"Lights Go Out on Dismal Science"? A Long Time Ago!

Illustration of  the Gaussian Copula Formula used by economists to justify credit default swaps.


"How many economists does it take to change a light bulb? One!  When the one they used in graduate school goes out, they sit in the dark."

The above joke, as cited by Neolib hack Robert Samuelson, is supposed to hint at why economists are so pathetic at making accurate predictions. Unlike astronomers,  who can accurately predict the position of Jupiter or Mars in 2050 or the next lunar eclipse or occultation of a star, the economists can't even predict simple stuff in their immediate domain - say like forecasting the growth would be 3.2 % in 2011 when it was only 1.7%

Of course, the reasons for that failure are now well known. Unlike astronomers and astrophysicists who - when they make predictions - must take into account all relevant information, the economists tend to leave out what they dismiss as irrelevant. In the case of the growth forecast, it was simply that the economic stimulus passed in 2009 wasn't large enough to promote the growth expected. As Nobel winning economist Paul Krugman noted it needed to be at least a trillion dollars more, given the recession was much deeper than the economists originally thought.

On April 26, 2010,  a letter of mine published in The Financial Times,  drew attention to the abysmal failure of modern macro-economics (touted as a “science”) to predict the 2008 market meltdown and financial crisis. I pointedly noted that economics had too many “externalities” which included aspects like environmental costs and resources that were omitted from its models, as well as lacking any consistent empirical basis analogous to physics.

In the particular case of the failure in predicting the credit crisis and meltdown, academic economics erred by assuming a putatively poorly regulated system was capable of sustaining massive risk entrenched in obscure, poorly understood credit derivatives created by Wall Street “quants” , most of whom had forsaken bright careers in science or mathematics to invent these devious financial instruments for investment banks. The assumption saw all the hinges come loose when the credit default swaps were immersed in securities purported to be safe, since they were given AAA ratings by credit agencies like Moody’s and Standard and Poor’s.

Thus, the  forecast failure was predicated on a three-way collapse of the paradigm: 1) commercial banks taking on the risk of investment banks by leveraging their assets to preposterous ratios (sometimes as high as 33:1), 2) credit derivatives designed using the Gaussian Copula Formula which enabled them to be sliced, and spread throughout ordinary securities such as collateralized mortgage obligations, and 3) a failure of the credit rating agencies to take proper note of (2) and in effect, be blinded while assigning bond ratings the securities didn’t deserve.

Since then, it’s become ever more evident why economics is a failure and can’t even be regarded as a science like Physics, or even in a “pre-scientific phase” as one respondent to my FT article (Sanjay Bissessur) claimed. But economists' failure to even appreciate or use the Gaussian Copula formula correctly shows that they aren't even in the pre-scientific phase.

In the case of the Gaussian copula, invented by David X. Li while working at JP Morgan Chase and articulated in his (2000) paper: ‘On Default Correlation: A Copula Function Approach”  it isn't a true mathematically sound equation analogous to those used in physics or celestial mechanics.. It is more an intellectual Frankenstein monster that never should have seen the light of day any more than a four-headed baby with a pointed tail. For example, Li's misuse of the distribution functions (F_A(1)) and (F_B(1)) would appall any genuine mathematician or physicist. Each is actually based upon significant uncertainties via survival law distributions which can vary enormously. There is no way to normalize any probability based on (T_A, T_B so there is no way to equate Pr[T_A, T_B] to anything on the left side. The equal sign is dangerous recklessness masquerading as math. Were economists or "quants" know any of this when they cranked out credit default swaps? The evidence of failure to predict the 2008 credit crash shows they didn't.

Back to Robert Samuelson who,  in his recent piece on the Dismal Science (2/ 21, Denver Post), attempts to blame Keynesianism (the theory of John Maynard Keynes that when aggregate demand is low government must offset the decrease via stimulus and deficit spending.)  He asserts "the U.S. DID respond aggressively to the financial crisis" - but misses the point (as was missed by most Pareto- compromised economists) that in reality the stimulus and deficit spending weren't large enough!  This was only evident in retrospect when it was learned the negative growth actually hit -1.6 % in the first quarter in which the stimulus was initiated, in 2009.  Hence, Krugman's insight that the stimulus ought to have been nearly $1.7 trillion instead of $787 billion.

