How To Fix The Economy

[slapout9]

Here is a real bank in North Dakota that is close to what the founding fathers of our nation wanted to set up according to the Constitution. They do have to borrow some money from the Feds but the interest collected is paid back to the state(preventing taxes from being raised!!!)...not to some corrupt illegal private banking company. If they had the power to print and coin money like the constitution grants them (natinal guvmint) they would not have to charge any interest at all and we would never have a recession again!!!!!!. Read and Remember when you hear the politicians talk on TV. Like I have said before the Economic crisis can be fixed tomorrow morning...if we have the Political will to do it.



http://www.motherjones.com/mojo/2009/03/how-nation%E2%80%99s-only-state-owned-bank-became-envy-wall-street

[davidbfpo]

Slap,

The UK financial mess has led to some local authorities mooting the re-creation of municipal / city region banks and calls for building societies (not sure if an American equivalent) to return to their safer, traditional practices, notably no commercial property loans and borrowing from the market.

davidbfpo

[Stevely]

Slap,

The UK financial mess has led to some local authorities mooting the re-creation of municipal / city region banks and calls for building societies (not sure if an American equivalent) to return to their safer, traditional practices, notably no commercial property loans and borrowing from the market.

davidbfpo

I think a building society in the US is a Savings and Loan.

[jmm99]

from Stevely
I think a building society in the US is a Savings and Loan.

Precisely. These building and loan associations (later S&Ls) became popular at the start of the last century, as very local institutions.

E.g., my grandfather in 1917, among his other functions for the Winona Copper Co. (Chief Clerk for the company and Justice of the Peace for the township), was the manager of the Winona branch office of the Detroit & Northern Michigan Building & Loan Assn. The idea was small savings accounts, which then would be lent for residential housing - not unlike a credit union.

As the 1900s moved on, many S&Ls merged and eventually morphed into full-fledged commercial banks. So, by the end of the century, they added investment and insurance functions. In the era of mergers, some were absorbed by larger giants, who then used the old-fashioned S&L regulators for their own benefit. E.g., AIG was and is "regulated" as an S&L !

[slapout9]

House Rep. Dennis Kucinich wants to introduce bill to nationalize the Federal Reserve. This is getting a lot of play latley. I bet the New York TalliBanksters are getting nervous.:)


http://www.youtube.com/watch?v=-r_-QRKyu6g

[lamont]

we would never have a recession again!!!!!!

You can't revoke the business cycle by reforming banks. And this particular downturn has been led down by an insurance company (AIG), not a bank, that was employing obscene amounts of leverage with insufficient capital ratios. Focusing simply on banks is missing the larger problem, which is leveraged bets big enough to sink the whole economy if they go the wrong direction.

What we need is to understand the implied social contract between moneyed institutions that employ fractional reserve lending and/or financial leverage and the consumer. When times are good, they profit off of financial leverage and provide liquidity that makes the economy expand and provides the 'rising tide' that lifts everyone up. But in order to prevent catastrophe when the leveraged bets turn against them the government needs to regulate their capital ratios and make sure they don't get drunk making leveraged bets that the good times will always continue. If we taught high school kids about the business cycle, about money, banks, leverage, etc we might not get into messes as bad as this.

All we have to do is recognize that when people with money are making enormous bets that the good times will always continue perpetually, that inevitably the bad times that are are sure to come will be really bad and we're going to all get stuck covering their tab. Prevent it up front, and not after the fact, and don't get suckered in by "free market" complaints about regulation during the boom times -- the people making money off of the boom who are whining about free markets will immediately turn to socialized losses when the tide turns, every single time -- stop falling for that.

[slapout9]

Hi lamont, you just brought up the proof that you can abolish the business cycle. Rich people. Ever see a rich person suffer from a down turn,recession ,etc.? they keep right on doing what ever they want, good times or bad...why? Because they control the money supply.

Under Americanism (the Constitution) the government controls the money supply and can spend whatever it needs to maintain the economic viability of the whole country. This is a responsibility of the Government Not the Talli-Banksters who are responsible to no one.

[Schmedlap]

Hi lamont, you just brought up the proof that you can abolish the business cycle. Rich people. Ever see a rich person suffer from a down turn,recession ,etc.? they keep right on doing what ever they want, good times or bad...why? Because they control the money supply.
Or, perhaps they live within their means. My father is truck driver and my mother works on a GE assembly line. That's what they've done all their lives. They never altered their lifestyle in any recession OR bull market. They lived within their means. They buy the same food, wear the same clothes, drive the same cars, and go about the same daily routines today as when the market was booming in 2000 and 2006 and when the economy was thriving in the 80's, mid-90's, and early this decade and when the market was down in the early 80s, early 90's, and now.

As for many other Americans... I blame their self-destructive behavior.


Under Americanism (the Constitution) the government controls the money supply and can spend whatever it needs to maintain the economic viability of the whole country. This is a responsibility of the Government Not the Talli-Banksters who are responsible to no one.
How does controlling the money supply (competently or otherwise) "maintain the economic viability of the whole country"? I would think it just ensures a strong and stable currency from which the country can succeed or fail, according to the choices of the people. From what I've seen, the people chose very, very poorly, repeatedly, for a very, very long time.

Where did all of these chickens come from? I hope that they're not here to roost! Oh crap, I think they are.

[Uboat509]

Or, perhaps they live within their means. My father is truck driver and my mother works on a GE assembly line. That's what they've done all their lives. They never altered their lifestyle in any recession OR bull market. They lived within their means. They buy the same food, wear the same clothes, drive the same cars, and go about the same daily routines today as when the market was booming in 2000 and 2006 and when the economy was thriving in the 80's, mid-90's, and early this decade and when the market was down in the early 80s, early 90's, and now.

As for many other Americans... I blame their self-destructive behavior

How does controlling the money supply (competently or otherwise) "maintain the economic viability of the whole country"? I would think it just ensures a strong and stable currency from which the country can succeed or fail, according to the choices of the people. From what I've seen, the people chose very, very poorly, repeatedly, for a very, very long time.

Where did all of these chickens come from? I hope that they're not here to roost! Oh crap, I think they are.

Agreed. Far too many people in this country are unable to tell the difference between what they want and what they are entitled to.

[Ken White]

Agreed. Far too many people in this country are unable to tell the difference between what they want and what they are entitled to.Though I'd suggest 'THINK' they are entitled to...

For every crooked rich person we have there are five or six not so rich persons who wants to rip off the system in any way they can. If you want to take a pitchfork to the really rich, go for it -- but you better get those less than rich rippers off of the system as well because they hurt far more than the really rich do. They have done this country more damage than all the Banks and wealthy people have.

Anybody over 62 who takes in over, say $40-50K a year and also draws Social; Security is ripping off the system (Yes, that includes me. I'll gladly send my check back as soon as all those who have more money than i do send theirs back). Try to talk about means testing SS and listen to the screaming...

Even better, try it with Medicare...

Those are two middle class destroying vote buying schemes, pure and simple. I have watched a vibrant, leading edge nation go to a run of the mill country on its way downhill in the three generations I've been alive, most all due to increasing and excessive dependence on the government and to a series of venal, crooked Congresses. Yes, that's redundant.

The rich aren't the only problem by a long shot -- but Congress is the real problem in both cases cited here (and several others). Direct your ire at them. The US economy will not get straight all long as we keep electing people who put their interests and their political parties fortunes ahead of the nation. That said, I've heard all this gloom and doom before -- and I, like everyone else I know, no matter how slightly, live better today then we have before and that was then and is now better than in most other nations in the world, all things considered. In spite of Congress...

[slapout9]

How does controlling the money supply (competently or otherwise) "maintain the economic viability of the whole country"? I would think it just ensures a strong and stable currency from which the country can succeed or fail, according to the choices of the people. From what I've seen, the people chose very, very poorly, repeatedly, for a very, very long time.

By controlling the money supply the Government can pay for the programs that will benefit the country(population) by following the greatest Strategic Plan ever written.

The 6 core missions of the government....Americanism:) are listed in the Preamble to our Strategic Plan...Uh I mean Constitution.

1-Form a more perfect Union
2-Establish Justice
3-Insure Domestic Tranquility
4-Provide for the Common Defense
5-Promote the General Welfare
6-Secure the blessings of Liberty for ourselves and Future Generations

[Entropy]

There will always be people who will try to game the system for their own benefit and to the detriment of everyone else. Punishing, tar-and-feathering or whatever after the fact doesn't fix that problem and it never will. To fix that problem, one needs to change the incentive system. To do that requires good, marginally fair and transparent rules and regulations and fair referees who understand the rulebook and enforce it consistently. We've had neither.

