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A note about the US economy and the recent elections (yes, we’re nuts)

9 November 2009

One core reality too-often ignored in post-election analysis:  the role of the economy.  Americans tend to vote their pocketbook in elections to Congress and the Presidency.

This is nuts, on many levels.

  1. Who sets economic policy?
  2. How long between policy changes and results?
  3. How do policy-makers navigate?
  4. But at least they have economic theory to guide them!
  5. And so the American people rationally votes…

(1)  Who sets economic policy?

The most important agency setting US economic is the Federal Reserve.  The Fed can act quickly to change one of the fastest-acting economic variables (monetary policy).  “Fast” means over 6 – 9 months.  The President and Congress have little influence over the Fed, except by the slow process of new appointments — and the atomic bomb of limiting its power.

(2)  How long between policy changes and results?

Congress and the President control fiscal, regulatory, and tax policy.  Major policy changes take time to pass through the Washington sausage machine — even when one party controls Congress and the White House.   And all of these policies take months or years to take effect. 

  • Tax cuts and direct payments are fast but expensive. 
  • Most spending programs take 6 – 18 months to have full effect.  
  • Tweaks to the tax code and regulatory changes take years to have effect.

Nor are these policy levers like putting pennies in a gumball machine.  Economic policy-making is an uncertain business — not even an art, let alone a science.

(3)  How do policy-makers navigate?

Our real-time economic data is almost nil.  We have a few hard-data points (e.g., payroll withholding data, new unemployment claims, port and railroad traffic).  And lots of unreliable data, almost useless (e.g., monthly employment data, quarterly gdp and income/spending data).

Hence we know where the economy was 12 months ago.  We have reasonable guesses about the previous quarter.  We have guesses about today.  We have forecasts about the future, with a proven record of almost uniform failure to predict inflection points.

Worse, the US economy is increasingly affected by the global economy, esp changes in the emerging nations.  Their economic data ranges from poor to imaginary.  {Update:  for an example of this see “Economists Seek to Fix a Defect in Data That Overstates the Nation’s Vigor“, New York Times, 8 November 2009}

Result:  the global economy is a large and rapidly changing animal.  Operating the US economy is like sailing through a  foggy night.  No stars, no moon, with only a broken compass and hourglass.

(4)  But at least they have economic theory to guide them!

Just like ancient Kings had astrologers.  Economic theory is where chemistry was a century after Newton’s experiments with alchemy, with Lord Keynes doing for economic what Antoine Lavoisier did for chemistry.  Fortunately for 18th century Kings, their success did not depend on the accuracy of chemical theory.

In fairness to economists, molecules don’t change their behavior on the basis of chemists’ publications.

(5)  And so the American people rationally votes

…just like primitive savages in old B-movies.  If the rains come and the crops thrive, the Chief relieves every reward and honor.  But if the rains do not come, then the voters demand sacrifice!

Our with the old party!  In with the new party!

But why don’t the officials of either party respect us in the morning?

Afterword

Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

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17 Comments leave one →
  1. oldmanchronos permalink
    9 November 2009 4:34 am

    (1) Who sets economic policy?

    The most important agency setting US economic is the Federal Reserve. The Fed doesn’t have much control these days. They’re basically running a negative interest rate and can’t get the economy to budge. Foreign countries moves on the dollar mean more than the Fed.

    (2) How long between policy changes and results?

    * Tax cuts and direct payments are fast but expensive.

    There not expensive since the temporary loss of revenue is quickly made up as the economy grows. Politicians don’t like tax cuts since they then have to admit that tax policy affects consumer activity.

    * Most spending programs take 6 – 18 months to have full effect.

    Spending programs don’t really take effect. The economy stays stalled until it can absorb the burden of the government program.

    * Tweaks to the tax code and regulatory changes take years to have effect.

