The Economics of Unreality

One of the stranger things about modern life is the rise of economics as a quasi-religion in the West. In another age, the rulers would run to the local witch doctor or oracle before making a big decision. Closer to our age, leaders would pray for guidance, maybe talk with a holy man. Today, the pols run to economists for advice on everything.

What makes it particularly humorous is the shamans of economics are more wrong than the old witch doctors. The reason is the modern economist really thinks he is a man of science, while the old witch doctor knew he was a fraud. Of course, the witch doctor also knew he faced the sword if he went too far out on a limb so he was careful to never get carried away.

Economists have no such fear of being wrong as being wrong is good for the guild. The more things get screwed up due to their bad advice, the better the employment prospects for the profession. Lucky for them, they get most everything wrong so the racket is a serpent eating its tail.  A good example is here in this Wall Street Journal article.

Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy.

But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. Debts are harder to pay off without inflation shrinking their burden. For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns.

Full employment? No one walking around America thinks we are anywhere near full employment. Anyone older than 40 should remember the booms of the 80’s and 90’s when employers were offering bonuses to new hires and employing head hunters to poach workers from other firms. That has not happened in a long time.

Of course, the labor force participation rate is at a 38-year low. Some of it is certainly due to demographics. We have more old farts on the dole due to the boomers hitting retirement, but that’s just starting as the first boomers hit retirement. The stunning truth is there’s an employment boom among the geezers. It is the young struggling with the stagnant job market.

That’s one bit of unreality. The other bit is the zero inflation stuff. I’ve gone around and around with economists about chain weighted inflation and the logic applies here. Granny may have substituted dog food for ground beef, but that does not mean inflation is flat. Similarly, every retail container has shrunk over the last decade, even though the prices are generally stable. Shrinkflation is a real thing we all see every day of our lives.

Putting aside those two complaints, which are always dismissed by economists as ridiculously based in observable reality, there is the confidence they have even in the face of being wrong. Exactly no one in the economics profession saw the crash coming and now they can’t figure out why they can’t re-inflate the world economy. But, being wrong is juts proof we need more economists!

The site where I saw this story linked had a comment from someone mentioning The Modigliani–Miller theorem in rebuttal to some other comment. For those unfamiliar with that particular tarot card, here’s the definition:

“The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.”

Therein lies the fundamental problem with economics and why it is not a STEM field. The entire profession is based on “all things being equal” or “in the absence of observable reality” statements that would get you laughed out of an empirical field. The only field that is close in the use of hothouse logic is climate science.

None of this is to say we should dismiss economics out of hand. In fact, the statistical study of human behavior should be a part of public policy debates. Where every economist goes wrong is in thinking he has found the philosopher’s stone once he finishes his first statistics course. As a result, the field never gets better. But when there is good money in being wrong, why be less wrong?

It is a pity because we will probably have to go through a near death experience before we figure out the mistakes. The Great Depression finally taught  the West that the money supply also includes outstanding credit. The modern economic profession is not learning anything new, despite the fact we have experienced the greatest technological leap forward since the wheel on top of a revolution in credit.

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Member

I’m not sure that anyone can figure out what will happen next. If anything should have prompted a flight to cash, it was when the EU started pulling money directly from Cypriots bank accounts a couple of years ago. Didn’t happen. If the Chicom economy goes tango uniform and the Chinese start liquidating their US real estate holdings, maybe that could start the ball rolling. West cost property tax revenues drop precipitously, a bunch of West Coast municipalities declare chapter 9 in short order and the rest of the US cities and counties decide to take a bath to liquidate… Read more »

Dutch
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Dutch

The economic numbers (unemployment, inflation, etc.) have been so twisted around by alterations in the calculation methodology in recent decades, that the results are practically meaningless. Using the old calculation methods, pre-1985, Shadowstats.com has some eye-opening figures. How about unemployment at 23% and inflation currently at 8%? It would better explain the economic trap that we are in than anything people are able to come up with these days.

Steve
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Steve

Funny, Adam Smith created the fundamentals of economics without resort to statistics. I think if he had needed statistics he would have invented it.

To be slightly fair to the profession. Unlike hard science, we don’t live in a world where you can have multiple experiments. Trial 1, cut income tax rates 15%. Trial 2, cut income tax rates 25%. Compare. And Hayek’s knowledge problem results in economists being more like the blind men describing an elephant. Only with math, ergo the pretense of knowledge.

james wilson
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james wilson

Once upon a time the monetary system was very imperfect. There were great peculiarities about it, with frequent panics and depressions. On the whole, in fits and starts the country was moving forward. But when the Federal Reserve was formed, it rained prosperity such as had never before been dreamed of, and no one wanted that to stop. It would be only fifteen years to the greatest depression in modern history. Then Pax Americana sailed the new system into perfection, until it didn’t. The Fed Zombie first protects omnipotent government, including itself. Creative destruction is dead. Destructive creation is alive.… Read more »

JohnTyler
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JohnTyler

Economics is not a STEM discipline because NONE of their theories – really, hypotheses – can be subjected to controlled experiment. There is NO way to test, under controlled conditions ANY of their hypotheses. In short, none of their theories can be proven falsifiable. Because of this, economists can always explain away why the real world application of their theories produced unintended results or results contrary to those intended, but , you will note, they never, ever consider their theories to be wrong. Also, in economics we see the absolute joke of “conservative” vs. “liberal” economics. Really ??? I thought… Read more »

Dan
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Dan

It is not at all surprising that the job market for geezers is booming. It is rare to find the competence and motivation in most of the younger job seekers that is inherent in the older work force.

stuart larkin
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stuart larkin

“It doesn’t matter how beautiful your theory is, it doesn’t matter how
smart you are. If it doesn’t agree with experiment, it’s wrong.”
— Richard Feynman

CaptDMO
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CaptDMO

Economists
Political “experts”
Humanities experts
Professional expert witnesses
Psych practitioners
Main stream Jurnolists….to name but a few (of the hyphen less)
Rent seekers. ALL of them.

Member

I am a “geezer” and I am experiencing an up tic in business. My customers like my grey to white hair, diction, promptness, and competent manner in which tasks are accomplished. The younger guys just can’t compete for the older folks dollars.

Shrinkflation – yes, when they went to 12 ounce bacon I rebelled. I will only buy the few brands left that consider 16 oz. a proper packaging of bacon. Oh, I will buy the two or three pound slabs occasionally, but never 12.oz. Never.

Andrew_M_Garland
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“[1] Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. [2] Debts are harder to pay off without inflation shrinking their burden. [3] For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns.” [1] They are beneficial, so how can they stall growth? [2,3] don’t say why. [2] Inflation doesn’t magically reduce the burden (the value of the resources) transferred in a loan, or what the lender wants to be repaid. The result of central bank promises to inflate the currency (to… Read more »