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Thoughts from the Frontline

Where’s the Growth?

September 21, 2014

In 1633 Galileo Galilei, then an old man, was tried and convicted by the Catholic Church of the heresy of believing that the earth revolved around the sun. He recanted and was forced into house arrest for the rest of his life, until 1642. Yet “The moment he [Galileo] was set at liberty, he looked up to the sky and down to the ground, and, stamping with his foot, in a contemplative mood, said, Eppur si muove, that is, still it moves, meaning the earth” (Giuseppe Baretti in his book the The Italian Library, written in 1757).

Flawed from its foundation, economics as a whole has failed to improve much with time. As it both ossified into an academic establishment and mutated into mathematics, the Newtonian scheme became an illusion of determinism in a tempestuous world of human actions. Economists became preoccupied with mechanical models of markets and uninterested in the willful people who inhabit them….

Some economists become obsessed with market efficiency and others with market failure.…

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Jack Hiller

Yesterday, 7:32 p.m.

Golly, Gee, Lot’s of negativity from bright and articulate critics. So, first on Mauldin’s interesting note, and then on to the complaints.

Mauldin again pointed out well that the low interest rates are hurting those inclined to save, and well implied that they are also hurting those institutions required to earn from bonds, and that’s a fair criticism of the QE program. However, hasn’t QE likely been successful in forestalling deflation that would have crushed lenders of all stripes, from small businesses relying on short term borrowing, to pension funds holding mortgages and corporate bonds that would have gone under? Furthermore, the banks have recapitalized using the arbitrage from ZIP borrowing to buy the longer dated treasuries at higher interest rates—what’s wrong with legally recapitalizing our banking system?

So, what’s the alternative? The theoretical academic alternative is to stand back, let the system collapse, wipe out those foolish investors in stocks from underfunded companies and bondholders, so the economy can start all over. This cure may seem to some worse than QE.

Got a chuckle from the complaint that the economist modeling is worse than climate change modeling—but they are both conceptually, mathematically impossible.

The standard econometric modeling applies linear equations by adding to input levels on equation variables, or plays with the parameter coefficients of the variable. That’s the math that mature folks learned in school. However, real world systems are not well modeled by linear equations, because the variables in real world systems not only contribute an input affecting output, but that input feeds back on the variables creating what appears to be chaotic behavior, but really conforms to deterministic non linear dynamic behavior. A simple example is the momentum ion a stock, or broad stack measures when a few trades appear to be setting a trend, inviting traders to pile on (and these days, High Frequency Trading powered by computers applying algorithms to automatically detect possible trends and play, momentum is far more important than old fashioned human trading).

To their credit, climatologists have adopted non linear dynamics for modeling the climate (what economists ought to progress to), but there are two grave problems that render their mathematically chaotic models unusable for climate prediction, assuming the models were even valid, which is an open question. Consider that anytime a temperature measurement enters as input to a model, the model recalculates output, but that calculation creates feedback to the system (climate prediction)as a modeling iteration.

Currently, we are all aware that weather prediction is fairly good for a few weeks, but the longer the time span, the worse the prediction—no fault of the modelers, because rapid increase of modeling error is inherent in chaos modeling. Because the models iterate thousands, hundreds of thousands and millions of time as the prediction date moves into the future, the initial input data need to be incredibly accurate to generate prediction from the many iterations (the so called butterfly effect reflects the huge sensitivity of chaos modeling to input precision). The empirical fact is that atmospheric temperature, wind, cloud, humidity measures, and similar measures for multiple oceanic systems collect fairly rough, imprecise measures that are averaged, and far from precise.

Should economics get serious about applying chaos models, e would properly dismiss the notion that prediction ought to be good for time spans of a year and longer. The real world is indeed very complex, and the best models could not possibly produce accurate predictions any better than weather prediction.

Yesterday, 5:07 p.m.

our government and the Fed have put us into the unenviable position of having a tiger by the tail…we cannot let go(of policies, that is).  I believe most problems have simple solutions, just the opposite of what models try to do.  The simple solution is, in fact, simplify…simplify tax codes, regulations, and overall government.  Not much more needs to be said.

Mark Sladoje

Yesterday, 2:37 p.m.