    Basic central planning will always fail to the market.
    .
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    FM reply: Most of this is empiraclly false. Become widely believed by repetition among people who have never taken or forgotten Econ 101. Much the same as for people believing in astrology or creationism.
    * The Fed has vast powers other than setting rates, as shown during the past 2 years.
    * Tax cuts have usually reduced tax revenue, esp during recessions (e.g., Bush’s Q2 2008).
    * There is a vast body of literature looking at experience in many nations showing that well-designed fiscal policy has effects, although often not on the desired scale — and with a heavy cost.

    “Basic central planning will always fail to the market.”

    Wonderful how dogma seizes hold of people’s minds, despite the lessons of history. With such things “always’ is avoided by sensible people, as is the certainty displayed in this comment.

    I’m not interested in re-hashing these Econ 101 basics on FM site yet again. Esperience has taught me that no matter how many facts and citations I give, true believers just endlessly repeat the dogma they’ve been taught. Take it to one of the many websites run by economics professors. Citations are welcomed here, but that’s it.

    In the past month or so I’ve had hundreds of comments saying that
    * Scientists speaking about climate science must be believed, unless they’re skpetical of AGW (e.g., many solar scientists). Then they are evil to be ignored.
    * Torture of suspected enemies is wonderful and should be applauded by all good Americans.
    * Most recently, public attention to the problems Americans in uniform and vets is un-American.
    I am out of patience. Pehaps I’ll be more tolerent next month.

    Like

  2. oldmanchronos permalink
    9 November 2009 4:54 am

    FM: “(4) But at least they have economic theory to guide them! Just like ancient Kings had astrologers. Economic theory is where chemistry was a century after Newton’s experiments with alchemy, with Lord Keynes doing for economic what Antoine Lavoisier did for chemistry.

    A bit hard on the alchemists. These poor guys lived at a time where free thought could get you burned at the scientific stake. They had to pretend for the kings and Church.

    As for economic theory, I find the subject amusing. At the micro level, it’s all about responsibility. Balance your income to your expenses and debt. At the Macro level, except for capitalism, all common sense is tossed out the window.
    .
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    FM reply: I believe that’s far too harsh. Lots of progress has been made in macro during the past century. But the complexity is immense, so the current theory is immature. Unfortunately economists are — like astrologers — called upon to make forecasts beyond their capability. Of course, its their rice bowl. They could say “I don’t know.” But that does not pay well, and earns the emnity of their peers.

    Like

  3. oldmanchronos permalink
    9 November 2009 5:23 am

    The Fed at present is running a negative interest rate and printing money. This isn’t really in dispute. The feds rate is zero and the dollar continue to lose value. Pre Obama there was about 800 billion in hard currency in circulation. The Fed has admitted to printing 2 trillion more. The White House may not have it all in circulation yet (see FDR playbook).

    It’s funny how you can take issues with “Basic central planning will always fail to the market.”

    300 million Americans making free choices in their lives is going to make the market far more efficient than a few bureaucrats issuing regulations passed by politicians paid for by lobbyist.

    No matter how much central planners work to control the market, the market will still exists.
    .
    .
    FM reply: As I said, please don’t read us tracts. Can you give citations supporting your beliefs? If not, please do as I ask and go discuss Econ 101 with a professional.

    Your opening remark ignores what I said in response to the first time you said it. Repeating it does not help.

    Like

  4. oldmanchronos permalink
    9 November 2009 5:33 am

    FM reply: “I believe that’s far too harsh. Lots of progress has been made in macro during the past century.

    You remember the Great Depression of 1920. It had all the dynamics of 1929. The Difference was government didn’t try to “fix” it. Macro economics is just an extension and justification of anti freedom political systems.

    What took America from an outpost to the biggest economy in 200 years is the freedom of its people. China has been around 5,000 years and most of its people live in squalor.
    .
    .
    FM reply: Last warning. No more religious tracts. Citations only.

    Like

  5. oldmanchronos permalink
    9 November 2009 5:45 am

    FM reply: “As I said, please don’t read us tracts. Can you give citations supporting your beliefs?