Samuelson also makes the error of most Pareto -distribution based economists, in referring to the "Fed pouring $3.2 trillion into the economy since 2008 to keep interest rates low and accelerate economic growth".   He adds that "so much money pumped out so quickly should have spawned higher inflation by monetarist reasoning, but it hasn't."

But one wonders what planet he's living on. In fact, inflation has been going up and rapidly  - more than 16% a year in the health care costs domain, and 5% a year in food costs. Don't believe me? Check meat , egg, dairy costs at different intervals. The problem isn't that there is no inflation, but that the Federal Reserve selectively ignores those costs -expenses it doesn't want on its cost of living assessments.  The problem is that the Fed leaves these costs, as well as for fuel, out of its CPI or Consumer Price index.

According to  former Fed honcho Ben Bernanke (WSJ, Feb. 17, 2012,, p. B1, 'Consumers Price in Real Cost of Living'), all such costs as food, housing - even exploding rent, as well as meds - are designated as "shelter costs". Hence, they are, get this:  "essentially made up numbers" .   Bottom line, according to Bernanke's statistics, higher costs of gasoline, groceries, rent and so forth - while not directly in our heads- are of no concern to him as regards inflation. After all, the CPI or consumer price index, is gamed to lowball the impact of these shelter costs so that even if inflation is really going up by about 2% a month, to Bernanke and his Pareto-stats it is really ZERO since his statistics (like the 'owner's equivalent rent") don't show up anything worth fretting over.

And economists wonder why they can't even get basic predictions correct?

The other aspect, is that although Bernanke pumped in $3.2 trillion - via his "quantitative easing" - it largely benefited only Wall Street and the stock pushers, traders by inundating them with cheap money.  Bernanke likened the Fed’s $85b a month bond buying to giving the economy small, needed doses of medicine - but it was more like crack to the financial markets that quickly became hooked on it.  This is the main reason a giant stock bubble has been produced which has no relation to actual corporate performance, i.e. corporations are still sitting on over $1.7 trillion in cash - one reason job creation is so sluggish.

Bernanke's pumping up of the economy  via QE I and II certainly hasn't helped seniors on fixed incomes who depend on the interest earned from fixed income investments for extra money to spend. (They lack the time horizon to be dabbling in stocks, or even mutual funds,  as they'd never have the time to make up the losses like a young Turk.)  It hasn't helped most college students whose loan costs have grown higher, and it hasn't helped minimum wage workers who've now seen their food stamps benefits cut!

In fact, a much superior alternative, if the economists had any sense and weren't tied to their delusions (and the Tea Party idiots in the House wouldn't have opposed it), would have been for much greater food stamp benefits - no cuts -and similarly extending unemployment benefits especially for the long term unemployed. These simple measures would have instantly - relatively so - spurred aggregate demand and a healthier economy. The reason? People receiving that money would have gone out to buy food, pay car or home loans, or buy fuel and meds. As opposed to corporations using the money to buy back their own stocks creating a false jump in stock prices, or traders jacking up the P/E ratios to make stocks look better and enhance their own commissions.

The sad fact is the entire U.S. economy is 'upside down' - in so many ways it makes a genuine scientist's head spin. In any rational real world economy, for example, the country would be creating jobs to repair its crumbling infrastructure - thereby killing two 'birds' with one stone (or rather stimulus cash infusion). It would also long since have pulled out of Afghanistan, realizing that quagmire, like Iraq, is a losing wicket and merely a money drain. All the money saved from the last two years in Afghanistan alone could have funded a major infrastructure repair program.  But we're a nation too deluded by external "threats" and security while ignoring our true domestic security.

Incredibly, the dismal science economists even have much of the nation  dumbing down - going gah-gah over their stocks or mutual funds' performance, but forgetting that doesn't mean diddly if they can't get water because their water mains are rusted through, or their toilets back up because the sewer lines are corroded.

The very condition of our nation, with so many serious, unmet domestic needs,  shows that the economics adhered to is more in the way of magical thinking than any "science"-  even a dismal one.

Will 2012 See the End of Austerity Politics?

This is the key economic question for the new year. Especially now as jobs appear to be making a modest comeback with 170,000 added in November, according to BLS stats (though again, this is barely 20,000 above population replacement levels). Also, as Paul Krugman observed in his most recent piece ('The Triumph of Keynesian Economics') the correct economic dictum as uttered first by British economist John Maynard Keynes, is that you always apply measures of austerity during booms, and apply economic stimulus packages during slumps.

