Wednesday, May 2, 2012

More a Religion Than a Science

A study was released by Fitch and Oxford Economics today purporting to explain the "recovery" of the US economy.  According to Reuters, "Fitch and Oxford Economics said the policy response to the financial crisis in 2008 helped prevent a longer and deeper US recession."

Reports like this undermine the credibility of Economics as a discipline.  There are no available research methods in macroeconomics capable of making statements and drawing conclusions like this.  Instead, a report like this represent a neat "consensus summary" that mostly represents the political views of its authors.  This is not on the same par as asking "why did the ball that I threw up in the air come down," but economists, far too often, make it seem like it is.

The cold, hard facts are that economists really don't know much about macroeconomic policy.  The largest historical experiences involving the application of macroeconomic policy at the instruction of famous economists were notorious failures.  The 2008-2009 policies seem to fit that pattern more than what is suggested by the Fitch and Oxford Economics report.

There was a day when there was no macroeconomic response at all.  Yes.  We didn't always react to economic and financial crises by dramatically expanding the reach and activities of government.  Try the latter half of the nineteenth century for the most dramatic example of periodic, recurrent financial and economic crises coinciding with the largest growth in GDP in the history of the country!  When financial and economic crises, and there were many, exploded on the scene in the latter half of the nineteenth century, the US government took no role and watched from the sidelines.

How can this be?  How can a steady stream of financial and economic crises, unchecked by any government policy actions, coincide with the most incredible real output growth in our history?  One explanation worth pondering is that the absence of government activism was the beneficial salve that turned America from a mostly agrarian countryside into the strongest economic power in the world.  There was no Fed; indeed there was no central bank.  There certainly were no discussions of "taxing the rich."  There were no income taxes.  Government sat by and watched.  And, guess what, it worked.

Now, we have an activist government that thinks it can and should cure every ill.  All of this chuptzpah is buttressed by an admiring media and an applauding group of academic economists.  Yet, it never works.  The 1930s and the modern day are outstanding examples of how government can prevent economic recovery over a very long period of time and prolong the agonies of the folks at the bottom of the economic pile.

There is always a belief that when something "goes wrong," that something should be done about it.  In the case of financial and economic crises, that belief seems unfounded.  By letting the ebbs and flows of the economic system do their thing, even if that means major economic downturns from time to time, you may be providing the necessary impetus to true economic prosperity that lifts all boats.  Instead, using rhetoric, unsupported by facts or analysis, simply keeps most advanced economies mired in their bureaucratic mess.  As usual, the poorest amongst us are the principal victims of this rush to do something, do anything, even if it doesn't seem to work.