So Amen to what Ken says about Congress.

[selil]

Here are his 10 ideas. You don't have to agree but he has the cred on what works and doesn't.



What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.
No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties. Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage.

[Ken White]

don't park your common sense and don't test academic theories outside a laboratory or closed environment where there is great potential for public harm.

Most of us do that. He offers no way to insure we elect Congroids that exercise any common sense so I'm not sure he's much help.

[Schmedlap]

By controlling the money supply the Government can pay for the programs that will benefit the country(population) by following the greatest Strategic Plan ever written.

The 6 core missions of the government....Americanism:) are listed in the Preamble to our Strategic Plan...Uh I mean Constitution.

1-Form a more perfect Union
2-Establish Justice
3-Insure Domestic Tranquility
4-Provide for the Common Defense
5-Promote the General Welfare
6-Secure the blessings of Liberty for ourselves and Future Generations
I would argue that those 6 core missions have been accomplished. Our country functions on a rule of law, it is safe from internal and external threats, we've got a high standard of living - even our underclass - and we're free. Returning to my earlier point - what the people have chosen to do with these blessings is squander them with a long series of bad choices. This economic nutroll wasn't caused by mishandling of the money supply. It was caused by widespread unethical conduct. How one handles the money supply has nothing to do with whether people will behave ethically and responsibly in their pursuit of that money.

[Ken White]

fives says 'promote' -- not 'provide' -- and that liberty includes the right to be stupid. Thus, even Congress and all the Politicians get a bye... :wry:

[jmm99]

Liberty includes the right to be stupid, so long as that stupidity does not hurt anyone else. So, "Congress and all the Politicians" do not get a free pass in all cases - nor do judges, lawyers and retired CSMs.

PS: I'm glad someone is citing the Constitution as our basic plan - good job.

[slapout9]

Perhaps this will help explain about banks and money.

http://www.engdahl.oilgeopolitics.net/index.html

[slapout9]

Our country functions on a rule of law, it is safe from internal and external threats, we've got a high standard of living - even our underclass - and we're free.

I just don't see how you can say that.....have you read what has been happening along the border with Mexico.

[Ken White]

Liberty includes the right to be stupid, so long as that stupidity does not hurt anyone else...Based on daily observation over the years, it appears more ignored than heeded by numbers of our fellow citizens and certainly by the majority of our Politicians.
...So, "Congress and all the Politicians" do not get a free pass in all cases - nor do judges, lawyers and retired CSMs.No one ever gets a free pass IMO -- a 'bye' OTOH, I believe, means that one gets to advance to the next or another round / attempt with outplaying or being penalized.

Thus IMO everyone, even the Lawyers, gets the proverbial three strikes... :D

Minor nit-noid correction; not a CSM, there seemed to be some silly concern over early Courts Martial -- yes, that is the plural -- that precluded my attaining that august rank. Still, I did get to do the job sans the title in two Battalions and Two Brigades, one each in both peacetime and combat. Leading me to conclude that Bde CSMs (much less those in the upper echelons) were probably not totally necessary. So just plain old vanilla SGM -- with much time in grade... ;)
PS: I'm glad someone is citing the Constitution as our basic plan - good job.Me too. I particularly enjoy that when it is also correctly used. Not that Slapout misused it but others sure do...

Congress, for example, does not even seem to be aware of it's existence... :mad:

P.S.

Thanks again for all your posts and particularly the legal updates. They're more appreciated than you may know.

[Ken White]

I just don't see how you can say that.....have you read what has been happening along the border with Mexico.this:
Since the mid-19th century, the United States has frequently employed the US Army on its southern border to perform various roles in support of the Nation—from outright war, to patrolling the border, to chasing bandits while securing persons and property on both sides of the border, and most recently to supporting civil law enforcement and antidrug efforts. LINK (http://www-cgsc.army.mil/carl/download/csipubs/Matthews_op22.pdf)

Two very different nations that share a border that's been bloody for its entire existence. Yes, things are different today -- but not really all that much.

[jmm99]

Thou shalt now and forever be The SGM - despite your plural CsM.

Seriously, on stupidity and damage to others, there should not be either a free pass or a "bye", even from the first round. What should be is not necessarily what is - that I have to admit.

Also thanks for this:


from Ken
Thanks again for all your posts and particularly the legal updates. They're more appreciated than you may know.

Slogging through the detainee, and associated cases, has been a learning experience for me (and hopefully for others here, as well).

And, bye the way, we managed to bye out of the first round of playoffs. So, we had to face off Mon nite against ourselves. Todd (my retired E-7 sans CsM) and I held the table for two hours - so, a good nite for the good guys. :D

[Schmedlap]

I just don't see how you can say that.....have you read what has been happening along the border with Mexico.
Yes. And even judging by the worst-case scenario, most pessimistic reports, this country is pretty darn safe. And, even if it weren't, what on Earth does that have to do with the money supply? Even if I were to concede your point, it would still bolster my argument - that we've used the luxury of prosperity, safety, security, and stability to generate more leisure time with which to ponder bad ideas, implement them, and raise an entire generation of morons who have no concept of personal responsibility or foresight. Any real or imagined security threat on the Mexican border that has been discussed of late is the result of the drug trade (Americans who demand narcotics because they don't give a damn about our laws), willfully lax immigration enforcement (from elected officials pursuing a political strategies to shore up hispanic voters), and multicultural BS (Americans with too much education, free time, and bad ideas).

I'm not knocking your concept of revising monetary policy. I think you're going too far in selling it. It is not the cure for most, many, or even a significant number of our ills. The best monetary and economic policies matched with the wisest financial regulations and system of incentives will still be useless if the population whom those policies, regulations, and incentives are directed towards are a fundamentally depraved people. So long as people care about me and mine more than right and wrong, we're a mile down #### creek, with a giant hole in the middle of the canoe, and no paddle or paper. Immoral people cannot be governed. They must be coerced and imprisoned or rehabilitated and socialized. Given the rate at which we're throwing people in jail, I fear that the former will be our medicine of choice. On the other hand, maybe this economic "crisis" will be a good thing because it will influence more people to choose the latter.

That is why I continue to see this as a moment of opportunity - not for monetary or regulatory reform so much as for moral reform that will hopefully occur within each person's thick skull, as they slowly realize that they've been behaving in a manner that is not only socially destructive, but self-destructive.

[jmm99]

although its 100+ pages of US-Mexican military encounters are a bit of a slog. I didn't slog through it today - been there, done that - and I think I cited it elsewhere (re: treaty law, perhaps).

[slapout9]

Schmedlap, it's is not my idea, it has been around for some time, starting with the Constitution, it is just that people are starting to question the whole idea of who we are paying our money to and why do we have to do it. I have attached a link to a detailed explanation on monetary reform and the effects it can have on the economy. I agree with you that no monetary policy will correct or fix bad people, but while we are figuring out what to do with them I see no need for me to pay private bankers personal profits with my tax dollars, which in effect means I get to pay the bill twice, once to the government and then a certain cut (interest) to the Talli-Banksters.

http://www.themoneymasters.com/printable-mra.htm

I also disagree on mission accomplishment of the 6 core missions. As long as the US exists they are likely to be enduring missions, not ones that have a stopping point only continuous progress toward the goal of a safer, better and more prosperous country for now and in the future.

[slapout9]

Latest interview with James Galbraith at Truthout magazine on the state of the economy....how it was a planned criminal event and what should be done.

http://www.truthout.org/050609J

[slapout9]

Latest from James Galbraith on how to fix the Economy....1st put the Tal-Banksters in jail (Justice) and then restore by using modified Keynesian economics. Some really good stuff in here about how the economy has NOT been fixed and what we need to do about it. Galbraith is one of the few Economist with an almost perfect record of economic analysis and what is going to happen.

http://www.tnr.com/article/economy/76146/tremble-banks-tremble?page=0,0

[Fuchs]

This article covers one aspect very well.

How Inequality Fueled the Crisis
Raghuram Rajan

http://www.project-syndicate.org/commentary/rajan7/English

[slapout9]

Latest James Galbraith Interview from Bloomberg. Until you fix the Banks nothing will change.

http://www.bloomberg.com/video/62193196/

[Presley Cannady]

Economics is alchemy with a cheaper tool box.

[Fuchs]

Economics is alchemy with a cheaper tool box.

You resurrected this thread for such a useless statement?

Did you want to entertain us by repeating nonsense about economic science that almost no actuale conomist agrees with?