This has been borne out time after time. For example, FDR could have had the nation out of the Great Depression much earlier, but he succumbed to the rhetoric of the austerity hawks in his party and began putting in place austerity measures in 1937. Bad idea! It extended the depression's effects at least five more years - until war production (which provided a massive stimulus) finally did the trick.

The situation in this country was approaching another Great Depression in early 2009, when Obama and the Dems put through a stimulus bill that in all probability rescued us from the worst (which is why Mitch Romney's recent comment that Obama's reiteration of this amounted to an equivalent statement to "Let them eat cake!" disqualifies him as any serious candidate). However, it wasn't large enough to get the country fully back on track. Basically, that $897b stimulus was top heavy with unproductive tax cuts (one third of the package) when it ought to have been more food stamps and unemployment benefits. Tax cuts don't work to pump up an economy in doldrums, the other two do!

Only in retrospect - from the data released in 2010 (with the much lower GDP over the years 2008, -09 available), could it be seen that Obama's initial package was inadequate. Had he gone full tilt Keynesian, and doubled that package to $1.6 trillion with almost NO tax cuts (only 10% if that) we'd now be seeing less than 7% unemployment. Had the Bush tax cuts also been allowed to expire, the production process would have been such that the unemployment might have gone below 7% or even 6.5%. The reason is that moderately higher taxes spur higher productive capacity and employment, contrary to austerity thinking.

In fact, if anyone had seriously read The Financial Times report (9/15/11) on the Bush tax cuts, they'd have seen they are not at all a stimulus device but a hidden austerity device! The reason is that tax cuts deprive government of needed revenue at the point of support for its basic spending programs as well as other that would provide an additional stimulus. Because tax cuts limit government's coffers, and "starve the beast" - in the parlance of the tax cut cult- then their effects translate into other social -public spending areas such as Social Security and Medicare, driving cuts to those. But when those cuts are made, the people affected halt spending and an austerity dynamic becomes entrenched.

The Financial Times analysis of the Bush tax cuts bluntly noted:

"The 2000s- that is the period immediately following the Bush tax cuts – were the weakest decade in U.S. postwar history for real, non-residential capital investment. Not only were the 2000s by far the weakest period but the tax cuts did not even curtail the secular slowdown in the growth of business structures. Rather the slowdown accelerated to a full decline”

Once it is recognized and understood that any tax cuts (including the payroll tax cuts) are de-stimulative then it also is possible for people to grasp that extending them means extending an austerity dynamic inimical to escaping a prolonged economic slump. In other words, we've continued to be in this slump not only because of inadequate stimulus packages (in both frequency and magnitude) but also the lack of marginally higher tax rates! The original backers of the Bush tax cuts in 2001 understood this, which was why they had a built in sunset date for early 2011. They knew the nation could ill afford to keep them!

It follows from this, that the extension of any tax cuts will mean an extension of austerity. It will translate into continued demands for massive cuts to "entitlements" because the money will no longer be there (according to the austerity groupies) to pay for the "entitlements" and hence they will be causing massive "deficits".

So what gives? Clearly it serves the stealth interests of the elitist, Neoliberal capitalist Overclass to ram austerity down the throats of the people to divest them of ever more benefits and support, to thereby render their existence marginal unless they're working 24/7. If so working, then they can't meddle in or track political issues or events, and hence become ever more the expendable serfs of the same Overclass. Again, this harkens back to the Theory of the Elites, e.g.

http://brane-space.blogspot.com/2011/12/theory-of-political-elite-1.html

http://brane-space.blogspot.com/2011/12/theory-of-political-elite-2.html

History also helps for us to gain a critical perspective so we don't end up down the same path as the German Weimar Republic. Some key insights are derived by examining the events following March 30, 1930 and concerning then Chancellor Heinrich Brüning. This is based on a recounting in Ian Kershaw's excellent monograph, Hitler Hubris(1889-1936), which documents the history leading up to 1936 and Hitler's seizure of power-consolidation of the Nazi state.

First some background. Brüning was an austerity maven and learned this fell philosophy as a doctoral student at The London School of Economics - where it was promoted by "free-market Austrian school" whores like Friedrich von Hayek (one of the heroes of the modern Libertarian Right, and their Ayn Randian nattering nabobs).

