“Economic Theory ten years after the crisis”

That’s the title of the paper: Economic Theory ten years after the crisis, written by Droucopoulos Vassilis, Emeritus Professor of Industrial Economics in the Department of Economics at the University of Athens. There must be other such articles around, but this is one of the few I have come across. The abstract:

It is my intention to address, primarily within the scope of mainstream macroeconomic theory, three of the questions making up the main theme of the conference, namely: “How a very problematic theory continues to survive and dominate both the policy and the academic scene. What are the processes in the economy and the society that sustain its dominance? What is the condition of the economic Orthodoxy (particularly under its current form of the New Macroeconomic Consensus, that is the hybrid of mild neoliberalism with conservative New Keynesianism)?”. A good many orthodox economists hold the view that there is no necessity for a paradigm shift. On the contrary, a mere “evolution towards a more pluralistic discipline” would suffice. Hence the title of my talk.

They still don’t get it since variants of Keynesian economics remain as embedded as ever. But what a laugh to see New Keynesian economics described as “conservative”. It must be the modern fashion, and they wonder why nothing works.

The expiry date for all forecasts is the very moment they are released

Her Majesty raised the issue herself. Why hadn’t the world’s economists predicted the global financial crisis? Had she asked me, my answer would have been that such things are beyond the abilities of anyone, and if someone tells you different, they are only kidding themselves. And I say this as the AFR Forecaster of the Year in 1988, which I received for being the only economist in Australia to say that Australia would, under virtually no circumstances I could think of, have a recession that year. Everyone else thought the probability was high, so I won by default.

The sad part is that economics has now in many ways been reduced to forecasting a narrow range of published national statistics, as if that were the true issue. What economists should be doing instead is working out the best way to achieve community goals, by putting institutional structures in place that create the wealth we can all then partake of, most helpfully by participating in the wealth creation process.

Why this has come to mind are the latest ructions in the market for oil, that no one – NO ONE – could have forecast a year or so ago. And certainly no one did. Here is the article that has brought this to mind: Bank of America sees $50 oil as Opec dies.

The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over coming months as market forces shake out the weakest producers, Bank of America has warned.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a mucher cheaper source of gas for Europe.

Francisco Blanch, the bank’s commodity chief, said Opec is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

Of course, these are forecasts made in December 2014. And if you don’t like this one, come back tomorrow and I will give you another.

Economists and the stimulus – a five years after review

The Global Financial Crisis ended in the middle of 2009 at the very latest. A big explosion followed by the TARP and then nothing. Wherever your economy was by June that year, that was all there was. Not good but also not the Great Depression either. But also around the end of 2008 and then into 2009 there were the various Keynesian demand programs put in place that are the actual problem we face today. Credit is available and can be had and at relatively low rates. No one is in fear of some financial explosion, at least not in any serious way. Everyone is wary but no one is desperate.

The problem now is debt and deficits. Every economy is very quiet. Nowhere is there robust growth and a rapid return to full employment. Our economies are struggling to rebuild with no exception of any importance that I can think of although there is, as always, a range of outcomes. So we come to this survey on government policy conducted in the US. First there was this:

Question A: Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

For me, an unbending Strongly Disagree. That our economies would go flat and the labour market would stop dead were straightforward, but I don’t use a Keynesian model. These were the actual results:

Strongly agree             39%
Agree                          43%
Uncertain                      0%
Disagree                       2%
Strongly disagree          0%

But then they asked this:

Question B: Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.

You might perhaps argue that the net effect on jobs was positive even if the cost to the economy was massive. This is the true test of economic idiocy and on this they abysmally failed. These were the expert opinions:

Strongly agree             20%
Agree                          36%
Uncertain                      23%
Disagree                       5%
Strongly disagree          0%

Only one in twenty disagreed and that was only mildly. There is no understanding these results other than the impossibility of even understanding why there might be a problem trying to encourage economic growth from the demand side.