Can We Really Guide the Economy?

Ryan Avent says that he thinks the "plausible range of economic outcomes is, at the moment, quite wide indeed", and wonders whether "the size of this conceivable range is actually reflective of potential outcomes, rather than simple ignorance":

If it seems like things could go really well or really poorly, is it because outcomes are very dependent on our actions or because we have no idea what's going on? And I suppose that if you want to understand the different approaches to policy advocated by liberals relative to libertarians, that question, and its answer, is key.

The easy answer is that this is not "simple ignorance". Studies have shown repeatedly and convincingly that the range of possible outcomes is nearly always greater than you think, not smaller. Economically speaking, actual results regularly come out quite far away from even pretty near-term forecasts, which is one reason why asking economists (or journalists, for that matter) to predict when we're going to come out of recession is an exercise in futility.

On the other hand, that doesn't necessarily mean that outcomes are very dependent on our actions. What action, for instance, did we take to send the price of oil plunging by $100 a barrel in the space of a few short months? That's the kind of thing which can only happen in a highly complex and therefore wholly unpredictable system.

So I don't think of liberals' policy approach as being deterministic -- if we do this, then the economy will do that. Instead, I think of it as working the other way around: if the economy does this, then we should do that. Right now, the economy is tanking, and so we should apply a large dose of stimulus. We can't predict with any accuracy what the results will be, but there's a very high chance that they will be better than if we did nothing, which is the default libertarian position.

Comments

[Smarty_Pants:]

"but there's a very high chance that they will be better than if we did nothing"

Perhaps for the short run, but what about after that? If history is any guide, we may wish we had done nothing instead:



[The] adventure in paper money ended badly for France in general and the monarchy in particular. On September 29, 1790, another 800 million [paper] assignats were authorized. By 1791 another 600 million were run off.

In 1791, mobs stormed the Paris food shops looking for bread. The government imposed price controls with the threat of the guillotine for any merchant not in compliance. The French state decreed that any person selling gold or silver coins, or making a difference in a transaction between paper and gold, would be imprisoned in iron for six years.

By May 1794, any person who even asked if payment was to be made in gold or paper was subject to the death penalty.

By 1796 the situation was in such chaos that the French burned all their paper money and the means of [its] production:

“on February 18th, 1796, at nine o’clock in the morning, in the presence of a great crowd, the machinery, plates and paper for printing assignats were brought to the Place Vendome and there, on the spot where the Napoleon Column know stands, these were solemnly broken and burned.” (Andrew Dickson White, Fiat Money Inflation in France.)

Jan 09 12:49 PM

[Trading to Win:]

Best phrase: Current Events From Future Trends.

Humans have a strong tendency toward optimism. One could say Hedonism.

Skepticism is, alas, a dying creed - especially in the mainstream media. Bulls always greatly outnumber bears. Bears are made to look slightly wacky. They are accused of being doom-mongers. Dr. Doom. How about Dr. Boom.

Jan 09 01:51 PM

[CautiousInv...:]

Ryan Avent says that he thinks the "plausible range of economic outcomes is, at the moment, quite wide indeed", and wonders whether "the size of this conceivable range is actually reflective of potential outcomes, rather than simple ignorance":


Other than quantitative easing, which cannot be calibrated to specific outcomes, nothing else is in place; only the broad outlines of the stimulus package have been released. So, I would think the range of possible outcomes to be extremely broad.

Jan 09 02:36 PM

[tinman:]

"The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences."
-- Winston Churchill

or

"Chickens come home to roost; the bigger the chicken, the longer it takes."

Jan 09 03:05 PM

[investor88:]

Good article and comments. We assume a bull market yet! Again we must let the market tells us not the other way round as we plod through the journey ahead.

Jan 09 08:15 PM

[Moon Kil Woong:]

At the cost of a Trillion you can stem the flow of job losses for a quarter or two. At $1.2 trillion losses annually and $10 trillion in debt (about 33% GDP) is it really worth it? It is enticing and looks good to throw a bone or two but we can't keep doing it forever.

We get only 1 chance at this, isn't it best to do it when we know it works, once the economy hits a bottom and needs a stimulus to get us out of the rut? This is what Keynsian economics is all about. We violate his principals buy running mass deficits in good times. Then we ascribe to it in the bad times. Current economists can call themselves Keynsians but really unless they chastise the past US hyper stimulation policy they are just more immature socialists cloying to the government to fix all ills and feed them sugar even when the sun is shining and the market is up.

Shame be on us for sacrificing the prosperity of our children when we don't need to and sacrificing the security we could have received in a down economy. Keynes would be ashamed. Truly ashamed.

Jan 10 05:46 AM

[morph366:]

One of the features of highly complex systems is that large effects can results from small causes. This can also be captured in terms of the "Tipping point" metaphor. The converse is also true that large causes may have small effects. This can be compared to the massive monetary easing and the Keynesian notion of "pushing on a string".

Jan 10 12:26 PM