Economists Are Funny, Episode VI
Jim Manzi continues his discussion with economist Karl Smith. Manzi has repeatedly asked Smith to explain why Manzi should have any faith in economists’ claims that fiscal/monetary stimulus will boost economic growth etc.
I am going to do a Mises.org on this, but for now I just want to excerpt from what Smith himself describes as a “defense of economics.” I think the term “lol” is used with reckless abandon nowadays, but I literally laughed out loud when I read this:
The second line I offer [in defense of macroeconomic models] is that of experience. That when economists had the helm we really were able to produce results. In the 1980s Central Banks were largely turned over to their economists who produced low inflation and low unemployment by manipulating the overnight lending rate.
Indeed, the two major failures in that period, Japan and the current recession, coincided with the overnight lending rate hitting zero and thus no longer being under the economist’s control. So our basic argument was that we can steady the economy so long as we have control over the overnight rate seems to be validated.
That is hilarious!
Smith puts the moron in oxymoron.
And the oxy-gen out of the room.
I kind of see what he is saying here. I mean, I’m a really good driver, and do an excellent job of managing different road conditions, avoiding pedestrians, other cars and such. There are, however, two examples in which my car went off a cliff while I was behind the wheel. But at that point, being airborne, I really had no control over the car, so I can’t be held accountable for what happened at the bottom of the cliff.
Andrew, I had been working on an analogy, but my Optimal Search Model tells me yours is good enough for Mises work. Do you want me to credit you by name, and if so what is your last name?
Professor Murphy, I’d be honored for my name to make an appearance, however tiny, on mises.org.
Andrew DePompei
Yikes!!
We should talk about this because I’d argue we got exactly the effects economic theory argues for.
To continue the car metaphor we would say: using the accelerator and the brake pedal I can keep the car going at the speed you want, unless I hit an obstacle so large that pressing the pedal to the metal won’t result in an increase in speed.
What would you expect to observe in this case?
That a failure to reach the target speed would be coincident with the accelerator hitting the metal. I argue that is in fact what we see. The episodes in which we are going too slow are the episodes in which the accelerator hit the metal and all other times we were at the target speed.
Indeed, we could formalize this by saying the distance of the economy from target should coincide with the distance of the Fed Funds rate from some Taylor rule. We also see that in 2008 the target interest rate diverged greatly from the Mankiw version of the Taylor rule and indeed the economy slowed way down.
This was not because the Fed gave up on following the Mankiw version but because the Mankiw version would have required a Funds rate of -5%, which is not possible.
Hi Karl (if I may),
I am going to write a more formal commentary on your discussion with Jim Manzi. Although you wouldn’t know it from this one post, I actually do like your guys’ discussion because you aren’t screaming at each other.
Even so, I really did find your defense hilarious.
The problem is that I (and lots of others) think that government interference with money/banking causes what we know as the business cycle. So for you to say, “Hey, we did a pretty good job, if you don’t hold Japan’s lost decade and our current worldwide catastrophe against us,” is pretty funny.
That’s why the car analogy is so perfect, to illustrate our viewpoint. I.e. mainstream economists drove the economy off a cliff, and now you are saying, “Hey, don’t look at us.”
Karl,
The question is what led us to the point where negative rates are called for. If you think this wasn’t in some way the result of Fed policy, then your point stands. On the other hand, if the reason we need negative rates now is because of prior Fed actions, the the results an economist-driven Fed has delivered aren’t so hot.
Karl (if you’re still checking back here…), to clarify, I write a lot of articles for Mises.org. That’s where I’ll write up my response to your position, more formally.
When I do, is it OK for me to quote your comment above, or do you want me to stick to your official blog posts? (I know sometimes people fire stuff off in comment sections that they don’t want blasted on the billboard at Times Square.)
Bob,
Yes, you can quote me. Hopefully, I won’t make myself sound too stupid in the comments.