The View From 1776

A Critique Of The Fed’s Economic Theory

In two articles, economist Robert Higgs explains why macroeconomic, Keynesian theories, after more than four years, have failed to produce promised results.

Is Macroeconomics Really Economics?


Recession and Recovery
Six Fundamental Errors of the Current Orthodoxy

To read the article, scroll down below the introductory pitch for the Independent Review.

Posted by .(JavaScript must be enabled to view this email address) on 08/17 at 11:48 PM
  1. Thomas,

    Higgs hit a home run with his two articles. My reading may be different than yours, however. Higgs derides as ‘uneconomic’ more than just Keynes’ wobbly theories, and his critique is broader than Federal Reserve policy. His denunciation also decries monetarism, and the infatuation with it; which, together with Keynesianism, belongs to that class of economic theories known as ‘macro-economics’. Moreover, his critique extends to anyone, of whatever economic creed and/or ideology, who promotes models based on ‘aggregates’. It should be noted many a conservative and ‘free-marketeer’ has embraced Friedman and monetarism even while scorning the Left’s infatuation with Keynesianism. So, while hubris may be a common liberal/statist trait, it is not an exclusive trait; for, many who disparage monetarism do so while erroneously hurling the ‘Keynesian’ epithet (and vice versa). And many who defend monetarism as against Keynesianism do so either without seeing they suffer the same weakness, else ignore the commonality. Quite rightly, Higgs shows the fallacy inherent in both (and all similar) theories stems from a common failing: any belief that ‘aggregates’ matter more to an ‘economy’ than do the myriad interactions of millions of individual contributors (people), leading to corollaries in which aggregates provide shortcuts on which to base or shape policy.

    Having stated and supported Higgs argument, I make one caveat to it (and, it is one to which I think Higgs will agree). While aggregates and macro-economics are weak (sometimes dangerous) models on which to base economic policy, they are still highly useful to the study of economics inner trappings. Like all models of complex things, they are gross simplifications and/or special cases having validity only within design parameters. Applying models of this type to real-world humans invariably biases outcomes because as people become aware they are manipulated, they alter behavior to compensate. Even without such awareness, behavior changes to re-secure prior outcomes, at which point, the model is no longer operative. Promoting such simplifications as applicable to policy instead of what they are (first order approximations for additional study, combination, testing, retesting and eventual acceptance) is the real rub.

    http://www.princeton.edu/ceps/workingpapers/112blinder.pdf - Economic Advice and Political Decisions:
    ‘A Clash of Civilizations?’ by A.S. Blinder, Princeton CEPS Working Paper No. 112 July 2005.

    http://en.wikipedia.org/wiki/Milton_Friedman
    http://www.econlib.org/library/Enc/Monetarism.html
    Posted by .(JavaScript must be enabled to view this email address)  on  08/25  at  10:07 PM
  2. Thomas,

    I forgot to mention the Blinder paper linked to my earlier post. It illustrates a far more serious and pervasive charge against economic academia – intellectual integrity (theirs) corrupted by a clearly socialist/statist worldview. Blinder was a major Clinton advisor and the architect of his (first-term) debt-reduction initiative. We know Blinder to be brilliant in his field both because Wikipedia ranks him so, and because he uses ‘brilliant’ and ‘intelligent’ in reference to advice and policies economic academia provides with such modesty. From the title, you would think he saw the problem as one of cultural dissonance rectifiable by making macro-economic theories comprehensible to lay-folk, but, in fact, it is a blue-print for subterfuge, sabotage and usurpation. It tars those opposed to the Clinton (i.e., his) initiative and/or its [unproved] theoretical basis as simply too stupid and short-sighted to appreciate or concede the great thing he/they offered. Written in 2005, the paper makes clear Blinder saw nothing wrong, disruptive or dangerous in his leftist policies, or with those enacted within the prior thirty years; including those leading unmistakably to the 2007-2008 mortgage and securities crash.

    http://www.govtrack.us/congress/votes/103-1993/h199 AND http://www.govtrack.us/congress/votes/103-1993/s190 - confirm Blinder re debt reduction bill was a pet Clinton project (not exclusively so, but overwhelmingly opposed by Republicans as too restrictive of future government – i.e., Republicans also wanted budget constraints, but opposed the irrevocability of a Constitutional amendment)

    http://www.cato.org/publications/commentary/no-bill-clinton-didnt-balance-budget - asserts Clinton never balanced the budget. Gives Gingrich and Republicans some credit for it, but mainly credits an exceptionally robust economy for which neither party can rightly take credit. Liberals insist it was Clinton policies that energized the ‘Dot Com’ market (yeah, and Al Gore invented the Internet!) rather than he had the good fortune to be present when the technology came into its own (helped in no small part by deregulation of the communication industry). In any case, Clinton never actually presented a budget to Congress, and when Republicans presented him with one, he balked (see http://www.washingtontimes.com/news/2013/feb/19/a-history-of-the-national-debt/); culminating in the longest budgetary shutdown/showdown in U.S. history. So, Conservatives have a marginally better case for claiming the Republican Congress, armed with its ‘Contract with America’, achieved the deficit reductions, if not actual ‘balance’; if only because they did not quite squander or sabotage the technology boom by spending even more than Democrats in the same situation certainly would. The legacies of both parties (as well as both branches of government) are economically dismal.