As Kershaw notes (p. 324):

"By June (1930), Brüning was running into serious difficulties in his attempts to reduce public spending through emergency decrees"

Note here that under existing German laws for the Weimar Republic, if no majority could be achieved for financial reform in the Reichstag (which was the case ca. March, 1930), the Chancellor had the option of issuing an "emergency decree" and attempting to obtain a majority for that. If such presidential decrees even failed to gain a majority, then - under Article 48 - the President could dissolve the Reichstag (which necessitated new elections within 60 days)

Unfortunately for Brüning, on July 16, 1930 his financial reform bill aimed at a (deflationary) policy of massive public spending cuts was rejected by the Reichstag. He then resorted to an emergency decree to make the bill law, but when this was rejected by a majority- so he resorted to dissolution of Parliament by July 18, 1930.The dissolution provided the opening gambit for Hitler and his brown shirts, who beat up socialist and workers, trade union members to the delight of big Business.

Hitler totally exploited the weaknesses of the Weimar system, calling down his wrath on its failed promises of tax reduction, flawed financial management and failure to trim unemployment. In vague terms, and with the massive austerity still threatening terrified Germans, Hitler promised security - financial and personal- with the central idea of "national liberation through stength and unity".

The result of the election was a resounding success for Hitler and the Nazis with nearly two-fifths of all votes coming from the German middle classes (Kershaw, p. 334). The major paper, The Frankfurter Zeitung, called it the "bitterness election" and cast the middle classes as villains for being motivated by the desire to 'overturn the current political system'."

Not long after, Weimar austerity did strike as the World War I allies called in their war debts and credits and Brüning got the Reichstag to go along with huge spending cuts . After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Brüning was finally forced out. After just two years of austerity, Germans were willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered their “austerity” pain.

In Germany's 1932 elections, the Nazis and the Communists came out on top, and by early 1933, with Hitler solely in charge, Germany’s fledgling democracy was shut down for good.In the wake of this,von Hayek and fellow Austrian aristocrats were forced to flee from the fruits of their economic programs, then did a complete revision of history.

Once safely ensconced in England and America, funded by oligarch grants, von Mises and von Hayek pushed a revisionist history of the collapse of Weimar Germany. Rather than blaming their own deflationary austerity measures, they tagged "big-spending liberals" who were allegedly in charge of Germany’s last government.The Nazi Propaganda Minister Josef Goebbels, not willing to let a good piece of bullshit go to waste, incorporated this into propaganda posters for the elections of 1932 and 1933 (see attached), incredibly depicting Marxism (conflated with liberals) as being the "guardian angels of capitalists"! (This, at the exact same time big business was applauding the Nazi SA street thugs thumping and killing Marxists, communists and any ordinary workers demanding more assistance!)

Will history repeat this year, with the 2012 elections a rehashing of those in 1932 Germany?

We had all better hope not, and that means putting the austerity demons in our own country to rest and to shame by voting them out in the coming elections - mainly the Tea baggers ensconced in the House of Representatives. The same bunch who have nearly driven the nation off the cliff with their "showdown" over the debt ceiling increase last August.

Those who forget the past are doomed to repeat it!

The Shredding of the Social Contract (1)

"We should cease making speech after speech accepting that our fate and the fate of the world, will inevitably be decided by impersonal, market controlled forces and the sooner we accept this the better off we will be. Instead we should be denying most strongly, in every forum available to us, that such a fate is inevitable... That instead the world deserves a better future than the one on offer from the ruthless money men and sleaze-ridden free trade marketeers, who are making this terrible bid to dominate the world."

Ian MacDonald, in The Barbados NATION, Aug. 14, 1998, p.8.

As this is being written a global cancer is spreading across the planet- engulfing whole populations in its wake, and destroying the cohesion of societies and the integrity of the natural environment. This cancer is inured to suffering and distress, whether of people or the planetary home and natural environment they inhabit. All it cares about is its own aggrandisement and accumulation of monetary wealth, capital at the expense of environmental sanity and labor fairness.

Students who've been highly educated and hold college degrees, facing massive loan payoffs? This global capitalist cancer could care less! The reason is that its essence and malignancy is dictated by debt, and the greater the debt and the more varied it is, the better -from student loans, to mortgages, to credit cards.

The enormous forces currently at work, fueled by manic speculation and debt, seek to re-shape geopolitical boundaries along dictatorial market-imperialist lines. Lines from which multinational corporations and capital govern and rule, rather than governments. The violent episodes of public reaction in Greece are merely at the surface of what lies in store for the planet, if we allow these maniacs to leverage control of our lives.

