Because I’m an economist, my buddies call me and ask me about what the hell is going on with the economy these days. My partner on That's Capital Jonathan calls me. My pal Carroll Parrot Blue calls me. My buddy Lori Fontanes calls me. Steve Kramer. Gene Carl.
It’s nice that folks keep in touch. But I tell them my best guesses. I also include a caveat: I’m not that kind of economist. I’m a microeconomist, not a macro-economist; this is outside of my area of expertise. But since folks keep calling, I thought I’d include my current take on things in a post here. I suspect I’ll eat some of my words, but I’d hardly be the only one to take down some humble pie this year.
So here's my two cents on what’s happening… and how we’re reacting to it.
Because I’m an economist, my buddies call me and ask me about what the hell is going on with the economy these days. My partner on That's Capital Jonathan calls me. My pal Carroll Parrot Blue calls me. My buddy Lori Fontanes calls me. Steve Kramer. Gene Carl.
It’s nice that folks keep in touch. But I tell them my best guesses. I also include a caveat: I’m not that kind of economist. I’m a microeconomist, not a macro-economist; this is outside of my area of expertise. But since folks keep calling, I thought I’d include my current take on things in a post here. I suspect I’ll eat some of my words, but I’d hardly be the only one to take down some humble pie this year.
So my two cents on what’s happening… and how we’re reacting to it.
One of the things that friends have asked me about is why it took economists so long to wake up and smell the coffee. Why do we even go so far as to say the “R-word” as if it was one of the seven words you can’t say on TV?
First, economists lean heavily on “marginal analysis." In plain English this comes down to figuring out, “What’s the best first step I can take under the circumstances?” And these are tiny steps. It takes a while to really go anywhere, like another discrete economic state (recession, rapid growth, etcetera). And a recession is a very different state of affairs than where we’ve been living in the last few years, especially if you’re connected to Wall Street. So if you’re creeping along seeing almost the same thing from one day to the next, you tend not to see the changes. Think about when you were a kid and how your aunties all talked about “how fast you’ve grown” when they say you at Thanksgiving Dinner after having seen you at the family Labor Day picnic. To you (or your parents), little had changed, but that’s because you saw so many little changes that nothing seemed to have changed.
Or think of it another way: when a kid is learning to ski and he’s getting down the hill and staying upright it looks like it will keep going. But at any moment things can crash.
Second, policy-oriented economists see their role as driving the economy to grow or at least steer clear of downturns. Looked at this way, a recession is taken as an indictment of failure. That’s a lot of ego at stake.
Third, no one likes to report bad news. At the very least, it throws a lot of cold water on a party mood. But it can also make investors and others jittery so that the thing we fear actually becomes real. As much as we’d like to avoid it, perception is often reality in economics.
Fourth, and probably most important, growth allows economists to pull a Houdini on tradeoffs. That is, if the economy keeps growing, we don’t have to make hard choices. We can get everything that we’re getting now and add a bit more of something else. Great trick, eh? Unfortunately, this impairs one’s ability to make hard choices. It would seem to me that economists, as well as the rest of society, have seen their decision making skills and willpower atrophy. Now we’ve become dependent upon, addicted to, growth. So our first instinct is to get the growth train going again. But now when we push the “growth button,” nothing is happening. This has made for an atmosphere of befuddlement and panic about what to do next.
This reminds me of something Bob Dylan said:
We live in a political world
Turning and a'thrashing about,
As soon as you're awake, you're trained to take
What looks like the easy way out.
So even as economists are finally getting around to saying that things could get pretty ugly, one economist, Robert Costanza -- he of “True Cost Economics" and the University of Vermont -- states that the recession is old news. His op-ed piece “Our Three-decade Recession” certainly takes an unorthodox view of our economic situation, but it also clearly underscores many of the rotten-to-the-core problems with economics and economic statistics. Chief among them: the cult of growth.
“Growth” is shorthand for growth in the Gross Domestic Product (GDP) growth. And GDP includes a lot of activity that is hard to call productivity. Think of it like this: when a shrimp boat pulls in its nets, it catch shrimp, but it also catches license plates, rocks, plastic bags, and a variety of fish and other “by-catch” that won’t bring in the bucks at the market. But GDP doesn’t distinguish; it’s as if the shrimpers were paid by the pound for everything in their nets rather than the shrimp they caught. That’s great if you believe we should get As for effort, but if you believe that real value matters, it’s a problem. Costanza digs right into this when he compares GDP to the Genuine Progress Indicator (GPI).
Reckoning well-being in GPI terms completely realigns the perspective of economic performance in recent decades; instead of overall growth, with hiccups in the late 70s, early 80s, early 90s, and early 00s, we see an economy that is largely stagnant with periods of decline.
What Constanza doesn’t say is that when GDP stalls or declines, GPI could outperform it. This comes down to matters of policy, personal choices, social values, and finding ways to enhance real productivity rather than fattening ourselves on speculative “wealth.”
So: will we continue to spend on a war that shouldn’t have been started?
We will continue to spend beyond our private and public means?
Will we continue to mismanage public institutions?
We certainly will, but if we can adjust sufficiently, we can spare ourselves the worst of economic stress in the coming months. But just in case, buckle up; it’s going to be a bumpy ride.
Titus Levi
The Idea of March 2008
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