Small Goverment, No Government

I just read this article on the Beeb about the possibility that protests against the democrats' health care plans might be phoney, staged events put on by "birthers" and bitter republicans. I confess, I don't really care. What did bother me is this line:

...'small government good, big government bad' is the Republican motto.

Are you sure? Lazily, I'm going to take some figures from the Wikipedia to show that this is profoundly misleading. Let's have a look at deficits as a percentage of GDP. Negative numbers indicate surpluses and positive ones indicate new debt. Generally speaking, a number under 3% (the EU's allowable limit) is pretty respectable. Let's eliminate the figures for Roosevelt/Truman because winding down WWII was bound to save a lot of money, and that trend continues through Eisenhower, so let's start with Kennedy/Johnson. The average deficit as percentage of GDP for democratic presidential terms since Kennedy is -5.7, for republicans in the same period, it's 7.0. In recent history, republican presidents lose slightly more money than democrat ones save. If we look at just the most recent two-termers for the most recent trend, we get -4.4 for Bubba and 9.3 for Dubya. You can give Clinton a handicap because he inherited a big deficit from Bush senior that he was able to turn around, whereas GWB inherited a handsome surplus from Clinton that he managed to run into the ground.

The so-called Blue Dogs have been getting a lot of press lately, and their message of fiscal conservatism is music to my liberal ears (though I do support universal health care for fiscal and normative reasons). I would like to submit, though, that even the reddest (as in "most commie") democrat would have a hard time beating a republican in terms of fiscal profligacy. There is an old idea in American foreign policy analysis that republicans can be more dovish because other countries expect them to be the toughest hawks, and democrats have to be more hawkish than they would like, because nobody will take them seriously otherwise, assuming they're a bunch of softies. The same seems to be the case in fiscal policy: people assume republicans will save, so they have the freedom to spend and bloat government. It's perverse. Don't buy it.

Other news that caught my eye (for the anarchically and totalitarian-inclined):
Living human rights advocates in Chechnya are becoming about as common as Aung San Suu Kyi's days at the beach.

There also seems to be a growing movement to have children-free zones in public places in Germany. Thank goodness! There was a smoking law in my hometown for a while that allowed restaurants and bars to admit minors or smokers. Being a childless smoker at the time, I was very satisfied. Even after having quit, I'd still prefer second-hand smoke to first-hand brattiness!

Stand by Your Macro

The financial crisis has certainly unleashed fits of apoplectic wrath and disappointment. The bankers seem to get most of the wrath for botching the system, and the economists seem to reap most of the disappointment for 1) promoting a system that made a crash inevitable, 2) failing to see the crash coming, 3) failing to prevent the crash, 4) failing to interrupt the crash, or 5) all of the above. A recent piece in the Economist does a fairly good job at sifting through the diversity of opinion among economists, but it makes the same mistake as everybody else has so far in analyzing the crash and economists' role in it. Specifically, it overestimates the state of social science.

An old international law prof. of mine once told me, "A good lawyer doesn't tell you what you can and can't do. A good lawyer tells you how to do what you want to do legally." This phrase picks out two of three good reasons why economics couldn't have foreseen nor prevented the crash: a lack of empirical knowledge and a lack of theoretical knowledge, to which I would also add the inability to determine social goals autonomously.

By empirical knowledge, I mean brute facts about the world, like how many cars were sold, how much money is in circulation, how many people are working where and for how much money, etc. Although statistics (as a branch of math) helps a lot to count accurately, there are many things the economists can hardly know in principle. If a German economist wants to know how much money German consumers have in readily accessible accounts, they can ask the banks to provide them aggregate figures. They won't, however, be able to see the nest egg I have squirrelled away in the Motherland, and which I can draw upon if my finances here get tight. A trifling example to be sure, but aggregate these blindspots in an economy the size of Germany's, and you could well have an economy the size of Ecuador's hiding under the mattress. More significantly, the fancy financial vehicles that have made the headlines recently all have the purpose of yielding better rates of interest than what boring mortgages or operating lines of credit can offer. If you have some solid debts, slice them up, mix them with some riskier stuff, sell the package at a higher rate than either alone would have brought or borrow against their putative value. Either way, this gives private financial institutions the means to create a multiplier effect on the amount of cash floating around. If you think money is printed by the central bank, you're right in the sense that the Bow River is filling the oceans. Economists in one country can hardly tell how much money their own compatriots have, let alone how much is being pumped out of a globalized financial system. An educated guess is better than nothing, but counting units of value that can be created out of thin air (well, out of bytes, Mbits, and contracts - close enough) is not an exact science.

The second problem is that, even if economists knew all about what is out there, they don't know how it all fits together, which is what I mean by theoretical knowledge. The subcordial debates among economists are evidence of this as are divergent prognoses. In general, economists would do well to remember Darwin's quip that "Ignorance more frequently begets confidence than does knowledge" or Bertrand Russell's that "The fundamental cause of trouble in the world today is that the stupid are cocksure while the intelligent are full of doubt." They should be honest about what they can and can't reasonably say, what they do and don't know. Instead, they are often concerned with producing as many forecasts as possible to make the news, get politicians' ears, and divert funding in their own direction. This is a perfectly human strategy, and they've brought much of the opprobrium on themselves through hubris, but they couldn't make these claims credibly if they wanted to. Also a part of theoretical knowledge, I would say a big part, is to know what makes people tick. The received wisdom is that, if you just assume people will act rationally, that assumption will approximate aggregate behaviour "well enough" and "most of the time". The alternative is Keynes' (pretty empty) concept of "animal spirits". Both of these sound to me like fudge factor assumptions about human nature and how people make decisions. My bet is that behavioural economics and neuro-cognitive science will be able to give us a better idea of how people actually make decisions, and then it will be for economists to rebuild their models with facts instead of hunches or fudges. I'm just putting that out there for now, but it might deserve a long post of its own one of these days.

Empirical knowledge is about what's out there, and theoretical knowledge is about how it all fits together, but shortages of both aren't the source of the disappointment with economics. I think the biggest problem is that economists can't determine our social goals on their own, but we tend to blame them for it anyway. Before the proverbial lawyer can tell you how to do what you want, you have to know what you want. Most people seem not to want stagflation, but they get confused about what they want when the choice is between high employment and high inflation (good for income, bad for wealth) or low employment and low inflation (bad for income, good for wealth). There's no good economic way out of that decision, though, and most people seem to expect economists to be able to tell us what would make us all happier, collectively and as individuals, and then to make it happen, dammit! You can't tell the economist that he should figure out a way for you to have your cake and eat it too, because he can't, and most of the time, they don't even have that (pitiful) degree of guidance.

I guess that this raises a bigger question of what the social sciences can do for society, and what society can reasonably expect from social scientists. We can't fix Darfur (certainly not on the cheap), we can't sprinke pixie dust on the economy, and we can't necessarily help you with your addiction to Cool Ranch Doritos. Does that imply malpractice or irrelevance? As for malpractice, it doesn't as long as we act in good faith, as long as we don't sell snake oil and profit off others' gullibility. Irrelevance? Well, if it were irrelevant, you wouldn't be wringing your hands over Darfur or job losses in the first place, now would you?