Have Most Economists been Fooled by Money?

I always find Sumner’s argument as intellectually provocative, which I like. On his latest Vox column, he argues, and once again is against the rest of mainstream economists:

“Economists need not agree…that tight money caused the current recession…they do need to find counterarguments…not rely of assumptions that have been thoroughly discredited by recent developments in monetary economics…If I am right, it was a massive intellectual failure within the economics profession, not reckless bankers, that caused the crash of 2008”

What popped into my mind soon after carefully reading this piece was ‘is it true that there has been a massive intellectual failure, or ignorance to be precise?’ Why I say ‘ignorance’ because mainstream economists thought that The Fed’s policy providing some certain amount of interest for excess reserves was negligible, while Sumner argues that it has big influence on this current crisis.

Anyway, if most mainstream macroeconomists have thought easy money as the culprit of 2008 crisis, referring to bursting asset bubble then we can say this massive intellectual failure has been persistent for so long because The Great Depression, Japan’s ‘Lost Decade’, and current economic crisis were initiated by bursting asset bubble.

Have most of the modern macroeconomists been fooled? Or is it because easy money argument the most widely accepted by public and government authorities? Or Sumner is wrong about his whole tight money argument?

By the way, there are some very fundamental yet important lessons from this small piece:

· 1. Tight or easy money cannot be measured readily, especially when using interest rate as the indicator. When interest rates are high, common misunderstanding is that money is being tight, and vice versa. This conception is somehow a big failure.

· 2.Monetary base is not a reliable indicator to GDP growth, as in great depression 1930s.

· 3.Even broader aggregates are not a more reliable indicator to GDP growth.

· 4.When we do not fully agree to market mechanism, we still need to correctly and patiently understand market signs, as commodity price, production index, and stock price indicate. At the very least, these asset prices and others which are not short-term debt based, are preferable as indicator of easy money.

5. Money does matter, indeed, if not everything. We can see how money can highly affect movement in asset prices which are capable of dragging or boosting GDP.

Postmodern Economists

Hello there, hello everyone! Well, having been granted the permission to blog here sure is like being granted the permission to write about almost everything in economics field (that is supposedly my specialty, or err the guidance for the rest of my life?). But please do enjoy.

Okay, let us just get to the thing. We, economist, in the end have to opt between being a quantitative and theoretical economist or intuitive and empirical (and skeptical?) economist. During my period of internship, I met those two kinds of economist. Those who believe in the power of econometrics and theories and those who believe in rather social well-beings (what ought to do, what is actually better for an economic agent with the given situation) and in empirical basis (could be their own experience of working in the field instead of sitting behind the desk like a dedicated and devoted super boring accountant). Of course, some might think that working with sophisticated models and complicated quantitative approaches is cool but after all we're economists not mathematicians. We just don't need to look cool with numbers.

Well, I can't say that I'm the one of those two kinds of economist. I just had my graduation last two weeks and I'm obviously confused about everything.

But, if you happen to like reading, The Economist's Tale by Peter Griffiths might be a perspective to support the later kind of economist I mention above. I'm able to honestly say that from his perspective, economics and especially macroeconomics is no longer boring subject. Economics has to be dynamic, adaptable, highly applicable and fun instead of rigid, theoretical and variables significance oriented.

Oh come on. it's just ramblings of fresh graduate's confusion.

Recession, a Major Threat to Economics Profession in Indonesia?

I suppose most economics students must have been following hot debates on the state of economics, macroeconomics to be specific. One huge worry coming up in the air: is economics getting far less interesting than before? However, the real question is supposed to be can I get a job amidst sharp decline in belief of the magic of economics? The magic here refers to a suggestion by Paul Krugman who finds economics to be very exciting subject as it can explain the great events that move history, the forces that determine the destiny of empires and more powerful things just by a few and simple symbols on a printed page.

In an effort to answer the question, I stumbled into a very interesting paper by Paola Giuliano and Antonio Spilimbergo which tries to explain correlation between recession and belief in macroeconomy in US. They conclude that there would be less trust in an effort using tools of economics to succeed among people growing up during recession than those growing up during good times. They heavily depend on luck, instead. In addition, it is suggested that people are to be less confident in public institutions, and therefore public policy. This is the pitfall.

What about the case in Indonesia? Do you guys remember when economics was a very popular major among college students in Indonesia during 1990s? According to the journal, it is very rational since at that time, the economy was experiencing an upward trend with growth averaged 7-8 % year on year basis. What can the results be beneficial to us, economics graduate? Do you think we should not step forward to taking economics as our major in higher education? Or to be specific, monetary economics and public policy as indicated by recent financial crisis and declining trust in public institutions?

