that don't reflect the reality on the ground. I wonder if the Fed even reads the "beige book" anymore. After all, quantitative data doesn't talk back.


Ares Olympus said...

Ugh, I accept we are all Keynesians now, and fiat money makes economists and bankers kings and wizards, and as soon as we try to overthrow our overlords, they'll be ready to ask for another $10 trillion dollar ransom of we want a functional financial system.

I don't see any reversal except global economic collapse and our only strength is "sovereign debt" and we've not even begun our printing frenzy.

I accept the Chinese may take over the world someday, but it won't be in the wasteland known as mainland China.

Its actually very good that China's debt bubble will burst before ours, and maybe it'll give us some ideas, but I don't see how you pass through what's going to happen without a political revolution.

Maybe China's cities will be abandoned, and the farmers will go back to the land? And maybe that'll be our future too after 2050 or whenever the last giants finally fall.

Lastango said...

"China does not exemplify a small government. It does show what can happen when government officials are smart enough to allow the private economy to do what it does best-- to create wealth-- without interference."

I think that's partly true. IMO, most of China's growth is a government-mediated pyramid of development-related debt and fraud. That's why wealthy Chinese are busy sending their families and the money they stole abroad. Like Russia's corporate mobsters, they are snapping up premium real estate in the US, UK, and Australia.

Their ill-gotten gains will be safe on the day China's government, under pressure to throw a bone to a vast, restless underclass, discovers the expediency of ferreting out corruption.

Jocker said...

America is an oligarchy, not democracy. The new Princeton research shows it: https://www.princeton.edu/~mgilens/Gilens%20homepage%20materials/Gilens%20and%20Page/Gilens%20and%20Page%202014-Testing%20Theories%203-7-14.pdf

Dennis said...

For your edification: https://www.youtube.com/watch?v=a0nsKBx77EQI rue the day when it was decided that economics was a science, social science, instead of an art. Far too much depends on a rational seller and a rational buyer which seems not to apply to much of what people buy or sell. Trying to control what people are allowed to buy or sell only leads to failure. No matter how intelligent the group of people selected to run the economy they can never correctly select what people desire.

Jocker said...

What You buy, and what You don't buy is a question of culture, and marketing. And, if marketing artists have enough money, what You buy is a question of culture created by marketing. What else - it is a question of construction of banking system, money creation etc. See history of "bank of England".