Tuesday, January 23, 2018

Out of the Economic Wilderness

Things go in stages. I remember a time when I put a lot of gunk on my hair so it would stand up straight in what was known as a flat top. Then I had a wave. The Air Force preferred something closer to my scalp. Post-Air Force, I let it grow for about four years. My hair had a lot of stages. Today, well, there are a few spots missing here and there.

And so it is with economic thought. I had the luck of taking a wonderful course in the history of economic thought at the University of North Carolina. A main goal of that course was to see that economic thinking evolves over time and very much reflects the natures and problems of a given time or place. This recognition of the temporary nature of economic ideas gives one some confidence that whatever the prevailing wisdom might be today, it is sure to be supplanted by something else in the near future.

As a graying economist, I have seen lots of change during my career. When I was at the University of Arizona getting a masters degree (while stationed in Tucson with the Air Force), the bravado of Keynesians was revealed in their confidence about the accuracy of forecasts of Keynesian models. Keynes had reacted to the failure of previous so-called Classical Models to explain the Great Depression. But it was the eventual failures of Keynesian models that led to a host of competing theories by unreconstructed Keynesians, monetarists, and supply-siders.

Today, we have a mish-mash of models with elements of each of those schools of thought. But there is a very clear and common thread among them that focuses on the apparent short-run instability of advanced industrial (rich) nations. We argue among ourselves about the proper policy in a given country at a given time but the argument is framed within a short-run model that encourages us to focus on moving the economy back to short-run equilibrium. If inflation is running too hot, we try to bring its temperature back down. If the economy is languishing with high unemployment and slow growth, we give it a pep pill. The pill might be designed to alter short-run demand or supply but the focus is always on overcoming an undesirable stage of an economic cycle.

This bouncing around has gone on in the USA at least since the early 1960s when John F. Kennedy announced his famous tax cut that would move us out of a recession. Since then, we have handed the policy ball back and forth between quelling rapid inflation and stimulating recessed spending. One byproduct of this has been a dizzy economic experience. Another offshoot is a national debt that reaches for the sky. There have been a few times when the debt as a share of the economy abated somewhat, but mostly it rises and then rises more. Today, it approaches 100% of the size of the US economy and promises to go even higher than that.

I think the dizziness plus debt is wearing us out. Worse is that it is becoming more and more obvious that this preoccupation with the economic cycle is distracting us from recognizing and treating what has become the new scourge of industrial nations. Today, we debate whether the economy is too strong or too weak. Today, we debate whether or not to have stimulative monetary policy. We argue about the stimulative impact of rebuilding the nation’s infrastructure. Imagine all those workers paving during the day and spending at night! 

But the truth is that short-run policy never seems to accomplish anything as we careen from recession to expansion back to recession. And worse than that is that the experience of industrial nations has changed. Whether this change was brought about by industrialization or by globalization, the result is that we are weakened by modernity. Our ability to grow is at risk. Our main economic challenge has gone from trying to reduce the amplitudes of economic cycles to raising our long-run economic growth path. Last week I used the example of a long distance runner. Let’s try it again. You want to win the marathon. To run 26 miles at a fast enough pace to win, you don’t swallow a handful of sugar. You train hard. You build your wind capacity and your muscles.

We are familiar with the difference between short-run and long-run policies. While the richer nations have been toying with cyclical policies, the poor developing countries knew they could catch up only if they focused on long-run structural issues like energy, transportation, legal systems, and so on. Before they could provide adequate incomes and opportunities for their citizens, they had to build a modern infrastructure. Now it is the industrial countries that need to rebuild to meet the challenges of the day. We should replace our short-term focus with longer-term ideas.

What does that entail? The remedies should mirror the problems. Everyone seems to acknowledge that modern competition has reduced the demand for workers in the US and in other rich countries. Despite the fact that the US unemployment rate is very low, we acknowledge that too many people have dropped out of the labor force, taken jobs beneath their skill levels, or work part-time when they prefer 40 hours per week. This is clearly not a short-term issue especially when we know that technology is bringing robots on that might be smarter and prettier than your average macro professor.