[GPaulus]

It is interesting to note that through this economic crisis everyone missed the root cause of the world wide economic collapse. What is the root cause of the global economic contraction? We tend to blame things that are intuitive like banks, Wall Street and private business layoffs but they are all symptoms. Financial Markets are the prime target because we associate dollars with the economy, as we should, but they are symptomatic of a much larger crisis. A crisis that we have to articulate before we can solve it. Einstein said that if he had one hour to save the world he would spend fifty-five minutes defining the problem and only five minutes finding the solution. This quote illustrates an important point: before jumping to conclusions regarding the economic meltdown, we must step back and invest time and effort to determine the real problem within the economy.

US banks, AIG or any other financial institution could not have caused an economic collapse of global proportion. The banks were second to the auto industry to feel the economic contraction. What common worldwide resource could have caused this crisis. At the time of the economic collapse late 2008 oil was tipping the scale at $130/bbl. The only thing that can cause a WW collapse is a WW inelastic commodity that is powerful enough to affect all countries WW. I beleive that the smoking gun is OIL.

Everything in life has an energy component (cost) associated with it--food, fuel, electricity, water, production, etc. People use disposal (fungible) income to meet small periodic swings in energy cost, but when the short term volatility of energy swings more than 20% and stays there for several months, people and businesses have to make hard choices. Do I pay for gasoline to get to work or run my process or deliver my product, do I put food on the table, do I keep the electric and water on, do I pay my credit cards, my home loans ...? At first they begin to borrow (take from Peter to pay Paul) and that works for a short period but at the end of the day after making these choices and runnning up the debt, those on the margin (large debt to equity ratios) did not have sufficient money remaining to pay the mortgage, or the car payment, or the credit cards, and the financial markets reacted as delinquincies mounted.

The result, I believe appeared to the neophyte that it was the banking and financial market who were at fault. We blamed 0 interest loans, brokers, etc. But I submit to you that they were only the tipping point, they were the first after automotive to see the train wreck coming. As soon as energy prices fell, the economy began its slow recovery. In my small mind, I am convinced that the cause of the economic collapse was volatile (out of control) energy costs of the past 8 years. At the time of the economic collapse, oil was heading above $130.00/barrel. And, it is not over by any stretch. Oil prices have topped $90.00/bbl last week and they continue to rise.

If energy does not stay below $75.00 per barrel the economy will not recover on its own. We will see a second 2012 contraction. With higher prices will come additional economic burden and a contracting rather than expanding economy will result. Energy Drives the Economy, Period.

[Fuchs]

Hardly. For one, many symptoms can be traced back to the financial issues.

Second, several nations have taxes on energy/oil that led to an effective market price higher than the one to be paid in the U.S. today. These other countries would have entered the crisis decades ago - but some of them are doing fine even today.

I pay 1.5€ per litre gasoline. That's 5.7 €/gallon which in turn is 7.8 US-$/gallon, for example. U.S. retail price: 3.1 US-$.
My country - Germany - is doing fine, albeit there's still a slight loss of growth to catch up to.


It makes more sense to look at the roots of the financial crisis in order to identify a bigger truth than just the symptom. I don't mean a political or law-wise look, but a macroeconomic look.
One could for example ask why the U.S. consumed and invested a fifth more goods before the crisis than it produced (after counting the small service trade balance surplus as goods production).
Meanwhile, resources were squandered on a colossal scale by building more houses than affordable, not pushing for energy efficiency, allowing the resource allocators in the financial sector to go mad and leech on the whole economy, neglecting infrastructure, spending much on the military, keeping up an incredibly inefficient and deficient healthcare system and maintaining a third world level of income inequality.

A crash was predictable, unavoidable - and the roots for this are still in existence, so there'll be another crash (or a long suffering) in this decade.

[GPaulus]

Hardly. For one, many symptoms can be traced back to the financial issues.

Second, several nations have taxes on energy/oil that led to an effective market price higher than the one to be paid in the U.S. today. These other countries would have entered the crisis decades ago - but some of them are doing fine even today.

I pay 1.5€ per litre gasoline. That's 5.7 €/gallon which in turn is 7.8 US-$/gallon, for example. U.S. retail price: 3.1 US-$.
My country - Germany - is doing fine, albeit there's still a slight loss of growth to catch up to.

We may have to agree to disagree on this one. I am not saying that higher energy prices will collapse an economy but what I am saying is that Volatile
Energy Prices will collapse an economy. Energy in the economy is "normalized" and products, transportation construction etc can adjust to inflationary (controlled) price increases because energy is in the baseline of their price for the product. But when 20 - 30 % swings occur or the prices climb too fast, the markets cannot react quickly enough. The result is usually double digit inflation. This time things were quite different and extranalities controlled inflation. The result was a deflation in the economy, a collapse.

Given enough time and stable energy pricing, the economy will recover.

[Fuchs]

Show me your "double digit inflation".
I have yet to see a statistic showing such a thing for an economy because of oil price hikes.

Hint: The consumption of energy isn't a large-enough share in any country's economy to produce double-digit inflation.

U.S. inflation rate has been single digit in this crisis.
http://www.thedigeratilife.com/images/historicalinflationrates.jpg

[GPaulus]

Show me your "double digit inflation".
I have yet to see a statistic showing such a thing for an economy because of oil price hikes.

Hint: The consumption of energy isn't a large-enough share in any country's economy to produce double-digit inflation.

U.S. inflation rate has been single digit in this crisis.
http://www.thedigeratilife.com/images/historicalinflationrates.jpg

The only periods in time energy prices became really volatile were in 1974/75oil embargo (quick and short duration) follow by 12% inflation, and 1980/81. follow by deregulation and again inflation. Since that time energy as a commodity has dropped except 1998/2000 Enron and 2006,7,8 OPEC. In the early 1990s we had some of the lowest normalized energy rates in our history and the economy took off. This time things were very different, the FEDs introduced extranalities into the economy, lowering interest rates to compensate and to thwart inflation. Priming the engine with massive stimulus money/projects.

The result of volatile enegy was an implosion and a contraction of the economy and everything lost value. That started an economic collapse and downward spiral --business cut jobs, production of non-essential products ceased, housing dropped, car industry slumped, people on the margin failed to pay their loans, credit cards, utilities, and foreclosures occurred. The banks and credit card companies became the bad guys. But, they were a symptom! And it will happen again if energy continues to move at a rate greater than the inflation rate. In November oil was $77 and now it is 95. How can that be? A 20% increase. Has oil demand risen by 20 percent?

[Fuchs]

In November oil was $77 and now it is 95. How can that be? A 20% increase. Has oil demand risen by 20 percent?

The very question already shows that you have no clue about economic theory. The correct question would have asked for the price elasticity of demand for oil (http://15961.pbworks.com/f/Cooper.2003.OPECReview.PriceElasticityofDemandforC rudeOil.pdf). That's 1st or 2nd semester microeconomics.

You asserted

But when 20 - 30 % swings occur or the prices climb too fast, the markets cannot react quickly enough. The result is usually double digit inflation.
and the graph proves you wrong. There was no double digit inflation in decades despite such crude oil price spikes.

Earlier spikes of the inflation coincide with world wars (and their aftershocks) and earlier recessions (which happen to involve high crude oil prices).

A global or a national economy has many more variables than energy cost and inflation rate. Federal reserve bank policies allowed high inflation (not this time) in the 70's, but not this time. In fact, there were huge deflation tendencies which were counteracted by expansionary federal reserve bank policies - the end result was a moderate inflation.
The whole link between energy costs and overall inflation/economic crisis is rather weak and indirect. Other variables can easily overcompensate the link.


The increasing energy costs of the mid-2000's did not help, but they're not the root of the global economic crisis. Likewise, subprime mortgages and CDOs were merely symptoms.
The crisis was a a correction movement against unsustainable imbalances with lots of secondary effects.
A high crude oil price is easily sustainable, as evidenced by the fact that some economies already pay a high price for crude oil products due to high crude oil-specific taxation.
The corrections of unsustainable imbalances happened at the weak spot of obviously unsustainable resource mis-allocations; distorted housing sectors (market price bubbles). Secondary effects rippled through an unproductive financial sector which had grossly neglected the management of systemic risks.
Finally, financial sector problems and their bandaging led to the fiscal de facto collapse of several states (Iceland and Ireland experienced economic nightmares because of out-of-proportion financial sectors, Greece/Portugal experience(d) fiscal nightmares because of unsustainable fiscal deficits).

