Why Macroeconomists Are Particularly Obtuse

Consider The Economist’s Romer roundtable: Debt will keep growing.

Not one macroeconomist acknowledges what I believe to be the true cause of the current collapse of effective demand: the extreme skewness of the income distribution and the attendant indebtedness and inability to spend at previous levels of the bottom half or better of the household income distribution. My reference rant on this subject is here.

The macroeconomists keep talking about “monetary stimulus” and “fiscal stimulus” as if they’re talking about stepping on the accelerator of a gasoline internal combustion engine - except that the engine is running on one cylinder, and if they “prime” the engine, all the gasoline is only going to fire on one cylinder, the one that’s getting the gas—in terms of this metaphor, the rich folks at the top of the currently neo-feudal pecking order.

The fiscal and monetary stimuli of the Great Depression failed to make the income distribution more equal, and failed to reduce unemployment to reasonable levels. Most households weren’t participating in the flow of income to a sufficient degree for that to happen.

It’s time for the policymakers to realize that the economy is in the middle of a vast transition from a debt-financed consumption-heavy economy to one that is higher saving and more investment oriented. That’s a big change, one that will take years. Businesses aren’t going to want to invest in capital formation for consumer markets when they won’t know what the prospective returns are until we burn off some of our excess capacity and consumption patterns stabilize, in sum and in composition, in some new configuration.

It took World War II to equalize the American income distribution last time, a frightening thought. I have no idea what it will take this time.

The best macroeconomic policy right now, and the only one we can afford, is to provide honorable workfare to the growing ranks of the unemployed—in part so that they do not become radicalized and alienated from America—and health benefits so that we don’t compound the losses of the current slump with avoidable sickness.

Macroeconomics in toto—the academic work plus the way it has entered policy—is a joke. The Keynesians misinterpreted Keynes in the 1960s to fund a guns-and-butter expansion that blew up prices; somebody told Richard Nixon that putting on price controls while the Fed was pumping up the money supply would help cure the Sixties inflation. We suffered through Gerry Ford and Jimmy Carter relearning the lesson of monetary history that to stop an inflation you have to slow down money growth, and Jimmy appointed Paul Volcker in 1978 to do that, ensuring that he, Carter, would be a one-term president.

Ronald Reagan came in and took credit for Carter’s decision, saying “stay the course,” and took advantage of the schadenfreude generated among the majority of the population to lower tax rates on the rich in the massive con known as “supply side economics.” (The tax cuts were supposed to reduce the federal deficits, but instead, Reagan started the growth of federal debt on the meteoric rise that George W. Bush consummated with his massive tax-cuts-for-the-rich-and-a-stupid-war-to-boot that have put us so deep in the hold.) And at every step, a credible, academically certified macroeconomist or ten has stood ready to offer “proof” of why these were going to be the right policies.

It’s time to give the macroeconomists some time off, a collective sabbatical, perhaps. Let’s concentrate on people, the American people, by providing, quite simply, a means for them to survive the crisis that was not of their own making; by providing a livable dole, as they call welfare in Europe, in the form of workfare, while these people look for jobs in a recovering private sector. Let’s not plunge the federal budge into massive deficits with pork-barrel projects that will provide yet another opportunity for the massively corrupt, money-compromised federal government to prove how corrupt it is in handing out taxpayers’ money.

There are 25 million unemployed and underemployed people in America right now. That number could easily double within five years.

Because if we’re taking care of the people, won’t the rest work itself out? I can’t get on board with the ultra-conservatives who say “do nothing,” because it is plainly evident that doing nothing will cause human misery, waste of productive potential, and ultimately, I believe, a revolution or severe repression in the United States of America.

But listening to macroeconomists talking about the dangers of “withdrawing the stimulus too early” makes me gag. So far the stimulus has done very little for the unemployed. Look at who got the big windfalls from the banking crisis! Goldman Sachs and a host of rich bankers! Who’s going to get the rich government contracts that will come with the stimulus? Beltway insiders, friends of the Democrats!

