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Misconceived theories, preconceived notions

Two items now on our website examine the current real-world implications of prejudicial thinking.First, William Pfaff looks at how the take-your-medicine conclusions reached by economists Carmen Reinhart and Ken Rogoff in 2010 confirmed the untutored intuition of policymakers looking for a reason to slash infrastructure and social spending throughout Western Europethe only trouble being that the prescription for austerity arose directly from the economists' questionable methodology. That, and a spreadsheet error that further distorted the calculations (Paul Krugman last week called the resulting effect on austerity-straitened nations the Excel Depression). From Pfaff:

The blood runs cold when one fully appreciates how vulnerable Western policymakers are to slogans and magical thinking. The Reinhart-Rogoff case is the latest, and certainly will not be the last, in which the credulity and carelessness of experts wreak havoc among millions of ordinary people. [B]ecause of austerity policies their paper was supposed to support, Greece sees hardship and political chaos, the Irish and Portuguese economies have collapsed, Spain and Italy suffer serious crises, the French government totters, and everyone hates the Germans for forcing austerity on everyone else.I am not writing this simply to pile onto the economists whose work was used to justify disastrous policies. What concerns me more is the demonstration of credulity on the part of elected leaders and policy professionals, who eagerly accepted research findings that seemed too convenient to be true.

Next, E. J. Dionne Jr. takes up the issue in the context of the political (and personal) responses to the Boston Marathon bombings, noting that where some were initially eager to pin blame on Islamic terrorists, others saw the hand of right-wing extremists. Once Tamerlan and Dzhokhar Tsarnaev were identified as the bombers,however,

[w]e then moved, with dispatch and without pausing for more information, to show how the event proved that our side was right in any number of ongoing debates.Opponents of immigration reform used the fact that the brothers are immigrants as a lever to derail the rapidly forming consensus in favor of broad repairs to the system. Supporters countered, defensively, that if there is any lesson here, it's that our approach to immigration needs to be modernized. In truth, this horrifying episode has little to do with immigration reform one way or the other.We fell back to other familiar ground. Sen. Lindsey Graham, R-S.C., said we should assume these brothers had to be linked with one of our international enemies and that Dzhokhar should therefore be tried by a military tribunal and not in a normal American court, the venue to which his status as an American citizen entitles him.I'd acknowledge that none of us can get through the day without making a lot of assumptions. All of us have intellectual, ideological, and moral commitments that we bring to bear upon what we think about almost everything.But the hyperpolarization of our moment has sped up the rush to (contradictory) judgments, a practice further accelerated by new technologies. We have less patience than ever with the often painstaking task of gathering facts. We are better informed, yet seem more efficient than ever in manufacturing conspiracy theories.

Read Pfaffs column here; Dionnes is here.


Commenting Guidelines

When an argument involves economics I think that we non-economists feel -- rightly -- that we are at the mercy of those extremely brilliant people who claim to know so much about so much because they do know a lot, and that's the hell of it. If anybody has data, it's the economists, Reinhart & Rogoff to the contrary notwithstanding.The other problem is that economists too can be wrong, and they can even be blind to basic errors in their own systems. Because they can be blind about what is simple, I think we can all quite rationally take it upon ourselves to criticize some of their founding ideas -- for instance, the austerians' notion that when one is humongously in debt it is irrational to go into more debt. On the face of it that looks self-evident. But man is a creature in time, and sometimes going further into debt is the only thing to do. (Yes, I'm being Keynesian here.) For instance, if you are up to your ears in debt and your dying child needs expensive medical treatment that your policy doesn't cover, the rational thing is to go into further debt. More debt will put off the day when you are debt-free and/or it will even lessen the possibility of a cushy retirement, but you borrow because it will save your child.Unfortunately, our economic thinking is too often tied to our political assumptions and commitments, and those are sometimes irrational without our being aware of it. Hence the need for political discussion with other to try to correct our own thinking, thinking which our ideologically different friends accuse of being nutty/crazy/insane/barking mad/bonkers/not playing with a full deck/you name it. (By the way, I think that the great variety of words that we have for "crazy" shows that in practice Szasz theory, though over-simple. is tremendously relevant to an awful lot of human interactions.)Which brings me to some scary underlying causes. Holly Case has a fascinating article in Aeon about Thomas Szasz' theory that psychiatry is a sham and that "madness" itself is a myth. One of Szasz' major points is that too often political extremism (see the Tsarnievs?) is fobbed off as insanity when, in fact, it is quite "normal" for such people to think as they do. (Shades of Hannah Arendt!) When I started the article I thought that it sounded bonkers itself, but Szasz' argument has much to recommend it I think we very badly need a thread on Case's article. A great deal of what we argue about here (and generally in politicaal arguments) involves what Szasz is talking about --or so I think.(I'm watching the mother of the Tschernaevs on CNN. The face of tragedy without being a mask. Pray for her!)

P. S. What the Reinhart-Rogoff brouhaha and the Tschernaev case have in common is they force us to question the very foundation of our humanity: what is to be rational? How do we know rationality when we find it?

I've known a few crazy people in my life, and I can tell you they were crazy, not because they couldn't think, but because they couldn't see. Logic is easy to parse; perception, not so much.

