Am I the only one who notices the eerie similarities between the debate over the current “stimulus” bill and the run-up to the Iraq War? The same drumbeat of propaganda coming from the press. The same repeated warnings of imminent disaster from some quarters–if we don’t give the government the emergency powers it needs to handle the crisis. Powers that conveniently enough always happen to be the same ones that the supporters had wanted even before the crisis? Just as taking out Saddam Hussein had little if anything to do with Al Queda and protecting America, most of the “stimulus” bill is really just a laundry list of pet projects that Democrats and progressives (and everyone else too) has been wanting the government to fund for a long time–which have little to do with encouraging the economy to recover from the excesses of the last decade and a half.
I quipped under the Bush Administration that “I wish those who keep insisting on failing to learn from history didn’t have the power to force the rest of us to share in their remedial lessons”. While I have to admit I was actually pleasantly surprised with Obama’s actions during his first few days in office (regarding issues like torture, Guatanamo, and foreign policy), I get the feeling that this time around the block I’ll get to sit in on other peoples’ remedial economics lessons.
Jonathan Goff
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I love how the media conveniently forgets that the last time unemployment was this high was under Bill Clinton in the early 90s, and that his stimulus plan was only $16 billion…
I heard this story on NPR last week (Obama Gives Keynes His First Real-World Test). It gives a little bit of historical context to the current situation. I’m not sure whether to be horrified or hopeful. My natural sense of optimism wants to be hopeful.
I’ve been thinking for some time now that if engineers threw together shoddy and dangerous products the way bankers and brokers have been throwing together financial products, they would be sued into destitution. Surely there’s got to be some form of conservation laws that apply to economics. There’s got to be a way to calculate how rapidly wealth is being added to the system by sources of actual productive work versus how rapidly it’s being depleted from the system through sinks like interest payments, fees, and derivative products (e.g. mortgage backed securities). I call them sinks because they don’t actually add wealth to the system, they just get people who have earned wealth elsewhere to fork over their cash to someone who hasn’t earned it.
It is with respect to these thoughts that I found a couple remarks near the end of the NPR story to be particularly interesting. One of the economists said that there is no way for them to run a controlled experiment with economic systems. There is no definitive experiment which has been or could be conducted.
But I’m still thinking, “Why not?” I know it would be irresponsible to conduct large scale monetary experiments on the real world markets (e.g. the current stimulus bill), but moving money around is nothing but numbers begging to be run through a computer simulation. Financial markets are a huge network, not unlike the power grid. Sure there are a lot of variables and a lot of factors to take into account, but to test a theory, you don’t need an exact replica of the real world. All you really need to do is to set up a plausible model and play with it long enough to get a feel for how it responds to a given set of parameters.
I program computer simulations of complex fluid mechanics problems on a daily basis. Given a sufficiently accurate mathematical models, computational simulations are amazingly powerful. But they can also be used to formulate and test new models. Physicists do this stuff all the time. Why can’t economists?
Anyway, sorry for the rant. I’ve been thinking about this for a long time and it’s been driving me crazy. If anyone knows why the basic theory of financial markets can or cannot be worked out from sufficiently sophisticated computer models, please feel free to enlighten me.
John,
To be fair, I actually do think that this economic downturn is very serious–much more serious than the one you mention. I just don’t think that trying to stimulate our way out of this mess is the way to go. There are tons of malinvestments that have been made, and the sooner those can be liquidated, and resources shifted by the market to where they really are most effective, the better. What Bush did after Clinton’s Bubble popped was to try and reinflate it with stimulus, leading to a much bigger and worse crash. Trying to reinflate things now just seems like a great way to make things even worse.
~Jon
Disclaimer: By the way, I meant no offense to bankers and brokers in general. I just have a problem with the ones who thought they could continue to make money out of money without actually doing anything to add value or wealth back into the system.
4Eric Collins
Disclaimer: By the way, I meant no offense to bankers and brokers in general. I just have a problem with the ones who thought they could continue to make money out of money without actually doing anything to add value or wealth back into the system.
One of my many buttons is the people that don’t know the difference between creating wealth and obtaining it, and don’t care. I think there is a moral basis to our current problems that is far more important than anything else. One that consumes more than they produce is not living in a sustainable manner.