    In fairness to liberals, I include the following link ( http://zfacts.com/p/318.html ) to a graph on debt/GDP that is useful even if somewhat misleading. To be accurate, multiple graphs are necessary showing debt alone plus other economic factors that, together, give a better picture of what is/was happening. ZFacts may honestly think itself ‘balanced’ in its verdicts, yet exhibits a clearly leftist bias. One such failure to disclose is clear from its defense of social security wherein it accuses Cato and Heritage of fear-mongering over Social Security; which brings up the elephant-in-the-room painstakingly ignored of unfunded debts (see http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html ). ZFacts’ focus on debt-to-GDP is a distraction from the far larger quandary of gross national debt (funded & unfunded). Unfunded debt clearly dominates the picture, and is clearly the result of liberal-socialist programs. For that matter, so is funded debt, which is also mostly due to social programs; both of which are regarded ‘non-discretionary’ (i.e., untouchable) regardless the party in power. Only the legitimate objects of government (i.e., defense, a system of justice, ensuring domestic tranquility, rights preservation, protecting property, promoting the general-welfare [aka, benefitting all without regard to class circumstance or interest groups], and to foster commercial growth) are today regarded discretionary; which is to say ‘dispensable’.

    http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html - interesting critique of FED domination; claims FED unduly influences economists and their opinions; a propaganda mill? It gets worse because, as Blinder’s own paper shows, leftist economic theorists feel justified misleading us into utopian traps from which we can never escape, and treating us as lab-rats for testing pet theories.

    http://wzus1.ask.com/r?t=p&d=us&s=a&c=a&app=a16&dqi;=&askid;=&l=dir&o=0&oo=0&sv=0a5cac01&ip=86df74c9&id=EEEFCEA82ACD33AD3D89740EEADB60C5&q=u.s.+merchant+marine+in+iraq+war&p=1&qs=1&ac=24&g=c3495TLd3SGhyJ&ocq=0&ocp=0&ocu=0&ocf=0&qa1=0&cu;.wz=0&en=te&io=0&b=a004&tp=d&ec=1&ex=tsrc=tled&pt=The U.S. Merchant Marine - University of Virginia&u=http://www.virginia.edu/colp/pdf/US-Merchant-Marine-in-21st-Century.pdf AND http://www.professionalmariner.com/Web-Exclusive-2013/Maitland-The-US-flag-merchant-fleet-It-isnt-dead-yet/ – make hash of Blinder’s suggestion our Merchant Marine no longer play a vital role in national defense. First, MM ships do not require refitting as they did in WWII (and earlier) in order to support our logistics, because there has been no large scale attack made on blue-water fleets since that time, and that is due to our overwhelming naval supremacy. Scuttle our supremacy (as Blinder et. al advocate), and our merchant ships will be forced to refit for war, regardless they are or are not sovereign. Our fleet played a huge role in Vietnam and Persian Gulf wars, and a smaller yet still vital role in the Iraq invasion and occupation. It took six months to build up our forces for the assault against Kuwait’s Iraqi occupiers, and the U.S. MM was essential to that buildup. Similarly, Britain’s Falkland Islands rescue was delayed by its shrunken merchant fleet, yet also enabled by that service’s dedication and vigor; a fact sadly absent from the accounts of both actions. There was concern, at the time, its commercial fleet would prove inadequate to the task; yet they managed to pull it off (to the embarrassment of an Argentina banking on it). Had these threats been more existential (short of all-out nuclear war), six months would have proved too long; thus refuting Blinder’s suggesting sovereign fleets are irrelevant to modern defense.

    Our MM has also served to convey U.S. directed humanitarian-aid globally; which is both policy and good public-relations. Our MM has shared responsibility for the on-going operations of our ports and waterways, and for their security. So, again, Blinder misleads us by fixing on just one part of their service to us.

    The MM is less than one-quarter its WWII maximum, downsized and upsized many times, and its role varied according to need. So, Blinder’s 2005 contention of a bloated MM is pure political theatrics intended for the ill-informed and easily duped.

    Our government has done little to encourage and much to discourage investment in our blue-water fleet since Vietnam. So much so that foreign companies now own and operate most of what remains of our merchant fleet. So, I guess Blinder and his ‘not-so-influential’ academics got their way after all. Blinder claims our MM is irrelevant to security and competitiveness; yet most industrialized nations have them, and those that strongly encourage theirs have grown market share and influence at our expense. The primary reasons our fleet is disadvantaged and our shipping shrunk are: excessive-regulation, crippling taxes (takes far longer for shipping to recover from high tax rates than other industries), and worker-compensation mandates. These are burdens which the competition does not have to match; and, therefore, gives them the edge. For a brilliant economist like Blinder to miss these essentials while confusing ‘self-inflicted wounds’ with ‘American-shippers [supposedly] indifferent to reduced market-share’, is risible nonsense only explained by ideology trumping reason.

    I could go on in this vein, but I think you get my point Blinder is (condemned by his own published words as) something of a fraud, and unprincipled in getting what he wants. His paper is loaded with distortions and innuendo (e.g., academic-integrity supposedly above reproach, accounting gimmicks, insider tricks, distortions, dismissal of Merchant Marine, &c). His emulation (even veneration) of Keynes is unmistakable. No doubt, Blinder is so blinded by his own brilliance (and operating on a plane so rarified the rest of us can only count ourselves blessed to have him doing our bidding), that virtues regarding ‘public trust’ no longer apply.
    Posted by .(JavaScript must be enabled to view this email address)  on  08/31  at  05:05 PM
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