This labor supply challenge is constantly on our minds but we process the information with old and worn-out models of the short-run. We continue to ask for more of the same policy gruel – juice up the money supply or give the middle-class a tax break. But we are not in a recession and we don’t need policies that cause the national debt to grow even more. What we need is to reorient the way we think. 

Tending the economic cycle does not create more sustainable economic growth. Economic growth is the salve that soothes but economic growth requires an understanding of how to compete in a high- tech world that wants to replace human hearts with robot brains.

We had to figure out how to evolve from an agricultural to an industrial economy. The transition was not pretty but we had to quit thinking about wooden plows and mules and focus on tractors. Now it is time to figure out how to move from the tractor to the driver-less, sun-powered robot. Arguments about traditional monetary and fiscal policy while creating mountains of debt, are not going to help. Where do we find someone to lead us out of the wilderness? Who understands that in the long-run we are not dead?


  1. Service. Not the $10/hour type but the educated type that manages the machines and uses them to grow the economy. Education must address this need so it does not produce another generation of people who have no training to be an asset to this changing environment. Incubators to help others start companies that deal with these services and products. Good news is that there are some school and college systems that are doing this but they are a minority.

  2. Larry great article. I believe that all to often economic policy is driven by political policy. For a president who takes over during a recession he was probably elected to fix the economy. Jobs, Jobs, Jobs! To do this they pass quick stimulus packages so they can be reelected. That will never change. Presidents want credit for accomplishments.

    1. Good point MM. But remember what they said about the King Who Wore No Clothes. At some point after experiencing poor policy time after time, the people should figure it out and demand something different. Of course, the new different thing might not be the best one. It is hard to imagine those clowns in DC getting the right prescription.

  3. For Mr Gibson,

    I have thought about this for a long time. I don't claim to be right just a thought. I start with what is the difference in training and education. My answer is with training you can do one job with an education you can do many jobs. If there is a demand for web development and few people have the training then of course salaires will be high. However, if one only needs 6 months or less training to be a web developer then eventually those salaries will normalize or decrease. Training will not prevent your job from being taken by a robot. Education and critical thinking will.

  4. Jim and MM,

    I think you guys are on the right track but are still thinking too narrowly. Reorienting government away from the usual focus on cyclical demand management would free up a lot of dollars. Instead use them to think about how to create a voracious global competitor with workers who are compatible with that. Education AND training would likely be a part of all that but so too would be a culture of growth and competition. I know I am dreaming and probably had a little too much JD on my eggs....and by the way -- I am not suggesting massive government spending. Instead I would look towards a well promoted vision of the US in 2068 with supporting incentives, deregulation, spending and tax reform. A smaller national debt would be a necessary part of this vision.

  5. Dear LSD. You’re thinking/dreaming and consuming too much egg and accompaniments. Take a break. Sit back in your lazyboy and put your big feet up, turn on Janis Joplin, and enjoy the accomplishment of someone at the helm that knows what the hell happened /is happening and has enacted/will enact laws and policies that will (hopefully) produce the type of changes you, JG, and MM desire—better education and training that support jobs of the future, fair competition and trade, reasoned spending and budgeting that will grow the economy/jobs and reduce the deficit/debt (eventually), and deliver economic, political, and energy security.

    A couple years ago an investment/bond savant said we’re in a new normal—e.g. less than 2% economic growth. Um-m-m-m, wrong. I do think a new normal is emerging, though, that evidences the downside of Keynesian and the benefits of freer industrial, consumer, and financial markets. I sense the beginning of what you allude to of accepting the need to develop ‘remedies that mirror the problems’—or something profound like that. I think that comes from a leader that speaks (and I assume also thinks) forthright—practical not political or academic (as in debating economic cycles, theories, etc.). I think that leader is found.

    Oh, what the heck . . . go enjoy some egg with a lot of accompaniment.

    1. So long as there is government and government produces macroeconomic policy there will be plenty to think and write about. There will be no holiday from stupidity. Regardless I seem to enjoy my share of eggs, JD, Janis Joplin, and so on. Life is good.