What If Everything You Believe Turns Out to be Wrong?

So, what happens when it turns out that everything you believe, the ground of everything you do, is based upon an error, a lie, an illusion, misinformation?

This is the sort of question I've been asking, in an esoteric, philosophic vein, in my series Being v. Becoming. (If the metaphysics of substance is supplanted by a process metaphysics of flux, whence the religious notions, e.g., of soul? salvation? etc.? Can humanity simply eschew its religions once they've been foundationally discredited? Or will some remnant survive, even when the illusion is revealed?)

This same sort of drama is playing out now in a clear-cut arena. For years, Conservative economists around the world have taken it as an article of faith that growth stops and, in fact, recedes when the national debt passes 90% of GDP. This has been the justification for austerity policies, including the Republican budget-slashing, welfare-bashing, social security-smashing sequestration mania of the last few years.

Turns out that 90% figure comes exclusively from a 2010 working paper entitled Growth in a Time of Debt by Carmen M. Reinhart and Kenneth S. Rogoff of Harvard University.

One of the initial problems with the paper was that it was never peer reviewed. That did not prevent its becoming the rationale for cutting social programs around the world among true believers. It reified their ideology. Paul Ryan's budget forays cite it as "conclusive empirical evidence." The Washington Post editorial board takes it as dogma.

Recently, Thomas Herndon, a graduate student at U.Mass Amherst, had the assignment of replicating the findings of an important Econ paper for one of his classes. He chose Reinhart/Rogoff. When he couldn't replicate the results, he reached out to R/R, and they emailed him their data spreadsheet.

After reviewing the R/R underlying data, Herndon found several serious problems:

"First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result."

This is a pretty big deal, it seems to me. What happens when the foundation of everything you believe about how government should respond in a time of recession is discredited? Do you go back and change/revise everything you've done based on this belief as a rational person might do? Do you increase social spending and thus economic exchange activity? Do you implement Keynesian-style, job-creating policies which put people back to work, say, upgrading infrastructure? Or, do you continue to hold to your discredited austerian view of reducing the economic activity of the government in time of recession because of stubborn political affiliation or ideology?

Paul Krugman, the Princeton Economist and columnist for The New York Times, has been all over this. Here. Here. Here. And everywhere. He's much more authoritative on these matters than I. You should read him on matters such as these. (Of course, he found R/R skeevy for a number of other reasons long before this colossal coding error in Excel came to light.)

It will be interesting to see how the European austerians and the Paul Ryans, Rand Pauls, WaPo editorial boards, Pete Petersons, Erkine Bowleses, Alan Simpsons, Richard Haasses, and Conservative economists in general, etc., adapt.

Economics is one of those not-quite hard, not-quite soft sciences. As a hard science, there are replicable experimental results in many areas. Theses are propounded, proved or discredited, and revised to account for new findings. Unfortunately, it also tends to have aspects of the sorts of social sciences where individual preferences and biases can find confirmation in observations—especially where data is obscured, ignored, selected, or otherwise manipulated.

We saw an instance of this in the recent U.S. election, where ideological polls (polls based on faulty but favorable assumptions) showed the Republican candidate Mitt Romney either winning or within striking distance of President Barack Obama going into election day. More scientific/analytic polls, however, showed Romney to be clearly losing. In that case, the election itself proved to be a slap in the face. Reality prevailed. Obama won by nearly 5 million votes in an Electoral College landslide. It was a huge embarrassment to many professional pollsters.

In this instance, I fear there is no such accountability moment for the true believers in austerity economics. And the world's economy is the worse for it.

Here's Herndon's interview with Stephen Colbert:

The Colbert Report
Get More: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive

The Colbert Report
Get More: Colbert Report Full Episodes,Indecision Political Humor,Video Archive

Change?

Change, unless it is revolutionary and often entailing violence, happens incrementally.

Today the stock market dropped 274 points on bad employment news. The unemployment rate ticked up a tenth and new hires were down.

Believe it or not, that could actually be a piece of good news. Why, you might well ask? Good question. You, my readers, are very bright people (and not corporations).

The answer requires you to think back to the early go-go G.W. Bush years—and even before. During that time, when unemployment rose, the stock market rose. When hiring went up, it fell. Month after month there was this disconnect.

When Bush took over after Clinton, there was, essentially, full employment. The stock market bubble of the Bush years was built on the back of the employment market. Unemployment rose, and the market skyrocketed. However, this bubble was, as we saw, unsustainable.

It represented a schism between productivity and profit-making, on the one hand, and employment, on the other: productivity and profits rose while employment foundered. Higher unemployment meant, in that bubblicious economic moment, greater profitability for the corporate owners and, Bush's ultimate constituency, the management class.

Workers' higher productivity was not being rewarded; wages fell and unemployment rose. Instead, profits went to corporations—which to this day still have remarkable stores of cash sitting on the sidelines and are still refusing to hire. Rising stock prices resulted. It was the mechanism of the great redistribution of wealth from the working and middle and lower upper classes to the rentiers at the top of the economy.

Today's higher unemployment news created a bad moment for the economy—this drop wasn't about Europe or China. This is significant. It is different from the trend of the 'aughts.