ECONOMICS:  Nothing more than ‘After this, therefore, because of this….’
THE PROBLEM:  Government Action—- Over spending, creating money, creating debt,
          inventing words (reasons) hiding behind “NATIONAL SECURITY” becoming
          more secretive (NSA)
Maybe the answer is less government, term limits, and, a new way to finance our     government with a different way to raise money, eliminate the income tax!

As Einstein said, ‘keep it simple!”

Mark S

Shawn Allen

Yesterday, 2:19 p.m.

Your presupposition that the words “secular stagnation” were useful meant that you pretty much lost me from the outset.

“secular” implies that markets move in predictable cycles ala technical “analysis” and I consider it nonsense akin to voo doo.

If by secular you just mean long-term then just say long-term

Yesterday, 2:08 p.m.

As a biological scientist, I read this economic theory with some difficulty.  Can someone please tell me—How do we tell an over-regulation from one that prevents the seemingly ever growing criminal element in business?  One person’s burdensome regulation may be the one that prevents Wall St from stealing my money.

Dallas Kennedy

Yesterday, 1:42 p.m.

Great article! Economic theory today is indeed a pathetic sight.

Yesterday, 12:32 p.m.

John, you wrote: “Keynesians argue that Abe had the right idea, he just didn’t spend enough and will need to spend a lot more in the near future. In other words, fiscal and monetary stimulus can lift inflation and boost growth in the short term… but the problem is that you can’t have that stimulus if you want to consolidate the national debt and boost tax revenues at the same time.”

You didn’t explain how that’s wrong in your view.

Yesterday, I had the good fortune to see this video: The Economy: Does More Government Help or Hurt - Stephanie Kelton only. The New Economic Perspectives post describes it as follows: “Video of public debate on the role of Government in the economy presented at the Kansas City Public Library, Plaza Branch on September 16, 2014.”

Stephanie Kelton’s blog begins her biography as follows: “Stephanie Kelton, Ph.D. is Associate Professor and Chair of the Department of Economics at the University of Missouri-Kansas City.”

She is a Post-Keynesian (not to be confused with New Keynesian), but many of your criticisms are addressed, and, I believe, debunked, in the video.

Stephanie Kelton lays out the Modern Money Theory (MMT) critique of Austrianism (aka “austerity” and “laissez-faire” among others).

Let me keep this brief and end by saying that the criticism you level at Keynesianism, that it is akin to faith-based and the facts be damned, is the exact same criticism leveled at the Austrian School of Economics and somewhat also the Chicago School (non-monetarist aspects, as MMT encompasses monetarism), that especially the Austrians are not data-driven but reject the data when it shows them wrong, that they are ideologues and ignore the facts presented that refute their a priori assumptions.

Ken Templin

Yesterday, 12:06 p.m.


I have read your work for many years and this week’s column is an excellent summary of why Keynesian economics is showing its flaws.  My simple view is that anything done in excess (drinking and drugs on the human body and debt and government regulation on an economy) will ultimately destroy the structure it was intended to benefit.

Thanks for the thoughts.
Ken Templin

Craig Cheatum

Yesterday, 10:20 a.m.

Hey John, it seems to me like you are describing supply-side economics, not Keynesian at all.  Keynes would have us save when the economy is good so we would have reserves when the economy reversed.  I can’t think of any sustained period when that happened, so supply-side policies have dominated for at least 3 decades. During the Bush years, some economists used the term double Santa Claus because spending was dramatically increased along with massive tax cuts (even when we were in a so-called expansion and should have been saving not spending). Even on the out years.  Obama on his first day in office explained that the deficit would be $1.3 trillion for the first 5 years.  Even with that general knowledge, what did Congress do to cut spending, nothing.

So what we are seeing is nothing new.  Commitments were made a long time ago.

I do agree more and more that there will be big reset. Over what period of time is a bigger unknown.

From a personal standpoint I’d like to see more work on derivatives (is it possible to eliminate almost all of them?)and velocity of money (some say the only important thing to watch, but what is the prognosis for the steep drop to continue, or will it reverse any time soon.

Yesterday, 8:54 a.m.

Those of us facing retirement, whose investments have been severely impacted by this economy, have some catching up to do. The highest income earners realize this is the last opportunity to save for the inevitable. The spending spigot is now closed for many of us.

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