Unfortunately, I couldn’t obtain the same data explaining trend of popularity of economics major among college students, let alone general survey in Indonesia which can be used to conduct the same research.

Hence, for those who are studying public policy as their major in their graduate studies must be more relieved, then?

A huge question with even larger implications.

During the 5th Anniversary Gala Dinner of the Lee Kuan Yew School of Public Policy, I was given the opportunity to ask Lee Kuan Yew himself a question. I asked him: "Indonesia is now faced with a condition that you have often warned against, where there are too many voices in the marketplace and the government is too easily influenced by public opinion. As a result, it becomes very difficult to implement economically sound public policies and long term planning for development. How do you suggest Indonesia deals with this situation?"

And for obvious reasons, he declined to answer.

However, now that I think about it, this question does not only apply to Indonesia, but to many countries around the world.

Take Obama and his healthcare reforms. People who are simply paranoid with terms like "socialism" and "euthanasia" have protested over his reforms, claiming that they will worsen the situation (despite the fact that ANY reform of the US healthcare system will be an improvement over what they have now).

Take SBY and fuel prices. Had he not re-lowered the prices, we'd be well positioned to NOT spend too much on fuel subsidies, and have a society that is well-prepared for another hike in fossil fuel prices that will definitely come about when the global economy recovers.

Take Margaret Thatcher. If she had caved in to her society's demands to remain in a Keynesian state, would GB have recovered from its stagflation the way it did?

Thus, here's the big question: Given a benign government in a democratic society (i.e. the government was elected by the people because they believed in it), would society be better off if its leaders were able to ignore the ignorant? That is, to not become swayed by every protest for every policy?

Using toll fees right.

The Indonesian parliament is currently debating the issue of whether or not to raise toll road prices. The plan proposed by the government is to raise the toll fees by 15%, and the parliament currently opposes immediate implementation because it fears that raising the toll fees will contribute to the Ramadhan seasonal inflation.

I feel that they're spending too much time debating an issue that can be easily worked around.

Here's the solution:
If you want to raise revenue from the toll fees without contributing to inflation in general, then you only raise the toll fees for private vehicles. That way, you don't raise transportation costs for firms, and inflation doesn't become an issue. Furthermore, you get the added benefit of influencing individual behavior. Significantly raising toll fees for private vehicles is a way to curb usage of private transportation. The more expensive it is to travel in private transport, the larger the incentive to switch to public transportation. I'm not saying that raising toll fees is enough to do this, but it helps.

Deterrence, taken too far?

An article on the Economist about America's sex offender laws.

It's really a matter of the trade-off between effectiveness of a law and social convenience (a term I use rather loosely).
The tougher a law, the harder it is for people to comply, but the better it is at carrying out its intended purpose. The more lenient the law, the less inconvenient it is for the "minor offenders" mentioned in the article, but the easier it is for the serious ones to avoid.

I neither agree nor disagree with the economist saying that the laws are too harsh. But what really needs to be looked into is: do the current laws achieve the intended level of protection, and can the intended level of protection be achieved with more lenient laws? Obviously, the current level of enforcement and strictness was achieved in the wrong way (damn vote-seeking politicians), but that doesn't necessarily mean the laws are too strict.

Does now become harder to be one of the richest person in history???

Someday ago, suddenly I found a very interesting article in Wikipedia, about the wealthiest person in history (inflation adjusted).

In this issue, I found some very interesting fact. The list tells us that no one of the richest person live in this era (Late 20^th Century and 21^st Century). Even Bill Gates wealth just a little piece of theirs. John D. Rockeffeller (The wealthiest in history) net worth has ever reached US$329.9 billion. However, Bill Gates can only achieve US$101 billion (He got it in 1999). While analyzing the source of their wealth, we can divide it into two type. First is from business and other is from political power as a king, queen, or other form of authority.

If we analyze the condition while they achieve that, simply we can find an interesting pattern. All that businessman lived in the late Industrial Revolution era. The biggest different between the era and now, is about the flow of information that still bad (Asymmetric Information), lack of equality (in knowledge and education), High Barrier to Entry, lack of competition policy and another condition that make the business have very high market power and can exploit it in order to maximize the profit. For Example : Rockeffeler has monopoly power in oil market in US through Standard Oil, and enjoy it very well until Sherman Act issued at 1890. We can imagine, how much value has been achieved by him.