The question now becomes: Is this a tipping point away from the 'supply-side' mythology of trickle down economics wrought by the laughable Laffer curve of Reagonomics? Does this represent a real, though probably politically imperceptible, change? Are we moving to a more Keynesian, demand-driven, egalitarian economy where increases in productivity by workers are rewarded by higher wages and not siphoned off for executive pay and outsized profits? I don't know. I'm no economist. But it does look definitely different.

This sort of trend—if it is one—is worth paying attention to going forward. Guys like this and this, who are economists, might be able to tell us.

Cyclical or Secular?

Once in awhile, the boys at South Park, crass as they are, really knock one out of the park (yes, that's a baseball metaphor and baseball season is looming; our middle school team is 3-7 so far this season, but we're just sandbagging with an eye to the playoffs). Their latest episode, Margaritaville, pretty much nails it. If you have the patience to deal with all the slow-loading features at their website, you can watch it online. In sum, Randy Marsh becomes a bit of a Jeremiah, chiding the citizens of South Park for letting "the economy" down, not worshipping it properly. The conceit is that the economy is like the jealous god of the Bible.

Now, Matt and Trey not economists, nor am I; but a number of really smart economists have been saying something similar: Stiglitz, Galbraith, Krugman. Hell, even that non-economist gadfly, Chomsky has weighed in on this issue. What they are saying is that the Obama administration and the Congress— and,in fact, pretty much every other government in the world—is treating the current crisis as if it were merely a cyclical event. As the conventional wisdom has it: "They don't call it a cycle for nothing;" the economy will eventually right itself and we will return to previous levels of employment, GDP, etc. The point of Galbraith, et al., is that this could be a true sea change and needs to be treated as such. Are they right? Who's to say? But, as Don Corleone says about Virgil Solozzo, these are serious men, and they deserve to be respected.

Stiglitz made news recently by saying that the current bank plan is tantamount to "robbery" of the American public. [That may be, but where was he when the taxes of the wealthiest in the country plummeted and the prices we all paid for oil and gas and other commodities held by these same plutocrats skyrocketed and oil company profits reached historically unprecedented levels? That wasn't robbery?] And he has called for a complete "overhaul" of the international financial system.

Galbraith frames the peril like this:

"The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama's economists lean left. Hence the priority they gave, in their first days, to the stimulus package.

But did they get the scale right? Was the plan big enough? Policies are based on models; in a slump, plans for spending depend on a forecast of how deep and long the slump would otherwise be. The program will only be correctly sized if the forecast is accurate. And the forecast depends on the underlying belief. If recovery is not built into the genes of the system, then the forecast will be too optimistic, and the stimulus based on it will be too small."

Krugman keeps beating this drum on his blog:

"The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved."

"It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess."

Chomsky, in this interview, brings up an idea I floated some weeks back: the notion that all the interests of all the stakeholders in the economy (as well as the individual corporation) should be taken into consideration in formulating plans:

"CHOMSKY: For a start, corporations, banks, and so on should be, I think, responsible to stakeholders. That's not a huge change. In fact, it's even been brought to the courts. It was an important case, highly relevant now. About 30 years ago, when the major steel companies wanted to destroy the Youngstown steel plants—major part of the steel industry, you know, the core of the community had been built up around it, and so on—and they wanted to move it or get rid of it. And the workers and the community wanted to keep it and felt they could run it privately. And in fact they brought a case up through the courts, arguing that the management rules ought to be changed so that stakeholders, rather than just shareholders, would have control over the corporation. Well, it lost in the courts, naturally, but it's a perfectly feasible idea. It could be a way to keep communities alive and the industry here.

JAY: So if you're looking at the financial system now and you take this principle, the representing the interests of all stakeholders, not just shareholders, what would that look like in terms of policy?

CHOMSKY: First of all, to begin with, it would mean that the government would not just bail out the banks, pour capital into them, but would exercise control. And control begins with inspection. So we find out what they're doing. And then you keep the viable parts. And if they're viable, they might just vote it into public control. I mean, the government could probably have, you know, bought AIG or Citigroup for far less than what they're paying them now. I mean, in a democratic society, the government would meet the public, and then there should be direct public engagement in what these institutions ought to do and how they ought to distribute their money, what the terms ought to be, and so on. I mean, they could be democratically run by the workforce, by the community."

Now, the reason I'm not a pundit is because I don't have a ready-made answer to this question—or, for that matter, a whole host of other questions. I don't even have an opinion. I do think it is an important question. And I do hope serious people—people with power and brains—are addressing it seriously.

Maybe it's the agnostic in me, the skeptic, but I don't believe the market—or the economy—is a god: Moloch, Baal, whatever. Or even godlike. I'm not so sure I even buy the hocus-pocus of Adam Smith's 'invisible hand'. The myth of the self-regulating market economy has informed our politics and even our culture for who knows how long, centuries perhaps. It has certainly been the prevailing ideology since the fall of communism. Communism's fall, I might add, led proponents of free-market ideology to, perhaps, overreach, and we're just now seeing the results of that hubris collapse all around us. As an ideology, though, the belief in the market and its magical, invisible self-regenerative powers is, by definition, irrational. And it seems to me that any true fix (whether the crisis is cyclical or secular) must be based on a rational analysis of the problems, and not on a set of fixed beliefs—even if that system might have had some explanatory power in the past.

------------------
UPDATE: Lest we forget, Alan Greenspan earlier admitted that his entire professional life had been lived in the thrall of this "flawed," irrational ideology.