Mark Thoma, over at The Economist's View, as always has a number of interesting posts, often picking up on posts by others. For example, there's his posting (and related comments) of Anatole kaletsky's Goodbye, homo economicus, in which Kaletsky asserts that "the economics profession must bear a lot of the blame for the current crisis. If it is to become useful again, it must undergo an intellectual revolution--become both broader and more modest." The Kaletsky posting is followed by What Academic Economists Do and the Need for Better Data (Mar. 26, 2009).
The thing I like about Thoma's blog is that the comments are as good as the postings.
First, I found particularly interesting the commenter (on the first Kaletsky post who added his view of what economics, as a profession, needs to do to address its failings. One thing mentioned--to "embrace the truth that the economic power [that] players have at the beginning of any scenario is a powerful determinant of the 'equilibrium' they end up with at any point."
Dare I borrow that for a riff on one of the ongoing discussions within tax? The owners of capital are paid attention to in our economy in ways that ordinary wageearners are not. And they use the power that wealth provides to help tilt the rules in their favor--from preferential capital gains rates to the lower and lower estate tax rates even now being considered. That initial position of wealth translates into power and is a significant factor in the "equilibrium" between taxation of capital and taxation of labor that is reached. So I would say that not only does economics need to embrace a different paradigm, but also many other disciplines, such as tax theory, need to embrace a different paradigm that recognizes the truth of the role that positions of power play in determining the outcome of changes.
Second, there are a number of comments about the failure of ecoomics to grapple in a helpful way with the real problems that face us. One commenter on the second post articulated my own frustration with much of the academic econometric literature of the last few years, noting that "with [modern math model mania], economists reify the model. They make assumptions, write a model, then actually believe the model IS the reality... [B]ecause RC assumes that markets clear, it concludes that fiscal stimulus cannot work. ... It has assumed away the real economic issue and then announced reality can't be the way it is. " The result is that "most of the core fundamentals are based not on tried, tested, and falsifiable models, but on pure assumption, belief, and ideology." Or as another commenter notes--economics "has become a slave to math models that are built on empirically incorrect assumptions." Another noted that the public's impatience with the "spectacular failure of economics in this episode is that too many economists speak as though they actually do know, when they clearly do not."
And third, a comment that goes to the heart of the problem: "This recession is the result of inequality. That's the driving factor. As income accrued at the top, the median household income stagnated. And used easy credit to continue to maintain its lifestyle. ...and what you saw in the Bush boom was the attempt to define it away. This reached the height of ridiculousness when some [Chicago school types] came out with a paper claiming that the poor were accruing all the gains from free trade by being able to buy cheaper at Walmart."
And finally, how we got here. "We have just come off a 40 year period where dogma was the primary tool of choice. This led to Laffer curves, trickle down and free market policies. Even when face with actual failures the remedy recommendations remained the same. In fact those in this camp are still suggesting minimal regulation, balanced budgets and/or tax cuts." Robert Feinman, comment.
My conclusion. Feinman is absolutely right. And as a consequence, our precarious economic situation and resulting fiscal challenges will not be resolved without a change of heart within Congress and a willingness to understand that last point. Forty years of dogma have left us with a tax code riddled with provisions to provide effective subsidies for favored taxpayers, including the Very Big Banks that have gotten us into this crisis (the active financing exception, among others). Four decades of a "greed is good" mentality, illustrated by the "I deserve it" attitude of the AIG bonus recipients (not to mention the rest of Wall Street's bonus mania in a time when these same banks were accepting tens of billions of dollars of taxpayer money either directly or through insistence on full payment under AIG's swaps) have left us with a financial system run by banks that are too big, by managers that are too greedy, and a shadow banking system--in the hedge funds and private equity funds--that is too risky. We need to change the dogma and we need to change the greed-based "culture" in the financial and shadow financial system, or we'll never get to real tax reform rather than ideologically based cuts for the cronies of power.
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