All these, in toto, bespeak an encroaching economic fascism that has now arrived under the face of the 'market' and multi national corporate hegemony, economic oligarchy- deploying financiers, investment bankers and creditors rather than stormtroopers. And dollar (or euro) signs instead of swastikas. One in which no borders, of any country, are impervious to the reshaping - whether in terms of mergers, downsizings, or progressive indentured servitude of the workforce, or sacrifice of hard-won environmental laws to stealth investment legislation sponsored by transnationals. A 'New World Order'.

In this blog and the next two in this series, I wlll examine in detail the core of the problems we are facing as a nation (or perhaps more accurately, segment of a nation) that still values social justice, upward mobility and equitable access to resources. I will also show what sort of beast the Occupy Wall Street protestors are confronting, and how this beast became what it is today - also why stopping it cannot be a localized strategy - but must be accomplished on a global level.

It was sometime during his presidency that former CIA Deputy chief George Herbert Walker Bush sounded the words "New World Order". He didn't have to amplify it or explain it, because those elitist enclaves that would wield its power knew already what it meant: citizen subservience to corporate "persons" rule, and economic fascism disguised as "free market" Neoliberalism. The aim? To deliver to this Neoliberal pseudo-free market artifact a world of serfs, some willing, some not so willing.

But Bush and others of his ilk knew the only way to achieve this was via a cancerous process called "globalization". This would become the great equalizer and enable impersonal market forces to remove freedoms and all hopes for economic mobility and security. Understanding this is crucial to understanding what the Occupy Wall Street protestors are up against, because in this sense "Wall Street" is just the visible tip of one small iceberg and agent for American ruin, but not the whole! The whole extends to the entire network of unaccountable central banks throughout the world, traced back to the Bank for International Settlements.

Most naive people, when they hear or see the words "New World Order", smirk and smile then think of some looney conspiracy theorist alone in his mom's basement churning out tracts on "black helicopters" and UN prison camps. But this is in fact the hyperbolic lunacy that the real New Worlders wish people to pillory: a deliberate exaggeration to conceal their own ambitions. In fact, this World Order doesn't require black helicopters or UN invaders at all, merely mobile capital that can wend its way across any borders and upend any social contracts at will by allowing capital to outbid the indigenous populace and its rights. The New Worlders know full well that in any competitive bidding war between capital inflows, it will be the one ensuring the fastest race to the bottom that prevails. And no one will be any the wiser.....because it's money via electronic trades and transfers.

Thereby, the workings of the global bond markets, for example, can reduce or remove from the world's social markets much of the freedom their own governments exercised in the past to pursue counter-cyclical economic policies. Thus, in the present era of low aggregate demand, the U.S. would have been able to pursue Keynesian stimulus policies - since we are in a balance sheet recession- and this could have pumped hundreds of billions in for public works to create new jobs. But.....the bond pirates have decreed austerity measures instead, so nothing is done to prime that pump that specifically can engender more jobs and we remain steeped in unemployment.

In effect, the bond marketeers, their rating agency allies and other more nefarious central banking interests, have forced governments worldwide to retreat into a pre-Keynesian world of minimal economic efficacy, even as their populations grow increasingly restive and furious. Governments like Greece (and the U.S.) are thereby left to wait out disruptive downturns in economic activity whatever their social and economic costs. And meanwhile, the one percent - including many bond traders, investment bankers and investors in hedge funds - conceive of ways to use credit default swaps to bet on government failures as their populations erupt.

By penalizing any government which attempts to employ a reasonable and rational Keynesian stimulus - such as has been proposed by Obama in his $447b jobs bill- the market forces (including their regressive political allies like the GOP and billionaire-funded "Tea Party") ensure that those same governments are forced to respond using only the disastrous and deflationary measure of expenditure cuts, including cuts to social benefits. Thereby the global bond pirates profit while populations become more destitute and insecure.

The global capital markets do even more than this: they effectively make any form of social democracy moribund. This social democracy embodies a hearty progressive taxation or deficit -funded full employment (i.e. at least at the 4% level) and healthy, consistent benefit levels - including for welfare recipients. But thanks to the global capitalist pirates, all of these are being unravelled at once! Taxes are now their lowest level for the wealthiest in more than a generation and more tax breaks are to come (if the Bush tax cuts are renewed), and deficit funding is anathema, while Social Security, Medicare and Medicaid are on the chopping block for an unelected, un-Constitutional super committee.

