Economists continue to self-immolate

by pdxblake

The Great Recession (or Lesser Depression as Brad DeLong has named it) has made a bit of a fool of most of the economics profession, particularly those at the fresh water schools who force the data to fit their theories.  Maybe I’m a bit late to the party on Jeffrey Sachs because I thought he was a fairly reasonable economist (notwithstanding the debate he had about foreign aid effectiveness with William Easterly, which turned into a bit of a drama) .

However, let us add Sachs to the list of economists who show their own self-importance and foolishness when confronted by the Great Recession.  He penned a hysterical (as in trying to generate hysteria) article on Huffington Post decrying quantitative easing and fiscal stimulus as solutions for the employment problem in the wake of the Great Recession.   As an example:

The big mistake of Obama and his economic team from the start was to treat the downturn as a temporary recession, albeit a very big one. A temporary recession requires a temporary fix. A structural crisis requires long-term strategies. Here we are in 2012 without any long-term strategies except to wait out the crisis.

Real solutions require fresh strategies to break free of vested interests in energy, healthcare, education, and infrastructure. In other words, in today’s political environment, real solutions won’t happen any time soon. We are stuck.

Mark Thoma is exasperated:

I’m getting tired of Jeff Sachs acting like he is the only one telling the truth about the economy, the problems are all structural we are told despite considerable evidence to the contrary, and — surprise!!! — his “truthtelling” somehow leads him to advocate the same pet projects he’s been pushing for years.

And turns to Paul Krugman who reminds us that the problems of the Great Recession are not new problems, they were faced in the 1930s and macroeconomics became a lot more informative as a result (thanks in large part to John Maynard Keynes). Krugman, with a a reference to Keynes’ ‘magneto’ analogy describes :

Keynes argued that the Great Depression could be thought of as a failure in the car’s electrical system; so let’s think of it as a situation where your car won’t run because it has a dead battery — that is, you could get it running again with a fairly trivial and easy intervention: just buy a new battery, which costs only a tiny fraction of the expense of a new car.

In saying this I am not denying that there may be other problems with the car, perhaps even big ones. Maybe it needs new brakes, or a new transmission, and these had better be dealt with soon.

Still, what sense can it possibly make to say that therefore you shouldn’t start by replacing that dead battery?

Sachs’ exasperation with the state of economic policymaking is to some degree understandable.  There are serious problems with how economic policy is made and there are longer-term fiscal problems caused by rising healthcare prices (which affects Medicare, which Romney and Ryan want to fix by just shifting the cost onto seniors).

However, it is not enough to throw your hands up in the air and decry the lack of solution when the current problem is not the same as the long-term problem.  Denying that fiscal policy (government stimulus from additional spending or tax cuts) or monetary policy (additional quantitative easing) can help with the near term employment problem because there are long-term problems that you think you have the solution to is no better than the Republican plan (more tax cuts, whatever the problem).  In fact, it is the same failure.  You have a solution to fit whatever the problem is.

So, you can add Jeffrey Sachs to the list of economists who have embarrassed themselves in response to the Great Recession.  And that’s too bad because the more economists who choose to self-immolate (intellectually), the more people will feel alright with dismissing the entire profession.  That, I might add, is in part its own doing.  By moving entirely towards more and more complicated mathematics (to appear more scientific) and deciding that every macroeconomic problem can be described by aggregating together individuals into a group (what economists call micro-foundations), they have become the clown that ignores the difference between individual behavior (and its sometimes inability to be rational) and the behavior of groups of individuals (which is more than just the sum of the individual parts).