High oil prices alone would merely have sufficed to challenge the viability of some products/business models and have caused some adaption processes in economies. In worst case, some countries would have felt a substantial change in terms of trade - comparable in aggregate effect to a changed rate of currency exchange. That's what we saw in 73/74.

Our economic crisis looked VERY differently this time.

[bourbon]

In November oil was $77 and now it is 95. How can that be? A 20% increase. Has oil demand risen by 20 percent?

The very question already shows that you have no clue about economic theory. The correct question would have asked for the price elasticity of demand for oil. That's 1st or 2nd semester microeconomics.
Gentlemen,

Market fundamentals are less and issue than index speculation, which has driven a premium of 15% by conservative estimates, to as high as 50%. NYMEX recorded record net long positions in crude futures and options. Its paper, just like it was in 2008.

There have been several posts and links in other threads about record commodity prices from excessive speculation.

Note: I should add that chapter four in Matt Taibbi’s book Griftopia explains the 2008 commodities bubble in the simplest terms possible. Taibbi does a superb job of explaining complex financial, political, and economic issues to the lay-reader, with remarkably less vulgarity. This book should be required reading for every American.

[slapout9]

Link to Real News Network interview of Yves Smith from nakedcapitalism.com on the true story of President Reagans economic policies.



http://www.youtube.com/watch?v=0FAZGqC5SeI&feature=feedu

[GPaulus]

[QUOTE=Fuchs;115081]The very question already shows that you have no clue about economic theory. The correct question would have asked for the price elasticity of demand for oil (http://15961.pbworks.com/f/Cooper.2003.OPECReview.PriceElasticityofDemandforC rudeOil.pdf). That's 1st or 2nd semester microeconomics.

Let’s go to 3rd semester economics. But before we get there we will talk about externalities, then we can talk about oligopolies. In each case where energy prices increased "wildly" relative to a gradual free-market price increase (price increase because of supply and demand, and price inelasticity), price volatility was caused by a market externality. In 1973, Oil Embargo, in 81, deregulation of energy, in 95-00 (consolidation of marketers) Enron index manipulation, in 2006,7,8 manipulation by commodity speculation.

The ability of this to happen is because of the relative perceived inelasticity of energy. Everything in life has an energy component and if you were to add up the real cost of energy in a delivered commodity and life, you would see what the true impact of volatile energy prices have on an economy. And, because of the relative inelasticity of energy the externalities induce the price swings.

But there are forces greater than the inelasticity of energy. In reality although less elastic than other commodities, load destruction will occurs when a commodity price becomes unstable and overal demand will drop regardless of the perceived inelasticity. We saw this occur in the early 2002/05s within the natural gas industry after Enron. Larger industrial users will switch or discontinue their processes, or close down, or move off shore to lower cost of production areas--they in essence switch (oil fired to coal, natural gas to nuclear, gasoline to natural gas vehicles, etc.) and load distruction (reduced demand) will occur regardless of the elasticity profile.

The primary cause of "wild" price swings in energy has less to do with elasticity and everything to do with a concept known as Oligopoly Markets. These markets act more like Monopolies. Oligopolies have many suppliers (supply) and many end-use buyers (demand). But in between, unlike many other markets, they have few large aggregators, a limited number of refineries, and few marketers to end-use markets. Take Enron for example, they accounted for nearly 80% of the aggregation natural gas market until their demise. In energy, there are many producers--small, medium and very large but they feed their supply into a small number of refinery and/or marketers (the big supplier pipeline gets restricted before it goes to the big end-use demand) that feed the end-use market. These marketers control the major portion of energy that flows into commodity market hubs and the end-use market. This is why volatility of energy prices can swing more than 10% in a few weeks.

What will it take to wake us up to the ever-tightening grip of oligopolies over ever more of our global marketplaces? Even though their power manipulates and warps our production, and our free market system, no one sounds the alarm. Experts go back to their paradigm of supply, demand and price. But and oligopoly market warps the Keynesian model paradigm.

Oligopolies induced volatility and the collapsed of our economy in 2008 did not set off any bells. Nor did the revelation come to the experts addressing the economic collapse. They blamed financial, housing, auto and lending, and anything else they could point at that fit the paradigm. In oil 10 groups account for 90% of all WW retail down-stream sales, with single aggregating companies often capturing more than 75 per cent of particular energy markets. These markets will not act according to second semester economics and our economy will not improve until we control energy prices by control the oligopolies behind it.

[Fuchs]

The variability of prices can also be explained with a bit market segmentation.

Assume 100 demand and 100 supply. 90 of the demand and 90 of the supply are subject to long-term contracts. Demand rises by 5 (at the old price).

This demand increase by 5 is not a 5% increase, but a 50% increase because the short-term market has only a volume of 10.

The effect in this model is an out-of-proportion price spike that gradually subsides as long-term contracts end and their share is temporarily added to the market volume - till finally the demand hike by 5 is really just a 5% hike.

[Presley Cannady]

Did you want to entertain us by repeating nonsense about economic science that almost no actuale conomist agrees with?

How many practicing alchemists conceded their trade was a bunch of nonsense? For economics to amount to science, it must make testable predictions that hold up under scrutiny. It doesn't. End of story.

[slapout9]

Presley, Your right it is not a science (it used to be known as a Discipline,whatever that means?) but some Economist can and do make predictable,testable arguments. This is a link to one below. We have 2 and only 2 ways to fix the Economy that is the whole tool set. As the link below will point out.

http://prospect.org/cs/articles?article=qa_why_the_deficit_doesnt_matter#

[Fuchs]

How many practicing alchemists conceded their trade was a bunch of nonsense? For economics to amount to science, it must make testable predictions that hold up under scrutiny. It doesn't. End of story.

Economists do scientific research because their methods are scientific (unlike alchemists' methods*). The scientific results are statements about probabilities, not about exact outcomes (even physics ceased in to claim that it can do more in many cases). These probabilities can be tested and be falsified if wrong.


I do not expect everyone to be an economist to understand that economics is a science, but I expect at the very least that those who attempt to deny economics the status of a science do know what a science is.

Furthermore, I expect that no activity that has encompassed two centuries and ten thousands of people be ignored, such as ignoring the huge activity in regard to making testable predictions and testing them.



Scientific fields are commonly divided into two major groups: natural sciences, which study natural phenomena (including biological life), and social sciences, which study human behavior and societies. These groupings are empirical sciences, which means the knowledge must be based on observable phenomena and capable of being tested for its validity by other researchers working under the same conditions.
http://en.wikipedia.org/wiki/Science#Basic_classifications


*: Guilt by association, a fairly dirty rhetorical trick. Well, at least it's more sophisticated than outright ignorance about the real world (of economic research).

[Presley Cannady]

Economists do scientific research because their methods are scientific (unlike alchemists' methods*).

Alchemists employed formalism, observation and experiment--the three methods of scientific inquiry. What they did not do was produce testable predictions that hold up under scrutiny; electing instead to issue either blatantly incorrect forecasts or more often incomprehensibly qualified handwaving.


The scientific results are statements about probabilities, not about exact outcomes (even physics ceased in to claim that it can do more in many cases).

Natural scientists were deploying probability to the problems of fluids, thermodynamics and the subatomic when economists and social "scientists" were still hemming and hawing dialectics. What you have today is the sorry marriage between statisticians feeding results to mumblers squinting to something real in the numbers. It's slightly more elegant numerology.


These probabilities can be tested and be falsified if wrong.

1. Outside of a very few narrow areas, they can't. There's no laboratory to achieve the repetition necessary generate the sample space. The inspiring signal is of limited value beyond backcasting and useless in generating new, testable predictions.

2. Even if 1) weren't the case, I'd love to see a SINGLE, verified economic forecast pegged within the 95 percent confidence interval that doesn't sweep the range of mutually exclusive possibilities with near uniform probability. Seriously, we ask less of meteorologists.

And there's your challenge, Fuchs. Simply point me to 2) and you will have demonstrated economics has at least produced a single scientific result.

[selil]

I love it when positivists (http://en.wikipedia.org/wiki/Positivism) or more specifically absolutists (http://en.wikipedia.org/wiki/Absolute_idealism) grab hold of the empirical method and what big "T" truths might exist.

The expectation that economists have to explain "EVERYTHING" to be relevant towards "ANYTHING" is pretty defatigable. This is especially true when you bring in the tool of economists, which is statistics, which is a relevant sample, of a relevant population, giving a relative solution, to a falsifiable proposition (hypothesis).