The problem is the existence of social democratic principles, and by extension social justice, cannot survive an open-global economy. Indeed, only within a closed economy can we see first hand if principles of social justice espoused in that country can work and persist. In fact, it is only within a closed economy that any kind of egalitarian spirit can even be remotely enforced. Meanwhile, in every case those "open economies" (the wet dream of the Neolilberal) undermine egalitarianism (including quality jobs for all) by virtue of the freedom of capital to march in and conduct impersonal bidding wars without popular consent. Worse, with no transaction taxes on this bidding, there is no accountability whatsoever! Because no costs are applied, not even ¼ a penny tax per trade, the bond pirates or multinational corporations can infuse as much capital as they want - or can bet on (via trading derivatives in credit default swaps) to bring a country to its knees. Meanwhile, if a nation does attempt to defend its citizens' labor rights vs. inflowing capital, the World Trade Organization or WTO can be appealed to on the basis of the impertinent nation enabling "trade impediments".

If then money or human capital can be allowed to migrate or move to wherever it wants on the planet, it will most often choose those places where labor and health costs are lowest, or the regulations that support them are minimalist. In this way it will maximize its profits and hence maximize its capital for further bidding wars elsewhere. This is a prime reason why millions of college educated Americans are out of luck on the jobs scene even when this recessionary period ends. With 2 billion competing, lower cost workers in China, India and Russia, there's no need to tap any but the cheapest labor - even for high grade skills!

The reason is that the Neoliberal lords of the "New World Order" and its mobile capital have declared their (students') labor comes at too dear a price, including the rights attached to their labor. Far preferable to move it to India, China or Mexico where capital impingements are not so great. The students, meanwhile, end up in a deeply leveraged quasi-proletariat which can easily be exploited for temporary labor when the need arises.

Finally, let us bear in mind that NO "free market" exists! It is a construct of the PR establishment and used to spread false consciousness, so that those caught up with no jobs and no prospects will tend to blame themselves as opposed to the rigged economic system. The fundamental attribution error.

How to know if a market is free or coerced? Charles Reich provided the test ('Opposing the System’, 1995, p. 22):

"A free market produces results that favor the health of society as a whole, because an essential balance is maintained. But in a coercive market, the balance is destroyed, the earning power of work and the standard of living of workers declines, and society as a whole is devastated while those with economic power gain an ever more unbalanced share of the nation's economic wealth"

This is exactly what we have with the top 1% controlling 57% of the nation's wealth, and 400 billionaires with the same monetary resources as 150 million fellow citizens!

Now, magnify this coercive market to the global scale and you have a global cancer! Ian McDonald again, writing in The Barbados NATION (Aug.14 1998):

"Do we really believe for one moment that those who preach free trade and the inevitable triumph of market forces have anything other than their own increased wealth and aggrandizement in mind? Do we honestly believe they think the system they espouse is fundamentally a good one for all concerned? Are we so naïve as to think if, by any chance, the system were to operate against their interests, that they would not make sure it was changed or abridged to suit them? Are we so innocent and trusting that we cannot recognize bullying and crude self-interest when our noses are being rubbed in it constantly?"

Author Willaim Grieder's take is equally pungent (One World Ready Or Not: The Manic Logic of Global Capitalism, p. 401):

"It does not require great political imagination to see that the world system is heading toward a further dispersion of governing power so the closet dictator of the marketplace can command things more efficiently, from everywhere and nowhere. The historic paradox is breathtaking: At the very moment when Western democracies and capitalism have triumphed over the communist alternative, their own systems of self-government are being gradually unraveled by the market system. "


And further (ibid.)

"Like feudal lords, the stateless corporations will make alliances with one another or launch raids against one another's stake. They will play weakening national governments off against each other..... In that event, vast throngs of citizens are reduced to a political position resembling that of the serfs.... "


Next: How the Global Corporatocracy is already making serfs of us all - via permanent unemployment

Do These Guys Deserve a Nobel in Economics? Errr... NO!

Shown: The two anti-Keynesians just awarded a Nobel Prize in Economics, Chris Sims (left) and Thomas Sargent. If extended unemployment benefits are permanently killed, and Medicare and Social Security permanently cut -you can thank these two!

Most of the past two weeks has been inundated with tons of blather about the two most recent winners of the Nobel Prize in Economics. (Let us also bear in mind that Economics wasn't originally part of the Nobels, and only added much later.) These two: Christopher Sims and Thomas Sargent, have evidently received their award for pouring bollocks on Keynesian stimulus from governments, which - let's face it - has seen a rash of attacks in the wake of the onset of the austerity virus.

