Edward Hadas

Admit economic ignorance

Edward Hadas
Oct 31, 2012 13:40 UTC

It is time for economists to admit that they are stumped. Four years after being blindsided by Lehman Brothers’ collapse, the profession is still stumbling in the dark. Policymakers and pundits still make confident pronouncements, but the conclusions are radically different. The expert disagreements give away the truth: ignorance reigns.

Here are six crucial questions which professionals should stop pretending they can answer:

1) What creates retail inflation?

If, as some economists think, ample supplies of money push up prices, then the current inflation rates of around 2 percent are inexplicably low. After all, monetary and fiscal policies have never been as generous. If, as other professionals believe, prices fall when there is excess supply of goods and labour, then inflation rates are inexplicably high. Production is still well below trend levels and unemployment rates have rarely been as high.

2) How do financial asset prices affect the real economy?

Before the credit bubble burst, most economists believed high prices in financial markets were a sign and a cause of a strong economy. Now bull markets seem more dangerous. But then again, low or falling asset prices seem to discourage economic activity, and they are presumably more dangerous when leverage levels are high.

3) Do big fiscal deficits damage the economy?

Austerity fans are persuaded that deficits are harmful, stimulus fans are equally certain they are not. The evidence, from Japan, Europe and the United States, is inconclusive. The largest government budget shortfalls ever in peacetime have neither clearly held back nor obviously increased either GDP growth or employment. The situation might have been much worse with smaller deficits, or the current high deficits may actually be storing up terrible trouble of some sort for later. No one really knows.

Unrealistic Nobel economics

Edward Hadas
Oct 24, 2012 12:34 UTC

Stable pairwise matching won Lloyd Shapley and Alvin Roth the Nobel prize for economics. It is an idea that is simple, slightly illuminating for economists, occasionally useful for everyone – and profoundly misleading.

The matches in question are between members of two groups, for example potential husbands and potential wives, or medical school graduates and hospitals that might employ them. The “stable” is defined narrowly: the pairing off is stable as long as no individual can find a way to improve his or her situation by trading partners. What counts as “improvement”? The game theory of Shapley and Roth does not really address that question.

The simple idea, demonstrated by Shapley a half century ago, is that under certain conditions a methodical process of elimination – many rounds of tentative pairings – leads to stability. Take a pool of equal numbers of would-be brides and grooms. The men keep on proposing to their favoured women. At first, only the irresistible men garner acceptances from the most appealing women. Gradually, though, each less attractive man will win the favour of some less attractive woman, who accepts the sad reality that she cannot do any better. At the end, while many people may wish they had a different spouse, no one will be able to arrange a trade. Any alternative pairing will be less desirable than the current one to one side or the other. That is exactly game theory stability.

Welcome the U.S. relative decline

Edward Hadas
Oct 10, 2012 13:53 UTC

Whoever wins the U.S. presidential election will preside over a relative decline in the country’s global economic position. He should, but probably will not, accept the inevitable.

There was a time when almost everything about the American economy set the world standard. In 1960, The United States was the world’s largest market. It had by far the most developed infrastructure, easily the best educational system and undoubtedly the most business-friendly government. It was the source of most innovations, from safe highways and comfortable suburban houses to computers and advanced pharmaceuticals.

Those days are long gone. The creation of the European Union has left the U.S. market in second place. Overall, the infrastructure in Europe and Japan is at least as advanced. The United States is still the global leader in many areas of industry, education and government, but it has fallen behind in some, and the gaps have narrowed in all.

The EAST cure for unemployment

Edward Hadas
Oct 3, 2012 13:52 UTC

The winner of the presidential election should do something about U.S. unemployment. The current rate of 8 percent is high by America’s historical standards, and that measure does not capture the gravity of the problem – too many people have spent too long out of work or have decided to leave the workforce because jobs are too hard to find. European leaders face an even greater challenge. The EU unemployment rate is 10.4 percent, and during the last decade it has been below 7 percent for only half a year.

What is to be done? Neither Mitt Romney nor Barack Obama has a clear plan. The Federal Reserve has an idea, but it is hard to see how $40 billion a month of newly printed money will actually help create jobs. I have an alternative approach: EAST. It is both an analysis of the problem and a solution.

E is for Efficiency. The industrial economy continually makes more stuff out of less labour. More efficient workers, machines and systems constantly add to consumption, and constantly subtract jobs. The lost labour has mostly been dangerous or tedious, so there is little to regret.