    Based on your post, citations would be the exception to the rule. I didn’t realize you wanted citations to present day public domain data. The Fed and The White House aren’t hiding the fact that they are economically neutered.
    .
    .
    FM reply: Most posts on this site link to some from of expert analysis. Nor is anyone of consequence saying that the government is “economically neutered.” Please stop saying these things without providing some supporting evidence.

    Like

  6. oldmanchronos permalink
    9 November 2009 7:36 am

    I don’t get you. You list the site as “a discussion about geopolitics, broadly defined, from an American’s perspective”

    Yet you respond: “Last warning. No more religious tracts. Citations only.

    What took America from an outpost to the biggest economy in 200 years is the freedom of its people. China has been around 5,000 years and most of its people live in squalor.

    If can’t find a single reference to religious dogma explaining the difference between America and China. Just Freedom.

    China developed chroming steel and Mediterranean cultures developed the differential over 2,000 years ago. Why aren’t these cultures the leading economies of the world? Do you wish not to answer these questions because of your need to believe in a central human authority?

    You have chosen the name of a Fabius Maximus, a dictator. I doubt Fabius required citations. He was free to kill those who failed to meet his standards.
    .
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    FM reply: There is no content to these religous tracts, nothing connecting them to specific issues of macroeconomics. If you can provide citations to experts supporting your position, fine. Otherwise future comments like this will be deleted.

    Like

  7. 9 November 2009 4:59 pm

    >What took America from an outpost to the biggest economy in 200 years is the freedom of its people.

    OMC: One cannot make that type of a statement authoritatively. I believe this is an example of Fabius’s call of “dogma”. Can you prove the above? Note that I personally believe this is one factor that helps to explain why the U.S.A. became successful.

    However there is also one little fact that you fail to mention. While the last empire (Europe) was destroying itself, the U.S. took to massively gearing up industrial production, arming itself, fighting, winning, and eventually becoming the last economic power standing. At the end of the war Europe and Japan were bankrupt. Who else was going to run the world economy and become the economic superpower?
    .
    .
    FM reply: Exactly. Among the biggest success stories of the past century are Japan, Singapore, and China. None are democracies in any meaningful form, all rely on mixed economies with a large degree of central planning. (Note: Japan was governed for 60 years by the Liberal Democratic Party, which was (as the saying goes) not liberal, democratic, nor a political party.

    Like

  8. 9 November 2009 7:47 pm

    This: “If they can get you asking the wrong questions, they don’t have to worry about the answers.”
    — Thomas Pynchon

    And this: “An approximate answer to the right question is worth a great deal more than a precise answer to the wrong question.”
    — John Tukey

    are a pretty good summary of our problem. Here: “My Per Capita Talk on Debt” is a new post {video} by Steve Keene about the current crisis. The video is worth watching.

    Like

  9. 9 November 2009 8:09 pm

    Just like ancient Kings had astrologers. Economic theory is where chemistry was a century after Newton’s experiments with alchemy, with Lord Keynes doing for economic what Antoine Lavoisier did for chemistry. Fortunately for 18th century Kings, their success did not depend on the accuracy of chemical theory.

    Just for the record, the Elizabethan English – as a response to Spanish bullion – actually attempted to utilize alchemy to create gold. Seadog Martin Frobisher conducted several expeditions for the Northwest Passage, from which he brought back loads of rock which both he and Elizabethan magus John Dee thought were gold ore. Dee also first coined the term “British Empire.”

    The Elizabethans were not alone in such efforts. The court of Elizabeth’s contemporary, Holy Roman Emperor Rudolph II, was probably as close to Hogwarts as any human institution has ever been. Tycho Brahe and Johannes Kepler, as their day job, were court astrologers for Rulolph II. Catherine de Medici was also into necromancy.

    For what it is worth, Renaissance courts also had jesters and fools.