More direct aid to the unemployed may not do anything to equalize the income distribution. More and more, I think such an outcome is a quasi-mystical occurrence that requires a national crisis (or not—we could settle into neo-feudalism).

But let’s not become a nation of debt-slaves more than we already are. America was the world’s greatest creditor in 1930—now we’re the greatest debtor. Substantially more debt—which caused the problem we’re in now—could sink us. Anyway, you can’t trust the macroeconomists.

Bail out the people directly. Give them honorable work and a means to survive a crisis that is likely to last a decade. The people know what to do with the money. They will spend it well. Keep the government and the macroeconomists du jour out of it.

Comments

[Roger Knights:]

Here's my fuller-employment suggestion. Since the gov't. is throwing money at make-work projects and infrastructure improvements, it seems to me that there's a project that could get under way much faster, with less likelihood of fraud or ineffectiveness than the ones I've been reading about. Namely, the gov't should offer to pay for home-improvement projects for home-owners in exchange for a share of future profits on the sale of the house. This would in addition stimulate lots of economic activity, would upgrade the country's housing stock, would make life pleasanter for home-owners and their neighbors (who'd live in an upgraded neighborhood), and would be a good investment for the gov't. in the long run. It would also be politically popular (assuming it would work). (There are certain desirable home improvements that wouldn’t require skilled labor, such as adding fencing, and improving home security, insulation, and earthquake protection. Millions could be hired to do these tasks nearly immediately.)

This technique could also be used to fund attic fans, south-side awnings, white-painted roofs, and heat pump installation. The US needs to cut its energy consumption, and a little governmental nudging--or even frog-marching--is OK to get us there. (Provided the solution it is peddling WORKS.)

Jun 21 05:38 AM

[Shalom Hamou:]

For once someone who does understand macro economy: never seen that before! I decided immediately to follow you!

My article Greenspan Conundrum and Income/Wealth Disparities says exactly the same thing with other words:

seekingalpha.com/artic...

Keep up the good job!

Jun 21 08:14 AM

[Ferdinand E...:]

When I began to read this article I found myself wondering if this was some kind of nut-briefing.. But when I saw the word 'workfare' I immediately tuned in. Milton Friedman once commented on workfare (or something like that) and turned it down flat, which made it clear to me that it was a concerpt with real possibilities.

In Sweden workfare would be a reality if it was not necessary to send billions to parasites in Brussels (the EU) and to stone-age countries so that they can buy weapons and plane tickets. But to me a flexible workfare program is a solution that we should be trying. Not just in Sweden, but in every country. I think that at one time the expression was that the government would be the employer of last resort. And, of course, workfare salaries would be less that 'free market' salaries.

Jun 21 09:44 AM

[American in...:]

It's a not convincing argument. As I recollect, the savings of the rich is not much higher than five percent. So increasing income inequality in America does not affect aggregate demand.

You would have a point if higher incomes were associated with higher savings rates. But I don't believe the evidence supports that claim.

The simple truth is that the rich spend they get and rest of us spend what we don't have.

Jun 21 10:08 AM

[Alphameister:]

I'll take the brilliant and venerable Milton Friedman, along with other macro-economists who share his free-market philosophy, over this author and most of those economists who ply their trade in the halls of DC.

Jun 21 11:50 AM

[Gregman2:]

Excellent post. "Not one macroeconomist acknowledges what I believe to be the true cause of the current collapse of effective demand: the extreme skewness of the income distribution and the attendant indebtedness and inability to spend at previous levels of the bottom half or better of the household income distribution." Kevin Phillips wrote about this in "Wealth & Democracy."

Jun 21 01:00 PM

[milkchaser:]

I don't think that Carter had much choice but to appoint someone like Volcker, since his first choice Burns had been unable to contain inflation. Even Carter had to face reality.

There was a notable rise in corporate profits after Reagan's tax rate cuts, although deficits were quite high. Given the outcome of the Cold War, defense spending was arguably justified. We reap the dividend today and for the last two decades. Reagan deserves more credit than the author gives him.