Eric,
The problem with economic modeling is that irrational human behavior is a significant component. The psychologies of markets is a slippery variable.
I share Jon’s concerns that this crisis is just a means towards greater government control and less freedom. It doesn’t matter whether it’s fascism, socialism or communism, the end result is the same. A concerted effort is being made to scare people out of their freedoms, this time to prevent a depression. And, while a depression is nothing to be wished for, if this one comes to pass it will be the 8th one in U.S. history. The ones prior to 1929 were more limited in duration as the Federal government did a lot less financial mismanagement then. Heck, there wasn’t even the Federal Reserve around for the first five.
Orville,
Good points–and yes that was more or less what I was getting at. That said, there’s a reason why I titled this post what I did. Fearmongering to enable government power grabs is becoming a fine old tradition from both parties.
~Jon
Fear-mongering has been around for probably as long as there have been people willing to take power by any means necessary. On the whole, though, I feel much less dread now then when the previous administration was beating its war drums and preparing to send young men and women into harms way.
There is always a danger that any government could begin claiming powers for itself that would endanger the liberty of its citizens. The United States is not immune to this threat, although our founding fathers did us a tremendous favor by building in multiple redundancies. The true danger is when people began operating around the edges of the law and against the letter and the spirit of the Constitution.
One last thing for your consideration. This YouTube video (You should know this) provides an interesting perspective on various forms of government. It may be over-simplify things a little bit, but it makes one point especially well: The one thing that has kept this country and its institutions safe for the past two centuries has been a healthy respect for the rule of law. In my opinion, this is one of the most important and fundamental civics lessons that we can pass on from one generation to the next. Our system may not be perfect, but if we stick to the basic principals of respect for the rule of law and respect for human life and liberty, then we can survive just about any crisis that may come to pass.
Ok, enough politics.. Let’s get back to some space-bloggy-goodness.
@Orville:
Exactly what freedoms are we being scared into giving up? Under Bush this question was easy to answer: the right to a trial by your peers, the right to due process, the right to be free from illegal search and seizure, etc. were all abridged under the premise that we would not be safe without abridging them. What freedoms are we being scared into giving up by paying to rebuild bridges?
Do you have an answer, or are you just “fear-mongering”?
Orville@6
The problem with economic modeling is that irrational human behavior is a significant component. The psychologies of markets is a slippery variable.
No offense, but I think that is a cop-out. We are not talking about a completely random or chaotic process. There are elements of that in any system that contains large numbers of interacting variables. However, by and large, individuals do not act randomly. More than likely they will have a very high probability of taking certain actions under certain conditions (see game theory).
My concern at the moment is not so much with the actions of individuals, but with the behavior of the system as a whole and its overall robustness. How do we ensure that there are sufficient buffers built into the system to absorb transient shocks? More importantly, how do we identify so-called ‘toxic assets’ sooner so that they may be appropriately dealt with before they precipitate a crisis?
Maybe I lived in an alternative universe, but in it, during the 14 months of “rush to war” — when Bush growled on his belly in front of UN, the press was unanimously in opposition to the president, whereas now it’s unanimously in support. So much for the drumbeat and fear-mongering.
As for Obama’s first actions, I’m not surprised that he likes real torture enough to close the Club Gitmo and keep the renditions. He is, after all, a Democrat. Now the terrorists are not going to have the option of gaining a few pounds in a resort in Cuba. Maybe it’s all to the better.
Governance by crisis is a sign of a decadent state.
Eric,
“No offense, but I think that is a cop-out. We are not talking about a completely random or chaotic process.
None taken, but irrational does not equal random. In fact I’m speaking of mass irrational behavior such as Joe Sixpacks becoming a real estate investors at the peak of the real estate bubble, or people buying tulips 2 centuries ago. Market cycle psychologies go through start at fear to invest, cautious optimism, mania, and then back to fear. Those psychological variables of mass behavior can be approximated based on past cycles. This is why a small number of people saw “it” coming in 1929, and more recently over the last few years.
