The angel is in the detail

By Edward Hadas
November 14, 2012

Barack Obama will not solve America’s most profound economic problems. That is not a partisan political statement about the newly re-elected president. Had Mitt Romney won last week’s contest, he also would not have been able to reduce unemployment, improve the trade balance, rebuild U.S. manufacturing excellence and strengthen the middle class. The fixing of the American economy is just not a one-man or one-woman job.

The Federal Reserve is trying to help with one of those problems, unemployment, but the central bank does not possess the refined tools needed to address this complex issue. Indeed, bold decisions made by the highest authorities cannot resolve any of the developed world’s greatest economic problems. The devil – and the angel – is in the innumerable details.

Of course, there are times when big policy decisions change the course of economic history, as when the new governments of formerly communist countries abandoned central planning, or when the U.S. government rescued its banking system during the last financial crisis. Less dramatically, changes in government deficits and central bank policies on interest rates can moderate fluctuations in the economy by compensating, to some extent, for hyperactivity or sluggishness.

Many economists want some grand gesture right now. Some call on the president to push for a big move towards fiscal austerity, others want massive stimulus, and still others want a big change from the Fed. Such calls are excessive. The economy is not robust, but it is not in crisis. Dramatic moves are far more likely to wreak havoc than to do good.

This is the time to address long-standing and deeply embedded problems. These issues can sometimes be summarised in a single statistic such as the unemployment rate or the share of GDP dedicated to infrastructure investment, but the causes are hugely complex and the cure requires thousands of detailed, dull and often difficult changes.

Take healthcare. While the United States delivers excellent medical care by any historical standard, in comparison to other developed nations its system is expensive and ineffective. However, there is no single clear weakness, just thousands of deeply embedded medical and financial practices which need revision. Hospitals, doctors, patients and insurers all have to change their habits and probably lower some of their expectations. Federal law and regulations can do only a small part of the work, presidential rhetoric can do even less.

The unemployment problem is similarly complex. The rate is not unacceptably high because of any crude error in monetary or fiscal policy. On the contrary, if economists Kerwin Kofi Charles, Erik Hurst and Matthew J. Notowidigdo are right, the big decisions which were supposed to reduce unemployment ultimately made the problem worse. The Fed’s relaxed monetary policy supported a job-creating boom in construction in the 2000s, but the researchers show that this good news masked an unusually rapid decline of low-skilled manufacturing labour. By the time the loss was fully recognised, after the housing bust, it was harder to start the long and detailed work of improving workers’ skills and creating less skilled jobs.

Of course, the government can help address such complex problems. Taxes, regulations, the legal system and educational practices can all be changed. The authorities can fund more helpful research and promote more effective economic coordination. Most of the detailed work, though, has to be done at lower levels of the economy. The secret of economic success is not the brilliance of leaders but the ability to create and sustain organisations which can take full advantage of individuals’ abilities.

Pre-industrial economies had guilds and close-knit trading networks. The corporation is now the predominant form of economic organisation, but institutions such as banks, industry groups, regulators and research consortia are also important. They can help spread good practices and ideas, and restrain bad ones. Even more significant are the informal economic ties created by family, education and location.

The economy flourishes when these many organisations and relationships work well, both separately and together. Conversely, when there are serious problems, the weaknesses are spread widely: a bad practice here, rewards for failure there, and the wrong people in control in some other place. Simple ideas and single decisions can rarely do much to improve complicated enterprises, let alone the complex networks that guide the whole economy.

The president and his fervent supporters may be frustrated by the limits to his economic power. Believers in the omniscience of government or the omnipotence of chief executives may be disappointed to learn that central authorities cannot simply order improvements. But such expectations are little more than magical thinking. In reality, a healthy economy is built by innumerable individuals who work together, strive for excellence and try to avoid bad practices. Problems are caused by excessive self-interest and destructive conflict. Problems are solved by economic angels, individual effort and fruitful collaboration, not by a wave of the presidential wand.

8 comments

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Once an economy tanks and the mindsets of the people as a whole change from spending and borrowing (buy now pay later) to scrimping and saving (plan for the future and put back for tough times), it will be a while before those mindsets change. Usually it’s a generational change that takes time. It took years to cause this issue bit by bit till it imploded. It’ll take years to get out of it, if we can. I keep thinking back to the phrase “too big to fail” that came out of all this. Does the government think they are too big to fail? If Congress as a whole doesn’t understand income vs expenditure, how are we to have any faith in them for all the intricacies that this article suggests?

Posted by LysanderTucker | Report as abusive

So?

Yes, the United States and most nations of the Western world have huge problems. They are not going to be solved; they may be resolved by natural forces. This will mean massive unemployment, shrinking economies, huge debt defaults, etc. There is even the possibility of riots, looting and worse.