Intelligent folk disagree as to the stupidity of the war. Time will tell. One wonders whether the millions of Iranians risking life and limb to protest in the streets today would be so emboldened had they not the examples of democracies to the east and to the west, brought to being by wars the author declares to be stupid. Given that the rulers of Iran undoubtedly form a fierce enemy of the United States, examples of democracy may prove to have been well worth the cost in blood and treasure if they bring about another democracy and end yet another brutal tyrannical power is brought down. I submit they are worth the cost even if they do no more than they have done: inspire peaceful demands for freedom and democracy from amongst an oppressed people.

As for Bush 43's tax rate cuts, tax revenues did rise with the economy from 2003-2006, and the ensuing deficits pale in comparison to this year's deficit (and those predicted over the next 10 years). And yet, the President behind those massive deficits, which make the Reagan Era deficits look small, is not mentioned by the author: an odd omission.

Jun 21 01:14 PM

[1RuleNoRules:]

WHOA!!
Tax revenue double under Reagan because of his tax cuts. Spending was philosophically entrenched and controlled by mostly a democratic congress. The Reagan Administration was taken to the whipping post(in the broadcast media) on every proposed reduction in future spending, it was ridiculous, reports of future cuts in spending would be backdropped by poor hungry children sitting on a porch in impoverished W.VA. Between Bush and Reagan wee balanced budgets and $0 debt.
Thank Ronald Reagan and the wave of supply side congressman that followed his lead.
Please eliminate spiked Kool-Aid from the disscusion.

Jun 21 01:18 PM

[milkchaser:]

I have never understood how the ability of a rich person to buy ever more extravagant goods changes the inclination or ability of the poor to buy more or worse quality oatmeal or laundry soap.

Nor are we likely to find the occupants of the upper quintile this year in the same quintile next year. For every one who moves from the nth percentile to the [n-1]th percentile, there is one moving up to take his place (a mathematical tautology that explains nothing, except that the rich do not always get richer). If the one moving up the scale manages to create more wealth for himself than the other one being crowded out, how exactly does that hurt all of the rest?

Envy explains why some people watch income distribution and envy produces nothing, certainly not an explanation of declining demand.


On Jun 21 01:00 PM Gregman2 wrote:

> Excellent post. "Not one macroeconomist acknowledges what I believe
> to be the true cause of the current collapse of effective demand:
> the extreme skewness of the income distribution and the attendant
> indebtedness and inability to spend at previous levels of the bottom
> half or better of the household income distribution." Kevin Phillips
> wrote about this in "Wealth & Democracy."

Jun 21 01:42 PM

[milkchaser:]

I meant to say that we would not find all of the same occupants of the upper quintile in that same quintile the following year. Certainly most stay put from year to year. Still, over time, in a growing economy, many are crowded out as more productive people rise to displace them.

The author praises the war years for tending to flattening income distribution. Those years were years of privation and rationing: Stamps for sugar, flour, tobacco and gasoline. Yeah, let's go back to that.

Jun 21 01:49 PM

[Leftfield:]

Looks like the demise of the middle class to me has gone on for decades and accelerated sharply. if you eliminate government work you really show a tiny group and they have no security like government or private workers in the past.
All along I thought a government safety net was a given if we crashed like the 30's or in 08. This time there was TARP handed to Wall St. fast enough to make a street punk blush. And more pork and bailouts of cronies. This is not the safety net for average people we may not be able to afford when it's really needed (probably now) as our national balance sheet gets looted.
It's all about grabbing the taxpayer by the unmentionables and expecting their hearts and minds to follow. The guilty include academics who follow fads and government grants to the point of complete uselessness (macroeconomists).
We were founded upon enlightened principles by enlightened leaders. The citizenry had recently fled tyranny and were sufficiently willing to sacrifice to fight it here. I don't know if we can get it together again in America. The remains of the middle class are too often government workers including educators, professionals and academics. All appear willing to justify themselves at everyone else's expense. The rich are all about being rich by any means necessary. The poor are generally dysfunctional. Leadership has been appalling to date. I see only serial casting out of incumbents and praying for a miracle or we descend to feudalism.