In other words. In forcing a discipline into a box they've never claimed you injure the relevant position by a claim they've never made. A handy logical straw man (http://en.wikipedia.org/wiki/Straw_man) or circumlocution.

I needn't remind this audience that empiricism is made up of many different schools of thought and have existed for much longer than the ad hominem of windowed time relating to recent political discourse. The Popper (http://en.wikipedia.org/wiki/Critical_rationalism) and Kuhn dichotomy means that science has just as many partisan ignominies as Fox and CNN do political pundits.

Regardless of the witchcraft that economists might use. The enlightened scientific philosopher will understand that empiricism and epistemology exist as holistic set of principles with the swinging tides of rational thought pulling upon each thread. The scientific method is many tools not just one.

[Presley Cannady]

The expectation that economists have to explain "EVERYTHING" to be relevant towards "ANYTHING" is pretty defatigable.

Oh, my bar is set far lower than that. I'm asking for economists to explain--or more accurately, correctly predict--ANYTHING about SOMETHING.


Regardless of the witchcraft that economists might use. The enlightened scientific philosopher will understand that empiricism and epistemology exist as holistic set of principles with the swinging tides of rational thought pulling upon each thread. The scientific method is many tools not just one.

No argument here. A number of veterans here eat modelers and number crunchers for breakfast, yet clearly we've confidence in their authority on what works and what doesn't. That said, an economist isn't a seasoned fighter dropping his experience on what and what doesn't work. Instead, he puts forward the pretense of theory, issuing lengthy "explanations" yet predicting nothing.

[selil]

Oh, my bar is set far lower than that. I'm asking for economists to explain--or more accurately, correctly predict--ANYTHING about SOMETHING.

My example is of ONE economist and ONE theory that I think explains quite well a lot of things. Vilfredo Pareto and the 80/20 rule or Pareto (http://en.wikipedia.org/wiki/Pareto_principle) principle. Not only statistically relevant (think sigma) it is relevant to daily life and significant in explaining many things from software to kids grades.

[Fuchs]

This is not a scientific debate, we don't have the time and resources for a prediction and waiting for it to happen.

For all else, read a peer-reviewed economic science journal.

There are thousands of relatively simple economic rules that easily meet highest empirical standards, especially under experimental or ceteris paribus conditions.

Some of them have even the robustness of natural laws, such as the observation that deficits are not sustainable or the inevitability of market failures under certain conditions. There's for example not a single known commercial unemployment insurance in the world (due to two especially severe market failures, excluding con artist endeavours).
Finally, there are even hundreds of management rules that can be proved (and were proved) with math just like math rules themselves, for example rules for optimising production under known conditions.


Economic science is a science, it's understood and defined as such. Those who doubt it can feel free to prove it, but they are powerless feeble voices against the existing definition of the meaning, sound and graphic of the word "science".
They can't argue that economic science is no science without ignoring the real-world business of ten thousands of economic researchers.

This stupid questioning whether economic science is a true science always leaves an impression about the questioner on me that's probably beyond the forum etiquette. Those people simply do not grasp social sciences, and certainly don't seem to attempt it.


Sure, some (or many) economists are no scientists at all, many have forgotten what they were taught about scientific work. There are lots of loudmouths who proclaim a lot of economic nonsense. Clueless people can see those loudmouths and make the mistake t believe that they were representative. Fact is, even natural sciences have such loudmouth (see cold fusion).
There are furthermore more economists than natural scientists in contact with a wide public audience and it's especially easy to earn good money with being a loudmouth as economist in comparison with being one as physicist.



This whole strain of the discussion is moot, and off-topic, of course. Even if economist s were not working scientifically, they would still be the best experts around for explaining "How to fix the economy".
Economics-bashing is thus futile.

[Presley Cannady]

My example is of ONE economist and ONE theory that I think explains quite well a lot of things. Vilfredo Pareto and the 80/20 rule or Pareto (http://en.wikipedia.org/wiki/Pareto_principle) principle. Not only statistically relevant (think sigma) it is relevant to daily life and significant in explaining many things from software to kids grades.

The Pareto "principle" was a crude, snapshot observation--which predicts nothing (even in "Pareto" distributed income clusters. The subsequent Pareto distribution (http://en.wikipedia.org/wiki/Pareto_distribution), which by itself is nothing more than math, predicts nothing and is a special case of a family of related functions. Pareto didn't even derive it himself.

[Presley Cannady]

This is not a scientific debate, we don't have the time and resources for a prediction and waiting for it to happen.

The topic is "how to fix the economy." Surely we should entertain the notion that the OP is nonsense. How do you fix something you no one knows how to fix?


For all else, read a peer-reviewed economic science journal.

As opposed to a peer-reviewed ufology or astrology journal? Peer review is but one tool for gatekeeping a body of knowledge, and not nearly the most important one.


There are thousands of relatively simple economic rules that easily meet highest empirical standards, especially under experimental or ceteris paribus conditions.

Then it should be simple to name one genuinely economic "rule" that holds under scrutiny, as opposed to listing off some rather simple observations as you do below.


Some of them have even the robustness of natural laws, such as the observation that deficits are not sustainable or the inevitability of market failures under certain conditions.

Neither one of those qualifies as testable statements. Both assert a point of divergence in the unbounded future, rendering it impossible to present evidence to the contrary gathered from past to present. The second suffers in that it doesn't even specify causation. Surely an asteroid strike would cause a market failure; is astronomy now the province of economics?


There's for example not a single known commercial unemployment insurance in the world (due to two especially severe market failures, excluding con artist endeavours).

Setting aside what is or isn't a con, surely you jest (http://www.hurriyetdailynews.com/n.php?n=turkeys-unemployment-triggers-increase-in-private-insurances-2010-08-22).


Finally, there are even hundreds of management rules that can be proved (and were proved) with math just like math rules themselves, for example rules for optimising production under known conditions.

Math is the formal expression of an idea. The difference between math expressing physical nonsense and physical reality are laws constraining its application. Without laws of thermodynamics, energy conditions for general relativity, or quantum inequalities, physics devolves into free for all. These laws actually produce testable results that coincide with measured reality. To date, the social sciences have produced no analogous constraints--either generally or conditionally.


Economic science is a science, it's understood and defined as such. Those who doubt it can feel free to prove it...

It's not the burden of the skeptic to "prove" economics is scientific anymore than it is the burden of any reasonable man to admit astrology absent evidence.


They can't argue that economic science is no science without ignoring the real-world business of ten thousands of economic researchers.

There are billions of men and women who work day in and day out on unscientific pursuits.


This stupid questioning whether economic science is a true science always leaves an impression about the questioner on me that's probably beyond the forum etiquette. Those people simply do not grasp social sciences, and certainly don't seem to attempt it.

Attempt what? Solving ordinary differential equations? Regression? Reducing sparse matrices? Crunching expected value and variance? These tools are used far more frequently and effectively outside of the social sciences than within. Hell, they're usually built, extended and maintained by people from the hard side of the tracks.

What I find disappointing is that economists invest so much time learning the unholy mess of gadgetry they've accumulated that little is spent determining whether or not their toolkit applies to the problems they're trying to solve. Their first hint should've been the century and a half wasted formalizing any intuition they could lay their hands on while producing not one verifiable result. Their second should've been after even the fire marshal industry started to clean up its act.


Sure, some (or many) economists are no scientists at all, many have forgotten what they were taught about scientific work. There are lots of loudmouths who proclaim a lot of economic nonsense. Clueless people can see those loudmouths and make the mistake t believe that they were representative. Fact is, even natural sciences have such loudmouth (see cold fusion).

If your point is that scientists make mistakes, then you're understating it considerably. We can't even compare the body of rejected hypotheses to those that bear fruit. The point is that science provides the tools for rejecting those hypotheses in the first place and coming to agreement on those that work.


This whole strain of the discussion is moot, and off-topic, of course. Even if economist s were not working scientifically, they would still be the best experts around for explaining "How to fix the economy".
Economics-bashing is thus futile.

I have to disagree, and I'll do so redirecting you to the question I presented at the beginning of this post. How do you fix the economy if no one knows how to fix it?

My answer is when in doubt, unleash your countrymen to research and experiment freely. Should any policy or law erected on the alchemy of social science interfere, eject it. Then wait and see.

[Fuchs]

I believe you that you have no clue how to fix the economy and you don't know who knows. I'm also confident that the latter is closely related to your cluelessness about how to identify people who know how to fix the economy, and likewise I'm confident that you have no clue about economic science.

