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Why Most Economists Get It Wrong

Why Most Economists Get It Wrong

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Published by Ron Robins
Economics as practiced is still the ‘dismal science.’ Most economists rely on economic modelling for forecasting. It rarely works. Economists ignore key relevant data. Fearing for their jobs they stick with the comfortable view. Massaged government statistics also lead them astray. Furthermore, complicit media rarely question prevailing economic orthodoxies or the ‘adjusted’ government data, adding to delusional thinking. Economists’ reliance on Keynesian economic theory is likely to lead them off course and to miss the next, potentially more disastrous, downturn. Now let me flesh out the details of these points.
Economics as practiced is still the ‘dismal science.’ Most economists rely on economic modelling for forecasting. It rarely works. Economists ignore key relevant data. Fearing for their jobs they stick with the comfortable view. Massaged government statistics also lead them astray. Furthermore, complicit media rarely question prevailing economic orthodoxies or the ‘adjusted’ government data, adding to delusional thinking. Economists’ reliance on Keynesian economic theory is likely to lead them off course and to miss the next, potentially more disastrous, downturn. Now let me flesh out the details of these points.

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Categories:Business/Law, Finance
Published by: Ron Robins on Dec 13, 2010
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Why Most Economists Get It Wrong
By Ron Robins, Founder & Analyst,Investing for the SoulBlogEnlightened Economics;twitter First published June 3, 2010, in his weekly economics and finance column atalrroya.comWhile visiting the London School of Economics in the autumn of 2008, Her MajestyQueen Elizabeth asked Professor Luis Garicano a straightforward question.Quoting the Financial Times, from November 4, 2008, “if these things [causing thefinancial meltdown] were so large, how come everyone missed them? Prof Garicanoapparently replied, ’someone was relying on somebody else and everyone thoughtthey were doing the right thing.’” I have some other views. Economics as practiced is still the ‘dismal science.’ Mosteconomists rely on economic modelling for forecasting. It rarely works. Economistsignore key relevant data. Fearing for their jobs they stick with the comfortable view.Massaged government statistics also lead them astray. Furthermore, complicit mediararely question prevailing economic orthodoxies or the ‘adjusted’ government data,adding to delusional thinking. Economists’ reliance on Keynesian economic theory islikely to lead them off course and to miss the next, potentially more disastrous,downturn. Now let me flesh out the details of these points.
Reliance on faulty models. Statistics ignored or abused
No economic model can account for sudden changes in consciousness, individualpreferences, or exogenous factors. As Alan Greenspan, former head of the U.S.Federal Reserve said in March 2008, “the essential problem is that our models - bothrisk models and econometric models - as complex as they have become, are still toosimple to capture the full array of governing variables that drive global economicreality."Before the meltdown, economists completely ignored voluminous data pertaining toexcessive debt growth and leverage. In the U.S. and similarly in other developedcountries, between the early 1980s and until the financial meltdown, annualconsumer and private debt growth often greatly exceeded income and GDP gains by100 to 200 per cent. U.S. data showed that in “2006 it took $6.32 of new debt toproduce one dollar of national income.” Yet mainstream economists either did notknow, or totally ignored this rapid accumulation of excessive debt and negative debtproductivity with their potential for creating a devastating negative economic shock.Even if most economists glimpsed the possibility of a forthcoming meltdown, manypreferred to say nothing about it. What bank economist would want to tell hismanagement to halt lending while every other bank is massively expanding it? A fallin the bank’s stock price could follow such an announcement and the economistwould either have to retract his words or possibly be asked to leave.Statistics that economists rely on, most especially in the U.S., have been so modifiedover the past three decades that comparisons with prior periods or with othercountries is almost impossible. They also make the U.S. economy look better than itreally is. I suggest readers go to www.shadowstats.com for an understanding of how
 
U.S. governments’ statistics have been changed. Relying on debatably biasedstatistics provides cover for politicians and compliant economists to project rosierviews of the world than might really be the case.The potential of faltering consumer demand should have been obvious to economistsby 2007. In the U.S., savings rates (whose statistics were again revised and look ‘better’ than they used to be) dropped to all time lows hovering in the -2 to 0 percent range of after-tax disposable income. This was while debt service levels were atall time highs. These extremes demonstrated that consumers could retrench in theirspending at any moment. Yet mainstream economists never sounded the warning!
Complicit, non-analytical media fed economic illusion
The media were at fault too. Facing deadlines and wanting ‘reputable’ quotes, theyinevitably interviewed economists from major financial institutions who had a vestedinterest in not rocking the boat. A few years ago a top Canadian journalist, whenasked why he primarily quoted bank economists on the economy, replied that theywere always available, whereas economists in academia - who might give a moreindependent view -were not.
Keynes theory inappropriate today
Most economists follow Lord Keynes’ economic theories. A principal concern of hiswas what he called the ‘output gap’—the difference between an economy’s potentialoutput versus its present performance. If the economy was underperforming, Keynesadvocated the government spend and borrow more to close the gap. Of course, thisis what governments are doing today, spending and borrowing anywhere from 3 to16 per cent of their GDP as private consumer demand for goods and services hasfallen precipitously.Keynes also indicated that in good economic times governments should tax more andrun surpluses to offset the deficits of bad times. However, I have not seen any largedeveloped country government or international economic agency project surpluses inthe decade ahead. Thus, Keynes’ theory relating to eliminating government deficitswill not work today. His current day followers conveniently neglect this aspect of histheory. Thus, huge debt accumulation with no offsets is facing developed countries.
Debt growth to depress economic activity
Now with developed countries’ government debt expanding rapidly, a limit to theirbond issuance might be reached.In a major report last March, the Bank for International Settlements (BIS)—the ‘central bank of central banks’—studied government debt trends in twelve countriesincluding the U.S, U.K., Germany, France and Japan. The Bank said that, “drasticmeasures [bold added] are necessary to check the rapid growth of current and futureliabilities of governments and reduce their adverse consequences for long-termgrowth and monetary stability.” Drastic measures means big government programcuts and higher taxes, which create slow or declining economic growth.Highly regarded Professors Carmen M. Reinhart and Kenneth S. Rogoff confirm thisprospect of slow or negative growth ahead in their seminal study, “Growth in a Timeof Debt,” published January 2010. They found that when government debt/GDPratios are, “… above 90 per cent, median growth rates fall by one per cent, andaverage growth falls considerably more.” BIS estimates put U.S. government debtexceeding this threshold: at 92 per cent for 2010 and 100 per cent in 2011.

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