Eric Collins wrote:
“Given a sufficiently accurate mathematical models, computational simulations are amazingly powerful. But they can also be used to formulate and test new models. Physicists do this stuff all the time. Why can’t economists?”
I think this relates to the state of economic theory in the world today. From what I’ve seen, most economic theories start out with, “Assume perfectly rational actors and perfectly efficient markets…” Professional economics simply isn’t operating at a level of detail that would allow accurate computer simulations. Imagine doing a CFD simulation of orbital re-entry assuming the atmosphere always behaves according to the subsonic ideal gas law.
I have heard of behavioral economists who are trying to get accurate, detailed theories of people’s actual economic behavior through experiments and observation. This is a good trend, but I think it hasn’t infused far enough into mainstream economic circles. And the behaviorists are probably also just starting to learn the basics. It will take time to build up theories of more complex group dynamics.
As for the hardness of the problem itself, there is something to be said for that because the problem is chaotic. It’s like trying to predict the weather where a small change in initial conditions can result in a large change in outcome.
But we do have weather simulations that can predict at least a while into the future, and they are getting better all the time. I agree it’s mostly a cop-out to claim that economic simulation can’t be done. It protects those with beautiful theories that aren’t useful in the real world.
John Hare wrote:
“One of my many buttons is the people that don’t know the difference between creating wealth and obtaining it, and don’t care”
I agree with this, and I think one of the causes of this problem is the current oversimplified economic theories that say it is impossible to obtain wealth without creating it, therefore if you got some money you must have deserved it.
Yes, the warnings about “impending disaster” if we don’t allow ourselves to be buffaloed into the stimulus bill do indeed follow the same dynamics as the drumbeats for the invasion of Iraq.
Incidentally, just to clarify, the invasion of Iraq was never about fighting Al Qaeda, and Bush & Co. never claimed that it was. The purpose was to reshape the geopolitical paradigm in that region to the West’s favor. That isn’t automatically a bad idea, but it can (and did) suffer in its execution. Still, the end result is that Iraq has a better government now than any in that region except Turkey and Israel. Was it worth the effort? That’s a different debate, but it does resemble what the future may bring with the stimulus bill: The stimulus may “work,” but almost certainly not very well, and definitely not as well as saner alternatives.
Fear motivates better than hope, at least in the short run; that’s why politicians use it in a pinch.
This applied equally well to the start of the space race. In 1958, Lyndon Johnson, then majority leader of the Senate, warned that if the Soviets controlled space then they “would have the power to control the earth’s weather, to cause drought and flood, to change the tides and raise the levels of the sea, to divert the gulf stream and change temperate climates to frigid.†No sensationalism there! Read that quote again, just for effect. Anything line used to sell the Iraq war or the stimulus package is quite mild in comparison.
Bob Steinke@14
Imagine doing a CFD simulation of orbital re-entry assuming the atmosphere always behaves according to the subsonic ideal gas law.
Yeah.. I get that it is a hard problem, and that oversimplified models are not likely to yield particularly useful information. I’m not familiar enough with economics or financial markets to properly judge what would or would not be practical to predict with computer simulations. I’m just saying that it should be possible to gleam some useful insights from examining the behavior of numerical models before one attempts to unleash yet another money
makinghording derivative financial product on the market.On a related note, I’ve just finished reading through the latest issue of SIAM News (Jan/Feb 2009 – not online yet). There is an article describing how there has been a significant amount of dispersions cast at the so-called ‘quants’ who came up with financial forecasting models that were used rather carelessly by day traders. Apparently, there has been no shortage of highly qualified PhD types working on financial modeling and risk analysis. Sadly, it seems as though there was actually a tremendous shortage of managers who would actually listen to the analysts and pay attention to what the models were trying to telling them.
The full article should appear online here sometime in the next couple of weeks.
It seems to be agreed now that what actually ended the pre- war recession was in fact the spending on World war II and not the New Deal expenditure.You can regard this as ‘useless’ spending, that is expenditure which left nobody with homes or products to enjoy. Now is perhaps the time for a programme which absorbs expenditure, stimulates industial production but casts its products out beyond the Earth, to the Moon or Leo rather than satisfying the wishlist of liberal politicians. (we’ve had that in England and we know that it saps rather than stimulates productivity)