Jun 21 03:54 PM

[Benign Brod...:]

1rulenorules: Reagan rasied taxes, that's why revenues went up:

"The only problem with this analysis is that it is historically inaccurate. Reagan may have resisted calls for tax increases, but he ultimately supported them. In 1982 alone, he signed into law not one but two major tax increases. The Tax Equity and Fiscal Responsibility Act (TEFRA) raised taxes by $37.5 billion per year and the Highway Revenue Act raised the gasoline tax by another $3.3 billion.

"According to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history. An increase of similar magnitude today would raise more than $100 billion per year.

"In 1983, Reagan signed legislation raising the Social Security tax rate. This is a tax increase that lives with us still, since it initiated automatic increases in the taxable wage base. As a consequence, those with moderately high earnings see their payroll taxes rise every single year.

"In 1984, Reagan signed another big tax increase in the Deficit Reduction Act. This raised taxes by $18 billion per year or 0.4 percent of GDP. A similar-sized tax increase today would be about $44 billion.

"The Consolidated Omnibus Budget Reconciliation Act of 1985 raised taxes yet again. Even the Tax Reform Act of 1986, which was designed to be revenue-neutral, contained a net tax increase in its first 2 years. And the Omnibus Budget Reconciliation Act of 1987 raised taxes still more.

"The year 1988 appears to be the only year of the Reagan presidency, other than the first, in which taxes were not raised legislatively. Of course, previous tax increases remained in effect. According to a table in the 1990 budget, the net effect of all these tax increases was to raise taxes by $164 billion in 1992, or 2.6 percent of GDP. This is equivalent to almost $300 billion in today's economy.

source: www.nationalreview.com...

Jun 21 06:12 PM

[mgcolin:]

I was no fan of Ronald Reagan...and it's tough to handicap all these what-ifs to say whether a set of policies were "net-net" right.

I think Obama/Geitner are definitely looking worse "net-net" for the country

Worst thing I feel Obama, Geithner are doing is putting pressure on Bernanke to do the wrong things...like keep the stimulus on and print more and more money to distort long interest rates longer...all designed to reinflate the asset bubble.

My Simplistic model:
Lessons from the 60's (SPEND), 70's (INFLATE), 80's (SPEND&BORRow), 90's (GROW, don't pay down debt), 00's (SPEND&BORROW), '10's (INFLATE or PAY - no more debt available)

So unless Bernanke removes the gas now, we will face massive inflation. I think the game is done already, I just need help figuring out how to play a complete collapse in late 2010 or early 2011.

Inflation is a monetary phenomena not a supply and demand phenomena. Demand will ALWAYS go up if there are no consequences for defaulting on debt or paying bubble value for asset...like completely losing your equity in a company, house, or stock. Just because there is momentarily no demand for anything doesn't mean that demand won't skyrocket if the wealth effect can somehow be recreated.

Obama and Geitner are pressuring Bernanke to let them continue to artificially reinflate the bubble. And they continue to put 'regulations' in place that really just protect the banks and speculators.

The banks should have been wiped out...nationalized, Sweden.
The S&P should have dropped to 6X trailing 10 year earnings (400)
The fed should not have printed so much money.
We should have suffered some of the consequences, not stolen from the future.

In the 30's asset values went down meaningfully and there were real consequences for taking on debt, taking too much risk...like losing your deposits in a failed bank, losing your house, family everything. Speculators suffered in the 30's...even the RICH were wiped out...you think Obama and Geitner want the rich to suffer meaningfully right now.... unfortunately the die is cast..these guys are getting the last fumes out of a worn out story...and the foreigners are figuring it out.....paying for our sins would have set up the country for 10 years of low inflation growth, but Obama and Geitner want the easy way out....which means inflation.

If by late 2010 there hasn't been any improvement in the Healthcare debacle, the S&P will be at 300 and inflation will be 12% calculated as conservatively as they can get away with....the dollar will be plummeting during election time and interest rates will need to go to 20%.

Some companies will be fine, diverse multinationals with scale benefiting from weak dollar....but the US economy will be a basket case until rates skyrocket, asset levels (houses/stocks) return to realistic levels and the debt holders are wiped out.