There's no one individual who knows everything about how to fix the economy because the topic is too big and complex, but there are many (actually many thousands) who have a good clue about many of the necessary measures (especially the big ones).
Macroeconomics is too difficult and abstract for popular media, though. This leaves many people clueless about economics and allows for a huge collection about stupid ideas about economies. Financial market-oriented reporting of mass media adds to the cluelessness and confusion.


I studied economic science for several years at a West German university, focused on macroeconomics, have a degree on it and I know enough economic theories* and papers to know that this stuff is science.

I knew about how the Euro zone will run into the exact troubles of today before the € was introduced because economic scientists had worked on the necessary theories back in the early 90's (each one for every advantage or disadvantage of monetary unions), because my professors had told me about those theories and because the micro experiment of monetary union in re-unified Germany was already supporting those theories.
Meanwhile the public - including those who disparage(d) economic science - had no clue about it.

Making more use of economic science would improve policy a lot. (As of today, lawyers are more influential in policy than economists are - and it shows.)
This reaches from big things like the current crisis or monetary unions down to negotiating simple treaties (the OECD standard form for double taxation treaties is distorted by lobbyists, for example - but only economists will be able to tell you what's the problem in it).


You don't want to see economic theory as science and this keeps you from seeing it as such. I'm happy that most people in power seem to see it as a science and politicians make use of it at least when political gaming allows for it.


Feel free to live on in a fantasy world where your re-defining of the world works. That doesn't help anyone in this world.


*: There was a time when I learned one or two new theories per 90 minute lecture. Economic theories happen to explain one thing a piece.


Oh, btw, I will tell the physicists that they shall never again call Newtonian Physics "science" because they're only "simple observations", and some guy on the internet meant that this doesn't count as science. Or I won't.

[selil]

The Pareto "principle" was a crude, snapshot observation--which predicts nothing (even in "Pareto" distributed income clusters. The subsequent Pareto distribution (http://en.wikipedia.org/wiki/Pareto_distribution), which by itself is nothing more than math, predicts nothing and is a special case of a family of related functions. Pareto didn't even derive it himself.

Well I guess we're done here. Good luck with that.

[Presley Cannady]

I studied economic science for several years at a West German university, focused on macroeconomics, have a degree on it and I know enough economic theories* and papers to know that this stuff is science.

Great, then it should be easy for you to point to a single economic relation or model that produces better forecasts than flipping a coin. Doesn't have to be general; conditional is fine, too.


I knew about how the Euro zone will run into the exact troubles of today before the € was introduced because economic scientists had worked on the necessary theories back in the early 90's (each one for every advantage or disadvantage of monetary unions), because my professors had told me about those theories and because the micro experiment of monetary union in re-unified Germany was already supporting those theories.
Meanwhile the public - including those who disparage(d) economic science - had no clue about it.

At the very least, you should be able to describe the models and datasets you used so we can verify this prediction by backcast. That also would meet the challenge's criteria.


Making more use of economic science would improve policy a lot. (As of today, lawyers are more influential in policy than economists are - and it shows.)

Lawyers are pretty good because they play a game with rules of their own making. Economists don't have that luxury.


Oh, btw, I will tell the physicists that they shall never again call Newtonian Physics "science" because they're only "simple observations", and some guy on the internet meant that this doesn't count as science. Or I won't.

Feel free. Who's going to argue that mechanics isn't founded on some very simple observations defining the time, displacement and mass in a coordinate system? Once your formalism is in place, the actual science is the meaningful relations between these quantities--conservation of energy, momentum, and angular momentum and derivatives thereof.

[Fuchs]

Great, then it should be easy for you to point to a single economic relation or model that produces better forecasts than flipping a coin. Doesn't have to be general; conditional is fine, too.

Sure I can.
It's pointless, though.

I've discussed with/against people like you before. I do this only in order to keep maybe one or two readers here from falling for your nonsense.

It would be entirely pointless to provide any more examples because you wouldn't take them seriously, but discuss on and on - no matter what kind of evidence I provide.


In short: I don't take you seriously because of what you wrote so far.

[Presley Cannady]

Sure I can.
It's pointless, though.

I've discussed with/against people like you before. I do this only in order to keep maybe one or two readers here from falling for your nonsense.

Let's assume my position is nonsense. Then wouldn't the easiest means to dispense with this back and forth be to point to


It would be entirely pointless to provide any more examples...

You haven't provided one, yet. All you've offered is:
1. the unfalsifiable assertion that deficits are unsustainable on an arbitrarily long time scale.
2. a point that market failures are inevitable; trivial in that the only evidence needed to sustain it is the observation that market failures have occurred, and...
3. a demonstrably false claim that unemployment insurance is commercially sold nowhere in the world.


...because you wouldn't take them seriously, but discuss on and on - no matter what kind of evidence I provide.

I've already cornered myself pretty well for your benefit. I'll accept any relation or model in the field of economics--or the whole of social sciences, for that matter--that generates falsifiable predictions with better accuracy than flipping a fair coin. Simple, no?

[slapout9]

the Coin Toss Economic Theory......very valid concept I might add. In any Economic transaction there is always the rigged criminal element present, something that so called economic science could never grasp:wry: Link to "No Country For Old Men-Coin Toss Scene"


http://www.youtube.com/watch?v=mhXJcfczNIc

[Entropy]

Lots of ad hominem floating around in here. Still, here's my 2 cents: Economics, like most social sciences, is a descriptive science, not a predictive science.

[Presley Cannady]

Lots of ad hominem floating around in here.

I wouldn't say that. I'm denouncing an entire field with, as Fuchs points out, tens of thousands of lettered participants. Once all the arguments are laid out, the line of credulity between proto-/pseudoscience and the real deal is a question of credulity popularity. So surely my own credibility is germane.


Still, here's my 2 cents: Economics, like most social sciences, is a descriptive science, not a predictive science.

We can certainly define science in such a way that forecasting is irrelevant, but you'll still have a bright line between all the natural sciences (which are predictive--and successfully so at that) and everything else (including the social sciences, humanities, piano, history, and the culinary arts).

That's not to say that "everything else" is useless. History, tradition and ritual, instinct, and the individual and popular accumulation of every day experience have shaped intuition for far longer than the natural sciences. However, the core business of economics is to make forecasts over future measures of income and wealth. And if we can't think of a single product of economic thought that generates better forecasts than a coin flip, then isn't it reasonable to ask how useful the field really is?

[Dayuhan]

Then it should be simple to name one genuinely economic "rule" that holds under scrutiny, as opposed to listing off some rather simple observations as you do below.

When the Navy comes into port, the price of hookers goes up.

[Fuchs]

When the Navy comes into port, the price of hookers goes up.

More generally, this would mean that higher demand means higher prices.
I didn't use this as an argument because it's in fact too complicated for a discussion in a military/security policy forum. The reason are the Giffen goods (http://en.wikipedia.org/wiki/Giffen_goods).

[Dayuhan]

More generally, this would mean that higher demand means higher prices.
I didn't use this as an argument because it's in fact too complicated for a discussion in a military/security policy forum. The reason are the Giffen goods (http://en.wikipedia.org/wiki/Giffen_goods).

Higher demand with constant supply, to pick nits. Giffen goods would be an outlier to the opposite conclusion: that increased prices reduce demand.

Most of the general rules have exceptions, but these are typically explainable and to some extent predictable.

Much of the observed erratic nature of economic science is not a consequence of deficiencies in the tools, but rather of the way the tools are applied: as with many other disciplines (notably history) if you torture the data enough they will tell you whatever you want to hear. Because the tools of economics are used as a basis for decisions that have immediate impacts on all manner of vested interests, there's a huge incentive to torture the data, something a chemist or physicist doesn't have to deal with.

One of the great challenges of democracy, whether established or emerging, is the difficulty of developing and implementing sound long-term economic policies - often incomprehensible to the electorate and unpopular in the short run - without getting thrown out of office. Any realistic plan to "fix the economy" is going to make a lot of people hate whoever implements the plan.

[Entropy]

Dayuhan,

Maybe you can explain why there is no leading theory in economics unlike, for instance, evolution or plate tectonics. There are several competing schools and none of them seem to have a lock on predictive accuracy.

[Fuchs]

Dayuhan,

Maybe you can explain why there is no leading theory in economics unlike, for instance, evolution or plate tectonics. There are several competing schools and none of them seem to have a lock on predictive accuracy.