From the Pfaff article:"[B]ecause of austerity policies their paper was supposed to support, Greece sees hardship and political chaos, the Irish and Portuguese economies have collapsed, Spain and Italy suffer serious crises, the French government totters, and everyone hates the Germans for forcing austerity on everyone else."Talk about magical thinking. The austerity measures, whatever their effectiveness, were not the cause of the deficit crises in these countries. The governments of these countries all got in so far over their heads in hock that capital markets would no longer buy their debt (i.e. would no longer lend them money) at interest rates that the countries were willing to pay. That is the cause. The effect is that these countries had to go hat in hand to the EU (read Germany). Let's concede for the sake of discussion that the strings that Germany and the EU central bank attached to the bailouts were counter-productive in the short run. The lesson learned in all this would seem to be, Don't get so far in hock that you need to rely on the kindness of powerful strangers who look to their own self-interest.Let's take this one step further. Suppose that there was no European Union and no common currency. Germany would have significantly less incentive to bail out these irresponsible governments, and there would be no central bank to buy up their junk bonds. In that case, what would they have done? If history is any guide, they would have engaged in still more magical thinking: they would have printed bales of their own currency. And then, after years, perhaps a generation or two, of pain and suffering that would dwarf whatever was caused by these austerity measures, the Chicago School would eventually be vindicated, again.Btw, the Economist article to which Pfaff links is a good deal more sober that Pfaff's take on Rogoff and Reinhart. The upshot seems to be that, after the formulas were fixed in their spreadsheet(!), their research still demonstrates what everyone already knew: that national governments can pork out on debt until they reach a point of morbid obesity, and this ill health will be a significant drag on the overall economy. Their corrected model, in fact, seems to confirm what we've been experiencing Stateside during these halcyon days of robust prosperity that have characterized the Obama Administration: annual growth of 1-2% and unemployment that remains stubbornly stuck above 7%.

There is a great of discussion in the public square on the topic of "crazy'. About time. Here's my two cents. Spend a little time considering the existence and, if found to exist, the nature of an thing called "projection". In my limited experience it won't make the challenge easier but it may make it less confusing.

Jeanne ==Yes, the Chicago School was right in thinking that the capitalists would not invest in bonds that paid little interest -- the capitalists are indeed sitting on massive amounts of cash. But this causes stagnation. The basic problem with the Chicago folks is that they contradict themselves in saying 1) when interest rates are too low the capitalists don't buy bonds, and 2) capitalism is self-corrective.Since money to stimulate the economy is not coming from the capitalists, it can only come from the government, whether by printing it or borrowing it. In other words, sometimes printing money is rational. True, it cannot alone solve a recession/depression -- the capitalists will eventually have to take some risks.

Jim,Some European countries had high debt-to-GDP ratios before the recession hit; others did not. What they all have in common is that their deficits went way up after the financial crisis from wherever they were before. So the underlying problem was the financial crisis and the ensuing recession, not government debt. Furthermore, even the IMF has acknowledged that austerity policies put a serious drag on economic growth, which means less revenue, which in turn means higher deficits, the very problem austerity policies are intended to correct. (See this article for an excellent explanation of how this happens.) The Reinhart/Rogoff paper purported to show that countries whose debt exceeds 90 percent of their GDP see minimal growth or recession. The corrected numbers show that some countries have had healthy economies while their debt was well in excess of 90 percent. That doesn't mean that debt is never a problem, but it does suggest at a minimum that the United States is, even now, well short of the point where federal debt begins to do more economic damage than budget cuts do.

Contra Pfaff: A broader question is how influential studies like Reinhart-Rogoff were in persuading countries to adopt austerity budgeting. My sense is that for deeply indebted countries with no way to finance themselves on the international markets Greece being the central example the answer is that it had little to no influence.That is because by 2010, when the Reinhart-Rogoff paper came out, Europe had already committed to austerity.

Hmm, not much influence, and therefore not much blame to assign to them. Oh well. Also, it would be interesting if folks could define "austerity." Some of the discussion on this issue is rather illogical, as one blogger has pointed out:

Matthew, thanks for those links. I assume that you're referring to a velocity of money theory, which I believe is what is meant by the "mutliplier" in your links: that if governments pump money into a sluggish economy via transfer payments, the velocity of that money will result in real, measurable economic growth.Let's suppose that prescription would work as advertised. On the supposition that the velocity of money in a given economy applies to any money in the economy whether or not it originates in government transfer payments, we may note that central banks have been manipulating interest rates to increase the supply of money, pretty much since the beginning of the Great Recession. that I'm not saying that pumping money into a weak economy is bad (although it does carry an inflationary risk which, thank goodness, hasn't transpired too badly so far). I am saying that there are other ways to apply the theory in addition to transfer payments, and in a time of debt and deficits, borrowing money to fund government transfer payments can be a real problem. My original point, though, is that Pfaff seems to be attributing the economic issues in the EU to the austerity measures. I'm saying that the austerity measures were the reaction to, not the cause, of the issues. I'm not disputing that the austerity measures may have been misguided. Raising taxes - taking money out of the economy - seems insane to me. The IMF paper to which you linked seems to advocate a comprehensive program to make Europe well, one component of which is a measured, disciplined, well-managed effort to address deficits and debt on the European periphery. That sounds like an austerity measure.(I don't dispute Pfaff's larger point, which Ann echoes above, that when technical expertise gets into the hands of non-experts, bad policies can be hatched. Part of the disaster that was mortgage-backed securities was that the marketplace for those securities relied on a theoretical framework whose flaws or limits weren't understood by the players.

Jim P. --It's not just the non-experts who can wreck havoc. The non-experts are usually led by experts with blind spots, and blindness can be found in brilliant but ideological economists too.Another problem, intrinsic to economics, it that economic systems are so complex and fast-moving that it's hard to see what is really going on in terms of cause and effect. But with the advent off "bg data", which is also sometimes practicaly instantaneous compared to the old days, that should give economics a surer base of current data to work with.Another problem has been that because industrialization is rather new on the historical scene, the economists really don't have too much experience to work with. Again, computers should help with collecting data about the past.

JIm P. =Raising taxes doesn't "take money of the economy" in every case. When the rich have lots of cash and are not investing it, then new taxes on them can be put into the economy by government spending, e.g., backing alternative energy, repairing the infrastructure, helping to pay teachers.