So 12% inflation, 20% interest rates, very cheap stocks...that's what 2012-14 will look like. It won't be the end for the US, but it will be the last few years, and by far the worst, of the US' Lost Decade and a half. It will be the seventies....but if you're in cash now...then Asia, commodities and foreign currencies you'll do fine over the next 10 years.

Jun 21 09:11 PM

[Rick Caird:]

Your arguments are exceptionally weak. First you claim, with no support at all that except one chart (correlation is not causation) that the distribution of income is related to the strength of the economy. Second, you do go through a list of tax increases that Reagan signed, but you neglect to look at the actual result. The result was taxes as a percentage of GDP were 19% in 1980 and 18% in 1990. Since GDP grew during that decade and since we have a progressive tax system, one would have expected, with no changes, that the percentage would have increased beyond 19%.

Third, you neglect to mention that Reagan accepted the tax increases with the promise from the Democrats they would cut spending. They lied.

Rick Caird


On Jun 21 06:12 PM Benign Brodwicz wrote:

> 1rulenorules: Reagan rasied taxes, that's why revenues went up:
>
>
> "The only problem with this analysis is that it is historically inaccurate.
> Reagan may have resisted calls for tax increases, but he ultimately
> supported them. In 1982 alone, he signed into law not one but two
> major tax increases. The Tax Equity and Fiscal Responsibility Act
> (seekingalpha.com/symbo...) raised taxes by $37.5 billion
> per year and the Highway Revenue Act raised the gasoline tax by another
> $3.3 billion.
>
> "According to a recent Treasury Department study, TEFRA alone raised
> taxes by almost 1 percent of the gross domestic product, making it
> the largest peacetime tax increase in American history. An increase
> of similar magnitude today would raise more than $100 billion per
> year.
>
> "In 1983, Reagan signed legislation raising the Social Security tax
> rate. This is a tax increase that lives with us still, since it initiated
> automatic increases in the taxable wage base. As a consequence, those
> with moderately high earnings see their payroll taxes rise every
> single year.
>
> "In 1984, Reagan signed another big tax increase in the Deficit Reduction
> Act. This raised taxes by $18 billion per year or 0.4 percent of
> GDP. A similar-sized tax increase today would be about $44 billion.
>
>
> "The Consolidated Omnibus Budget Reconciliation Act of 1985 raised
> taxes yet again. Even the Tax Reform Act of 1986, which was designed
> to be revenue-neutral, contained a net tax increase in its first
> 2 years. And the Omnibus Budget Reconciliation Act of 1987 raised
> taxes still more.
>
> "The year 1988 appears to be the only year of the Reagan presidency,
> other than the first, in which taxes were not raised legislatively.
> Of course, previous tax increases remained in effect. According to
> a table in the 1990 budget, the net effect of all these tax increases
> was to raise taxes by $164 billion in 1992, or 2.6 percent of GDP.
> This is equivalent to almost $300 billion in today's economy.
>
> source: www.nationalreview.com...

Jun 21 10:38 PM

[Rick Caird:]

On Jun 21 10:38 PM Rick Caird wrote:

> Your arguments are exceptionally weak. First you claim, with no
> support at all that except one chart (correlation is not causation)
> that the distribution of income is related to the strength of the
> economy. Second, you do go through a list of tax increases that
> Reagan signed, but you neglect to look at the actual result. The
> result was taxes as a percentage of GDP were 19% in 1980 and 18%
> in 1990. Since GDP grew during that decade and since we have a progressive
> tax system, one would have expected, with no changes, that the percentage
> would have increased beyond 19%.
>
> Third, you neglect to mention that Reagan accepted the tax increases
> with the promise from the Democrats they would cut spending. They
> lied.
>
> Rick Caird

Oh, and my source is: www.taxpolicycenter.or...

Jun 21 10:41 PM

[six:]

1. The American people most certainly are at fault for the current state of affairs. They bought homes they knew they could not afford, they used those homes like an ATM, they ran up their credit cards buying crap they never needed.