The reason is mostly the limited data sets for econometric analysis (squeezing the value of certain variables out of data sets). Take economic crisis as an example. Major economic models (such as used in central banks) can have in excess of 2,000 variables, but they still lack the data input for crisis situations because there's not enough data to discern the values of many variables.
It's rarely possible to observe a specific variable directly because it's so difficult to set up clean experiments. Instead, economists need to use huge datasets to find the value through empirical analysis (and this requires huge datasets from similar situations).
Consequently, such models fare poorly in regard to simulation of crisis situations.

Many other times there's not so much several competing theories as several adding theories. There are about seven theories about the optimal currency area, each one about one aspect of the topic (some aspects favour bigger, others favour smaller common currency areas). An economist needs to know all or almost all of these, for missing one may lead to entirely wrong conclusions.


There's furthermore the problem that economic theory is a very wide field. Two nobel prize winners can discuss a single topic and disagree (happens actually quite often, see Krugman vs. Stieglitz). Afterwards, it's usually easy to point out why one has argued one way and the other one a different way: Their background (research on certain fields) usually leads to a bias in such discussions (the contributions from different research fields are often competing and it takes a neutral synthesis and good econometric data to find a complete picture).

[Presley Cannady]

Dayuhan,

Maybe you can explain why there is no leading theory in economics unlike, for instance, evolution or plate tectonics. There are several competing schools and none of them seem to have a lock on predictive accuracy.

You've answered your own question.

[slapout9]

John Kenneth Galbraith(father of James Galbraith) had the last predictive model that described what was happening in the 1970's condensed version is this......you have 3 choices Inflation, Deflation or Wage and Price Control.

Incidentally James Galbraith's latest book "The Predator State" supports a lot of what Presley is saying, in fact he has given several speeches on the failure of economics. It is largely due to Criminal Political Influence.

[Ken White]

... It is largely due to Criminal Political Influence.It is that and not wealth disparity, failure to tax the rich or any of that foolishness -- it is that Politicians and their Buds are getting wealthy (as they always have...) due to that influence... :wry:

[Presley Cannady]

John Kenneth Galbraith(father of James Galbraith) had the last predictive model that described what was happening in the 1970's condensed version is this......you have 3 choices Inflation, Deflation or Wage and Price Control.

From an interview in 1999 (http://latimesblogs.latimes.com/thedailymirror/2008/10/voices----john.html): "But I don't make predictions. I long ago discovered that my wrong predictions are wonderfully remembered, and my right ones are quickly forgotten. So I rely on the history of capitalism."

Galbraith eschewed modeling even before he soured on forecasting, so at best the only thing he's ever done is "explained" things that happens. Even with the trappings of math, economists are essentially historians flipping coins.


Incidentally James Galbraith's latest book "The Predator State" supports a lot of what Presley is saying, in fact he has given several speeches on the failure of economics. It is largely due to Criminal Political Influence.

I agree with a number of Galbraith's conclusions regarding the state of the field, but very little about why economics is a failure. Fundamentally, I have no reason to believe economics could have ever succeeded--corrupt machinations or not. Certainly, it will never succeed with the mathematical toolkit economists presently bring to bear.

[slapout9]

I agree with a number of Galbraith's conclusions regarding the state of the field, but very little about why economics is a failure. Fundamentally, I have no reason to believe economics could have ever succeeded--corrupt machinations or not. Certainly, it will never succeed with the mathematical toolkit economists presently bring to bear.

You are right and James would agree with you. If you go to the back of the book I recommended you will see that James recommends that future economics rest on 3 Pillars, to use the jargon of the day. And they are Planning,Engineering,and Basic Scientific research. No Econometric Math toolkit required.

[Fuchs]

None of that will inform governments whether counter-cyclical economic policy is a good thing or just how large and dominating corporations can be allowed to become before they create unacceptable trusts.

Governments also need advice about the design of the tax system. Econometric studies are very useful for understanding and balancing the side-effects of taxation.

[Dayuhan]

Dayuhan,

Maybe you can explain why there is no leading theory in economics unlike, for instance, evolution or plate tectonics. There are several competing schools and none of them seem to have a lock on predictive accuracy.

Interesting question... are theories like plate tectonics or evolution considered "leading" by geologists or biologists, or are they seen as such by those outside the profession because they are accessible and (in their elementary versions) relatively comprehensible? I'm not sure why economics doesn't have one, but I'm also not sure why it should.

Certainly there's a lack of predictive accuracy in economics, but that's true of many disciplines as well, particularly when you take them past the undergrad level and apply them to real world conditions. A geologist can tell you where earthquakes are likely to occur, but not when they will occur or how severe they will be. A meteorologist can tell me roughly how many typhoons are likely to emerge from the north Pacific, and can predict a general course for any given storm, but there's a wide margin of variance and they can't tell me how much rain a given storm is going to drop or where exactly it will go. We know the weather forecast is uncertain, but we don't ignore it.

I'm not an economist by trade and I've plenty of criticisms of the trade, excessive reliance on mathematical models and excessive disregard for non-quantifiable factors being prominent among them. At the same time, I recognize that they do provide a very useful and very important set of tools... wouldn't want to approach a complicated job with only those tools, but I wouldn't want to leave them behind either.

Worshiping economists and slavishly obeying their every word would be a huge mistake. Dismissing them and ignoring everything they say would be an equally huge mistake.

A great deal of what passes for economic discourse in the popular realm is contaminated with ideology and vested interest to a point that renders it meaningless.

I wouldn't bet any money on a popular revolt happening in the US any time soon. I'd likely bet against it, were I inclined toward betting.

[Dayuhan]

None of that will inform governments whether counter-cyclical economic policy is a good thing or just how large and dominating corporations can be allowed to become before they create unacceptable trusts.

Governments also need advice about the design of the tax system. Econometric studies are very useful for understanding and balancing the side-effects of taxation.

Econometric studies are useful for understanding and balancing the economic side-effects of taxation, and other policy decisions. These decisions also have non-economic side effects that must be considered, one reason why econometric studies, while important, cannot be the sole basis for policy decisions.

[Fuchs]

The tool for this is called preferences; people need to somehow express their preferences for/against the side effects in monetary terms and then economists have the tools to factor them in. Everybody can make a gut decision about the severity of side effects, but economists are the professionals who at least attempt to do this empirically.

They're kinda waiting for progress of philosophy and psychology here because these areas of research so far fail to be helpful enough.


Nevertheless; an example: Economists know three kinds of "best" tax systems. The "first best" requires so much information that only god could do it. The "second-best" is still impractical. The "third best" is what economists seek; it's at least meant to minimise the net damage of externalities.

Some taxes have huge side effects (income tax was estimated at up to 30% additional costs for the society in an American study during the 90's), while others have only negligible side effects (such as coffee tax, a tax that requires almost no effort because at one stage coffee is in a bottleneck and very easily taxed).
The idea is to balance the taxes so that the side effects in % are roughly the same.
This needs to be seen in context of pigou taxes and political intentions (such as fairness), of course.

[Entropy]

Dayuhan,

Plate tectonics, as a theory, is well enough established that almost all geologists subscribe to it. Same with evolution and biologists. Economics, on the other hand, seems to be a neverending series of fads. There isn't a dominant theoretical framework that most economists subscribe to, although many economists are strongly partisan regarding whatever theory they personally subscribe to (Keynes, Chicago, Austrian, etc.).

This is a problem for two reasons. First, the track record for any of these theories in terms of predictive ability is pretty poor. Secondly, policymakers and the general public are constantly getting conflicting advice about what to do to about economic problems by proponents of the various schools. Who is right? Who should be listened to?

I should add that this problem isn't just about prediction - it's also about understanding what's already happened. There isn't even agreement on historical cause and effect between proponents of the various economic theories.

[Fuchs]

The differences between the economic science "schools" are not that stark. Instead, the difference is often merely about the value of some key variables - and that uncertainty is the result of difficult observation of said variables in limited datasets.

It's like geologists agreeing on tectonics, but not being sure about the drift speed or even drift direction.


The key difference between Keynesians and others is for example almost entirely about the value of a single multiplication variable'; is it larger than one or not? Studies yielded conflicting results.
http://en.wikipedia.org/wiki/Spending_multiplier#Estimated_values

The different economic schools are not so much incompatible in their formulas as in their assumptions.

[Dayuhan]

The tool for this is called preferences; people need to somehow express their preferences for/against the side effects in monetary terms and then economists have the tools to factor them in.

People don't always express their preferences in monetary terms. Sometimes they express them by voting the bastards out of office, or by hanging the bastards from lamp-posts. Economists may not be able to factor those reactions into an equation, but the bastards - those who make policy - have to.


Plate tectonics, as a theory, is well enough established that almost all geologists subscribe to it. Same with evolution and biologists.