In the cause of political power. politician (king, queen) achieve wealth with exploiting their power, as a consequence lack of development of democracy, no balance of power and another bad condition that make government is far from efficient. Tsar Nicolas II from Rusia is one of good example for this condition. He achieved net worth US$290.7 billion in his life. In Russian History, he is known as a dictator and has made many disaster like Khodynka Tragedy, Bloody Sunday, and the anti-Semitic pogroms and many more.

What about now? Today we can see that, market is become more competitive and more efficient. Globalization also make everyone can do many thing more flexible and easier than ever. Information is become easier to get. The access to education is become easier to find, and knowledge not only a competitive advantages that enjoyed only by a little segment of society. In government side, now, democracy is well developed, the balance of power is formed, and control mechanism for government action are well established, and become harder for politician to get abnormal gain from his power.

So, can a person today become as rich as them? The answer is “possible” but it become harder than before. The market become more efficient, low barrier to entry, regulation for monopoly case, and another constraint make impossible for businessman become as rich as rockeffeller. For politician, the developing of state, republic and Democracy make impossible for them become as rich as Tsar Nicholas.

Ow… It is a good point. In other side we can conclude that, the equity between human in the world become better, since economic growth and opportunity between human become equal. May be now, you can not be as rich as Rockeffeler. But your opportunity to become wealth and rich is greater than before.

Electoral musings.

One question still lingers in my head, after viewing the Indonesian Parliamentary Election results: did the other 35 parties realistically expect to get enough votes to breach the electoral threshold?

I don't quite understand why these smaller parties actually thought they stood a chance against the bigger parties. Keep in mind a couple of things:
1. The bigger parties are, well, bigger. More funding, more supporters, better reputations. It's hard to compete against parties that get much more publicity than yours.
2. The smaller parties are mostly new, making it that much harder to establish a name for themselves.
3. The smaller parties have nothing special. Most have platforms that are very similar (if not nearly identical) to the bigger parties, because many of these smaller parties were formed by former members of the large parties who couldn't get the positions they wanted in the MP roster. Not to mention that Indonesian politics isn't so much about the platform as it is about the big names.

So, when a 44-party election results in one party getting 20% of the vote, while 29 parties didn't even get 1%, I think it's rather clear that having 44 parties is a waste of campaign funds, no?

P.S. And, apparently, it's also a waste of mental hospital space. No, but seriously, the failed candidates are doing some pretty crazy stuff.

On useless publicity stunts

Yes, I'm talking about Earth Hour.

Like giving to charity and assisting old ladies with their grocery bags, preserving the environment is something we choose to do because of our moral compulsions, and not because of any direct benefits. The only "direct" benefit we get from it is the feel-good effect: we think that doing it makes us better people, and everyone enjoys the idea that we "made a difference" by supporting a good cause.

However, what's most important to individuals isn't that their activities actually help, but that they attempted to help. You know, "it's the thought that counts". That's why research has shown that mechanisms designed to stimulate charitable giving are likely to increase the number of people giving to charity, but are not likely to increase the amount of money donated by each individual. (I read this months ago, and I'll post a link when I find the relevant article)

Simply put, Earth Hour is an easy way out for people to get their environmental feel-good effect. "Oh, we've saved enough energy to light up 900 Indonesian villages! Yay!" say the Jakartan public, as they rush to turn their lights, computers, LCD TVs, and air conditioners back on. And in the morning, as they drive at a snail's pace through the heavy Jakartan traffic in their gas-guzzling SUVs (with AC on full blast, obviously), they'll have this warm, fuzzy feeling inside, because they think they've made a positive contribution to the fight against global warming.

If it actually raises awareness on energy conservation for the long run, that's great. But I'll hope you'll excuse me for being a bit skeptical.

The wrong benevolent mechanism at wrong place..

FYI, I have been going to faculty of economics for almost four years and I have got the senses that this campus is full of incentives-responded mechanisms ever since. Thus, actually, I was quite shock for a while knowing that from badge of 2006 on, every single student of economics must take environmental or human resource economics as one of his concentrations...It's nonsense...

What were they thinking to have students choose one of it? Is it like something they play God?
Truly honest, I can't tell why environmental or human resource? Moreover, why MUST? Didn't they take some important lesson about people responding to incentives thing from econ 101?

Obviously, they are not economists (should I put some 'quote' on?), yes?