2. Inflation is not even a remote possibiltity until wages increase. Any bets on when that will happen?

3. If you want to target the rich then do it with an estate tax that ensures the wealth of America does not become the source of a new royalty. Use the estate tax to eliminate or greatly reduce the income tax. Pay people to make money not inherit it.

Jun 22 12:49 PM

[The Geoffster:]

What a pile of crap. This is America. Read the Constitution and quit your idealistic attempts at social engineering. Get the government out of the way and let the free market flourish. I'm sorry if it hurts your feelings that some people do better than others. I wish I could play golf like Tiger Woods and invest like John Paulson. Equalizing outcomes spreads misery and destroys initiative. People are not equal and never will be. Water seeks its own level. We would all be better off if the government concentrated on guaranteeing our Constitutional rights instead of reducing us to the lowest common denominator. TO EACH ACCORDING TO HIS ABILITY.

Jun 22 01:08 PM

[cowlady:]

Soundest thing I've read in a long time. The fact that there's so little consensus tells me that this situation is unprecedented and no one knows REALLY what the heck is going on. This country has never had its "number one" status seriously challenged since WWII ended. BRIC? Yes. What we are seeing is advance capital compelled to do what it needs to in order to reinflate. We can't grow and consume and grow and consume ad intinitum. This article speaks to the notion of a momentary breath of benign capitalism based on maintenance throughout a period of reorientation, and growth as innovation rather than a bottomless pit of consumption stimulated more in the mind than by real material need. Meaningful work, natural growth that fulfills naturally-emerging needs. Trickle-down is a hoax. If all goes as it is, we canl take refuge in the exploitation of Africa to lessen the stress, but in a few decades, we'll just hit another wall and have to blow off some more steam. Then the spaghetti will be all over the walls.

Jun 22 10:05 PM

[cowlady:]

Have you worked hard all your life and then find you can't leave that life-long endeavor, in the form of capital, to your children for their children? A person lifetime of work belongs to him and to his progeny, not the government. And a person who has worked hard will have, most likely, have passed to his children, a work ethic that they will put into practice. An inheritance is also a legacy of a fine example of enterprise and diligence.


On Jun 22 12:49 PM six wrote:

> 1. The American people most certainly are at fault for the current
> state of affairs. They bought homes they knew they could not afford,
> they used those homes like an ATM, they ran up their credit cards
> buying crap they never needed.
>
> 2. Inflation is not even a remote possibiltity until wages increase.
> Any bets on when that will happen?
>
> 3. If you want to target the rich then do it with an estate tax
> that ensures the wealth of America does not become the source of
> a new royalty. Use the estate tax to eliminate or greatly reduce
> the income tax. Pay people to make money not inherit it.

Jun 22 10:22 PM

[antiquary:]

"I have never understood how the ability of a rich person to buy ever more extravagant goods changes the inclination or ability of the poor to buy more or worse quality oatmeal or laundry soap."

A bad comparison. What the rich mainly spend their money on is not lifestyle (and let's also point out that many of their main capital luxury purchases, like vacation homes, are resaleable, usually at a profit) but on staying rich or becoming richer. They buy income producing property (tangible and not) and they buy political influence. Live on less than you take in, invest the rest, and when you reach the point at which your day-to-day expenses are paid by investments, your income takes off, so long as your expenses are kept constant. By this, wealth inequality becomes income inequality.

By contrast, poor people, who are often stupider, poorer educated and-- this is key-- more incapable of looking past the immediate, don't have the desire or ability to live on less so as to invest the rest in income producing property. They have emotion, which brings both pride, a quality so manipulable by advertising, and children. And the closer they are to the subsistence level, the more power their employers have over them, for they can't say no. Which means they won't get raises. Their ignorance is, in effect, money in the bank for everyone higher up.

All of which is not to say I'm anti-capitalist. Capitalism as we practice it is the greatest evoker of overall virtue in history. I'm a distributist (see en.wikipedia.org/wiki/...). The great G.K. Chesterton said it best: "Too much capitalism does not mean too many capitalists, but too few capitalists." This has to be solved by real teaching of financial education in schools.

Jul 20 06:32 PM