    Like

  10. mikyo permalink
    9 November 2009 8:19 pm

    Jester

    In societies where freedom of speech was not recognized as a right, the court jester—precisely because anything he said was by definition “a jest” and “the uttering of a fool”—could speak frankly on controversial issues[1] in a way in which anyone else would have been severely punished for. Monarchs understood the usefulness of having such a person at their side.[1] Still, even the jester was not entirely immune from punishment, and he needed to walk a thin line and exercise careful judgment in how far he might go – which required him to be far from a fool, in the modern sense.

    http://en.wikipedia.org/wiki/Jester

    Like

  11. mikyo permalink
    9 November 2009 10:16 pm

    He he he! :P

    Like

  12. oldmanchronos permalink
    9 November 2009 11:10 pm

    FM: “There is no content to these religous tracts, nothing connecting them to specific issues of macroeconomics. If you can provide citations to experts supporting your position, fine. Otherwise future comments like this will be deleted.

    I shall endeavor to tie comments to the various religions of macroeconomics.
    .
    .
    FM reply: That would be appreciated. Links to expert analysis are always welcome on the FM website, no matter what they advocate.

    “various religions of macroeconomics”

    While any belief about science might be a matter of faith to a specific individual, the overall endeavor is science if it conforms to the “rules” governing science. As such, it is IMO not appropriate to call macroeconomics a religion.

    Like

  13. underscore33 permalink
    9 November 2009 11:11 pm

    yes, we’re nuts, uninformed, and some say it’s rational (in the maximization of personal benefits sense of the word) to remain so!

    in regards to point 5, here’s a great article about how voters, even the most educated and informed, tend to make short sited decisions when voting, especially when economics are involved.

    and New Jersey seems to be the poster child of this irrationality, throwing out the mediocre reformer and overlooking the third party best choice for a man who promises nothing because he know he won’t live up to voter expectations!

    Sadly, it seems that no matter how mature economics and other social sciences may get the real problem might not be with the discipline, but closing the gap between the lay folks and what little knowledge we do have.

    Like

  14. mikyo permalink
    9 November 2009 11:18 pm

    “Logic is the beginning of wisdom, Valeris, not the end.”
    — Captain Spock, Star Trek VI, The Undiscovered Country.

    I disagree. The beginning is to know that many of us are NOT rational, ESPECIALLY under stress. Only then can we move into the realm of logic.
    .
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    FM reply: You answer is by definition incorrect. The original Star Trek is a definitive source of wisdom.

    Like

  15. mikyo permalink
    9 November 2009 11:30 pm

    I would have said that empathy is the beginning of wisdom, then when you have that, then you can graduate to logic.

    Like

  16. oldmanchronos permalink
    10 November 2009 12:44 am

    “OMC: One cannot make that type of a statement authoritatively. I believe this is an example of Fabius’s call of “dogma”. Can you prove the above? Note that I personally believe this is one factor that helps to explain why the U.S.A. became successful.”

    What I find intriguing is the amount of knowledge that was known thousands of year ago but never developed. The guy teaching my statics class opened with “It wasn’t until relatively modern times that people had the knowledge to know how to build buildings. Before that time, it was trial and error and it led to cathedrals using the flying buttress.”

    I pointed out that the Greeks had the math back in 400BC and the flying buttress was a well understood design principle back in the 4th century AD.

    But to your point, there was something that acted as an inhibitor to this knowledge being widely known and used. The US adopted a system that allowed people to freely associate and learn and to benefit from there work. Can you prove this led to Americas success? No one can. You can’t recreate the founding somewhere else and see if the outcome is the same. We are limited to comparing the economies of different countries with their culture and political environments.

    “However there is also one little fact that you fail to mention. While the last empire (Europe) was destroying itself, the U.S. took to massively gearing up industrial production”

    The US had developed and created quite a bit of wealth before WW2. If you look at the lend lease program during WW2, the US funded much of that war. But the world agreeing to use the dollar over gold certainly didn’t hurt us.

    Like

  17. mikyo permalink
    10 November 2009 1:11 am

    Harnessing Hippogriffs“, The Archdruid Report, 4 November 2009 — Excerpt:

    “There have been many examples of market economies in history that were not controlled by governments, but there have been no examples of market economies that were not controlled, and if one were to be set up, it would remain a free market for maybe a week at most.”

    Like

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