Why?

Stupid, incompetent, corrupt politicians; too many entrenched special interest groups(this does NOT mean business); the focus on ideologies; the people looking to the wrong sources for solutions.

These problems are very solvable; but not the way anybody wants.

Solutions are available at http://trueproblems.wordpress.com/

The facts no one wants to read.

Learn to think for yourself.

Banned from huffpost.

Censorship is evil.

Posted by ALLSOLUTIONS | Report as abusive

At least you put the right perspective on the real engine in the U.S. – it is us. Problem is that the small problems of our early government has twisted the decision making and has enabled the Government to overstep its bounds. Tell where crony politics has not corrupted our governing body. Tax code is corrupted(lobbied), agencies are run by political hacks, government spending suffers for all of this. The politicians just trade favors – I’ll vote for you guys contract if you let me go…this is government d’jour . They will find anyway to spend and feel good about spreading it around. MR. Hadas – you are right – it takes well qualified and gifted people to solve these issues. We have too many incompetent cooks..over our broth. I wasn’t ecstatic about Romney – but he knew how the private sector worked and Obama only know how government programs work….now we are back to the social tinkering and spending – hope is all we have left.

Posted by xit007 | Report as abusive

We the consumer, are part of the problem. We buy things we co not understand and we don’t read our receipts.

We cannot add and subtract quickly in our heads, we are rushed through checkout lines, and should we find a mistake in our receipts, we then have to stand in another line at customer service if we want it corrected. I find several mistakes in favor of the store each year, usually under one dollar. Usually I don’t have time or energy for customer service, so over the years I have developed a mind set of allowing myself to be cheated.

We buy things we do not understand. The worst are insurance, mortgages, things with warranties, automotive mechanics and medical/dental services. There is a new urban truisim: “The only thing sure about insurance is that you pay premiums.”

Re-empowerment of consumers would be part of the solution.

We need to re-learn the habit of reading our receipts. Perhaps significant financial compensation for store errors — ten dollars or ten percent of the overcharge, whichever is more?

Children need to learn to add and subtract.

Insurance, mortgages and warranties need to be made simple enough for a high school graduate to understand, and recourse should be affordable and quick. Ditto auto mechanics, doctors/dentists, contractors and government.

Posted by Oma | Report as abusive

Clearly the time has come to get rid of these economic charlatans, so called leaders who are nothing more than mascots of Maffia cartels. Corrupt, belligerent, immoral failures like Mr Obama the Peace Prize winning War criminal.

Posted by Renox | Report as abusive

I think this piece is quite pathetic!!!
See why:
http://www.keipr.com/sitebuildercontent/ sitebuilderfiles/seammaec011112final.pdf

Posted by ArmenPapazian | Report as abusive

Since Capitalism survives on sales which depend upon disposable income the quintessential solution to most problems within our economy is the availability of money.

We have debt money and non-debt money. The former comprises 99.7% of all money in circulation. The remainder is made up of coins. Since, the collapse of Bretton Woods brought about mainly by American deficit spending, debt money has gradually forced investment preferences from productive assets to financial assets which contribute little or nothing to economic growth and progress for a majority of Americans.

We’ve seen the ineffectual Bernanke Helicopter Drops QE to the nth power, frittered away simply because the drops were in the wrong sectors. In the meantime debt money has and will continue to extract its rent from an economy needing to retain some of its surplus to rebuild. Yet, the annual debt service $450 B in 2011 is seldom mentioned as major issue. Debt service will decline in 2012 by almost $100 B due to much lower interest rates, not less borrowing.

What is not mandated ad infinitum is the need for a sovereign nation to borrow. Current law indeed the Constitution provides for the issuance of non-interest bearing legal tender in the form of coins. And in 1996 the Congress authorized platinum coins in 31 USC 5112(k) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit.

This link fully describes Platinum Coin Seigniorage and its operational alternatives for eliminating all discussion of the fiscal cliff, debt ceiling, Sequestration etc. Also included at this link is the speech the President should give resolving the issues of austerity and default.

THU AUG 02, 2012 AT 06:30 AM PDT
Beyond Debt/Deficit Politics: The $60 Trillion Plan
by Letsgetitdone

http://tinyurl.com/cjzlt82

Posted by PotomacOracle | Report as abusive

Edward Hadas the problem is your logic assumes “angels” will just materialize and solve all the problems that have been problems for years in numerous sectors of the economy. Keep praying and wondering why “your magical thinking” doesn’t solve our problems. If the problems are so wide spread, it would take a powerful central government and powerful state governments to solve all of them. It would be good to have a media that used some scientific thinking, so we can all start working together in a coordinated fashion to start solving them.

Posted by M.C.McBride | Report as abusive