Thursday, January 22, 2009

Macroeconomics and Public Discourse

I've been struck by three things relating to our economic discourse lately. First, was the use of the term "socialist" in relation to Obama's econmic views during the campaign and since. Second and third are Alan Greenspan's testimony before House Oversight Committee in which he says that foundational aspects of his economic philosophy turned out to be false in light of the economic meltdown seem to have had zero effect on the arguments put forward by people like Eric Cantor and Newt Gingerich who continue to take them as axiomatic and undeniable. Macroeconomic issues are and will remain at the top of the docket for a good long while and the way we speak about them seems incredibly impoverished.

Been chatting about this briefly with Maynard from Creative Destruction (a real, live macroeconomist...well, o.k. a real one at least) about why there is no explicit theoretical awareness to our discussions about the economy. It's there, of course. We have Keynesians against Friedmanites all over the tv and radio, but we never seem to locate the discussions of particular issues -- TARP bailout funds, stimulus package components -- in terms of where they come from. I'm not asking anyone to become an amateur economist, but it does seem odd that there is a basis to the debate which is never, ever referenced.

It seems that at least a cursory sense of the views would inform our discourse and make for better conversation. At least we would know what assumptions we were making when we adhere to a view and we could see when those foundational intuitions were being challenged.

So, to start the discussion, let's set out four major viewpoints using a terrible analogy, clocks.

Milton Friedman -- The economy is like a well-built watch in which the gears are perfectly meshed and any messing with it by the government will only break it by applying forces to the gears that they were not intended to and will not be able to bear. The economy is a self-correcting system which will naturally find its most healthy state by virtue of internal mechanisms. There is an equilibrium point that maximizes the workings of the economy and left to its own devices, that point will be maintained.

John Maynard Keynes -- The economy is like a well-biult electric clock. Generally, it runs fine, but every once in a while it will run down and not work properly. The only way to get it to run again is for the government to buy new batteries and put them in. The economy is a semi-self-correcting system that has a number of different stability points. Given certain markers, the economy will settle at one of these stability points, but some of them are really, really bad for everyone involved. This is what happened in the Great Depression where macroeconomic factors did not rescue the economy, but kept it pinned to the wall. The only way to move the economy off of a really bad stable point is to jolt the system and the only thing big enough to do the jolting is government.

Our conservative/liberal debates are usually really debates between those who take Friedman's view and those who take Keynes' view. Greenspan's testimony basically said that his long held view that Friedman was correct and Keynes was wrong was faulty, yet we continue to hear repeated Friedmanesque arguments from people who seem to not realize that there appears to be deep problems with the view.

These views are, of course, different from:

Socialism -- It's an ok clock, but not terribly reliable. It almost always runs a little fast or a little slow and while we let it run most of the time, the government needs to keep resetting it to make sure it reads the time we want it to read. It also needs regular rewinding accomplished by governmental controls of major sectors.

Marxism -- The clock, if left to its own, will always read the wrong time. Why do they call it the second hand when it is first in terms of actual work done for the clock as a whole? Notice that the little hand moves the least, is the fattest, yet is considered the most important. The little hand wields the fist of oppression, comrades. Nature is red in tooth and claw and left to its natural state, the economy will lead to human bondage. The laws of history, on the other hand, will fix it all and bring human freedom.

Note that liberal economic policy resembles neither of these last two. To labor another terrible metaphor (and what could be more relevant than labor), the idea from the right is that the laws of economics produce a wind that always steers us in the proper direction, we just need to keep our sails set straight ahead. Liberal arguments are that we ought to sail as much as possible, but occasionally we need the government to turn on the outboard motor to get us back on course and we need the authorities to set up buoys and lighthouses to keep us aware of the rocks and shoals. Regulation and oversight are needed lest we fiscally find our boat run aground or sinking. This is not socialism at all. Yet, the term was able to be used in the same way that "value voter" never got challenged.

How do we get people to talk in terms of the debate? Or should we, at all? Is this unnecessary academizing?