True, but once you get past the broad guidelines there's a fair bit of contention within those professions as well, though it's a good deal less public and receives a lot less attention, since the subject matter has a lot less immediate impact on daily life. When the subject is money, there's a lot more scrutiny and the inaccuracies and uncertainties get noticed a whole lot more.

To use an example already cited, most economists would agree on the basic framework of the relationship between supply and demand. Take it to specific real-word cases with unique contextual details, and there will be a lot less agreement. I suspect that this is true in other disciplines as well: biologists may agree on the broad framework of evolution, but get down to the specifics of how it works and where it's going and the agreement will evaporate... not that many people will notice.

[slapout9]

People don't always express their preferences in monetary terms. Sometimes they express them by voting the bastards out of office, or by hanging the bastards from lamp-posts. Economists may not be able to factor those reactions into an equation, but the bastards - those who make policy - have to.


Yep!

[Fuchs]

Economists are still the ones working on how to measure preferences. The difficulties could be overcome if psychology (and for some problems also philosophy) make the required advances.

So far, much can be understood with what has been measured already.
The time-value preference rate (sorry, don't know the exact translation) is for example known: It's the base interest rate. All other (real) interest rates can be explained with additional factors - and one who understands the theory of interest rates isn't prone to fall prey to typical interest-related market failures any more.


Likewise, most economic problems are not only explainable, but also predictable (save for their exact timing). People just don't want to listen to dry theory - and cognitive dissonance is a powerful opponent to theory anyway.
In the end, it's not so much a failure of economic science that crisis happens and isn't accurately predicted, but a lack of understanding of economic science by laymen (not the least because of the use of poor sources and lack of patience).
There is a reason why some countries are in a circle of boom-crash-boom-crash with 8-11 year wavelength while others do not produce any real boom or any real crash, save for flimsy copies of booms invented elsewhere (such as the dotcom boom): Economic science has a different influence in different countries.
Some countries have actually implemented all economic science advances of the 19th century already and are working on adapting 1960's economic science advances into their society. Meanwhile, other countries still think they can somehow cheat their way around the backside of the coins.

[Presley Cannady]

You are right and James would agree with you.

Not really. Galbraith is convinced that econometrics will ultimately fail because of nebulous unpredictability in human affairs. I'm convinced econometrics fails because Galbraith and the like seem to content to tackle their field with barely the math an undergrad might pick up in his first two years.


If you go to the back of the book I recommended you will see that James recommends that future economics rest on 3 Pillars, to use the jargon of the day. And they are Planning,Engineering,and Basic Scientific research. No Econometric Math toolkit required.

I don't see how anyone can tackle the last two pillars without math. A qualitative science isn't a very useful one.

[ganulv]

A qualitative science isn't a very useful one.

I always thought transparency and systematicity were the defining criteria for science, not whether or not the result was deemed useful. FWIW, philologists managed to formulate the concepts of genetic relationship and the phoneme using almost exclusively methods we would now call qualitative.

[slapout9]

Not really. Galbraith is convinced that econometrics will ultimately fail because of nebulous unpredictability in human affairs. I'm convinced econometrics fails because Galbraith and the like seem to content to tackle their field with barely the math an undergrad might pick up in his first two years. He is convinced our economic models will fail because of Criminality!!!!!he believes the best economist to explain the current situation besides himself is Thorsten Veblen.(brief synopsis: Veblen believed whenever you have unregulated free markets sooner or later they will all be taken over by crooks)




I don't see how anyone can tackle the last two pillars without math. A qualitative science isn't a very useful one.

You can't tackle the last two without math but it is the math of engineering not econometrics. You don't need advanced math for economics....6th grade arithmetic is all you need.

[Fuchs]

Having studied economics for five years on a West German university I can assure you that economists know pretty much all the crap that happens and have their appropriate terms and models for it.

"Crooks", for example, are usually a symptom of the principal-agent problem and the three market failures of information asymmetry, power asymmetry and externalities.
We know our stuff - much better than laymen.



Qualitative argumentation is useful for understanding, quantitative modelling is usually necessary for validation and prediction.
Qualitative argumentation without quantitative backup is usually little more than a fairy tale or ideology.


Econometrics are necessary to find the values of the variables in models, and without these values you know nothing. In fact, a single wrong value can ruin the result of a model with dozens of variables completely.
You can guess values, of course - just as you can throw a spear blindly into a lake for fishing.


I actually wrote my macroeconomic dissertation for the diploma without a single formula, and got away with a 1.3 grade. The reason why I was able to get away without quantification was that the topics hadn't been researched well and wasn't in the stage of econometric research yet. The researchers were still discussing the basics of the topics.
Correspondingly, I was not able to give a definitive answer to any question that arose.

[Ken White]

He is convinced our economic models will fail because of Criminality!!!!!he believes the best economist to explain the current situation besides himself is Thorsten Veblen.(brief synopsis: Veblen believed whenever you have unregulated free markets sooner or later they will all be taken over by crooks)However, they fail to consider that so too will regulated markets also be taken over by crooks -- as will centralized economies. Instead of moaning about those facts, just accept 'em as a part of the human condition and insert checks and balances to counter quite normal and always present human greed. The human condition is inherently unstable -- that is not going to change, perfect security and / or stability will never be attained as long as animals are involved...

[slapout9]

The human condition is inherently unstable -- that is not going to change, perfect security and / or stability will never be attained as long as animals are involved...

I agree we will never have perfect security/stability BUT we can do a whole lot better than what we are doing now.

[Ken White]

I agree we will never have perfect security/stability BUT we can do a whole lot better than what we are doing now.Not in dollars, we have more of those than we probably need (not that we spend them sensibly...) but in freedom and self reliance? We've already cur both those things in half compared to, say 1950. Certainly many things are better now than they were then were -- but many are decidedly worse particularly with respect to those two issues...

That address stability which we can improve upon little if at all. It's a people thing... :D

[GPaulus]

Dayuhan,

Plate tectonics, as a theory, is well enough established that almost all geologists subscribe to it.

I think we are too quick to accept a theory when it passes our paradigm test but as Aristotle has so wonderfully explained, "It is the mark of an educated mind to be able to entertain a thought without accepting it."

We are a long way from proving plate techtonics just as we are a long way from accepting all of Adam Smith's formulation of economics in "An Inquiry into the Nature and Causes of the Wealth of Nations."

Here is an article I wrote on plate theory that I think may be closer to the truth. There is a lot we simply don't understand yet about the earth, earthquakes, tremors and vocanoes. I think it is a mistake to even say "Plate Techtonics is well known. The Earth's crust is like a giant jigsaw puzzle, broken into several pieces known as tectonic plates that constantly bump and grind or slide past each other." It is much more complicated then simply that. The stress imposed by "earth tides," created by the moon earth interactions causes the crust to bend and deflect twice each day. We see this in the form of high and low water tides, but the earth's crust deflection is what actually causes the water tide to occur. This deflection is like bending a steel rod back and forth--eventually it crazes, cracks and weakens the crust--allowing the continent to collapse, slip and the liquid magma to move. The cracking appears to the observer along natural boundaries as a plate and thus plate techtonics. The moon and earth interaction causes the crust to crack but that has little to do with plate techtonics, the suttle difference has little to do with the plate except that where there are active vocanoes, you have a active fault boundary along the cracking. Vocanoes occur on islands and near ocean coastlines because of the heavy weight (pressure) of the water. This pressure causes a hydraulic effect on the magma forcing it up along weaken fissures (tidal fatigue cracking). Once the pressure becomes great enough and the earth's crust weak enough, a volcano grows and finally erupts. The eruption diplaces the incompressible magma and it releases. The void left from the magma release over time, causes the continent to collapse downward due to gravity. The collapsing is felt as a quake. Our scientists call it a fault line using the plate techtonic theory but it is not really the plates sliding as they posit.

It is a "continental collapse" (as I call it) phenomena and it is why our oceans are becoming deeper. Once, the earth was nearly covered by shallows seas but now the oceans are much deeper and there is a greater land mass exposed. When the earth had shallow seas, most of the continents were under water and the water level was hundreds of feet higher in elevation as evidenced by the finding of sealife fossils high in the mountains. The deepening of the oceans began 580MM years ago just prior to the "Cambrian explosion period" (and continues today). It exposed large amounts of land and allowed many species to propagate.The resulting affect causes volcanoes, earth tremors and earthquakes. In summary, plate techtonics has as many flaws as economic theory....

[Ken White]

Out of curiosity, are you discussing tectonics or tech tonics?