In one unabashed paean, 'A Nobel For Non-Keynesians' (WSJ, Oct. 11, p. A17), author David R. Henderson waxes wildly about the "contributions" of each of them, e.g. in respect of Sargent:

"Mr. Sargent was an early and important contributor to the 'rational expectations' revolution in macroeconomics, and area for which his collaborator Robert E. Lucas, won the Nobel Prize in 1995.."

Sargent's more mathematical "rational expectations" model posited negative "rational" reactions of people to events like the Fed loosening the money supply, "a conclusion at odds with the Keynesian model". For example, it's claimed that people will adjust their "wage demands" higher if the Fed increases the money supply (as it has recently been doing by buying back hundreds of billions of treasury securities, under 'quantitative easing'). Then, by increasing the wage demands unemployment will increase, rather than decrease.

Sargent also argues that people will "make decisions now" based on how they rationally believe the government will deal with Social Security and Medicare. Thus, according to the Pareto Distribution basis, if government were to act for cuts now (such as being bruited about by the supercommittee) then people might invest more in the stock market (for higher returns) instead of depending on government.

As one former Fed economist put it ('Economists Win Nobel for Focus on Real World', WSJ, Oct. 11, p. A3):

"If you made a credible committment to do this now and the markets saw that, this theory would predict that you have a much more positive impact on the economy today".

In other words, as standard for Pareto optimality BS, sacrifice citizens' security for a generic market benefit, available only to the elites, mainly the 1%. See, e.g.

http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto.html

Meanwhile, allowing Medicare and Social Security benefits remain as they are would be "Pareto inefficient", reinforcing the old Pareto Parable that if a sheep and a wolf form a collective, it is always preferable for the wolf to eat the sheep for the "collective" to be maximally optimal, e.g.

http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto_13.html

Sargent's own bias in his development of his mathematical models to support his "theory" confirms this. For example, in one of his theoretical models Sargent arrives at a set of "competitive equilibria": C = {(x,y)! x = h(y)}, such as shown on the accompanying graph where "welfare" is plotted vs. "tax rate". Entering into the basis for generation of such equilibria is what is called a "utility function" framed for example as: U(L, c,g) where L denotes "leisure", c is the rate of consumption, and g is the per capita government expenditure. From this, Sargent purports to obtain some parameter 'alpha' spanning a range in a limited set from 0 to 1/2.

At some point later then, one also will find the tax rate τ, enter. Thus, he claims a government will in general balance its budget if: g = τ (1 - L). Meanwhile, he poses "welfare" within the constraints of competitive equilibria as defined by:

W(τ) = L(τ) + log {alpha + (1 - τ) [1 = L(τ)]} + log (alpha + τ[1 - L(τ)}

He argues that a "benevolent government" chooses L = 0, c = g = ½

while a "dictatorial" outcome yields: W = 2 log (alpha + ½)

This in itself is nonsense, given that any true benevolent government would never ever require a leisure L = 0! However, a dictatorial "slave camp" government, such as under Chairman Mao in the 1960s, would! SO, what the hell is he getting at? The graph shown sets it in perspective assuming an alpha = 0.3 or just past midway in the set {0, ½}. Thus, he argues that the "government problem in a Nash equilibrium" is defined by a limiting maximum tax rate, max(τ) such that: L = log [alpha + (1 - τ)(1 - L)] + log (alpha + τ(1 - L)]

Then, if L < 1, the option is τ = 0.5

However, as the tax rate moves beyond this limit, the welfare crashes! Well, by that I mean it reaches a Nash equilibrium lowest value of around -1.2.

Stripping away all the math and balderdash, what do we have? Well, a curve that fits perfectly within Pareto Distribution parameters of Pareto optimality or efficiency! (Notice the line marked "unconstrained optimum, which is really an optimum for maximal Pareto effciency). What we are being warned against here, is the use of too many government expenditures or resources for the common good, whether in Medicare, Social Security or even unemployment insurance. Any time one seeks to maximize a putative welfare within these limits, one ends up in a crash pile. The welfare drops and so does everything else.

Beware then of all those who wish to stimulate the economy by too high a tax rate! Hmmmm....wonder then why our unemployment was lowest during the 1950s when the marginal tax rate was 91%. Oh, these latter day anti-Keynesians will argue it was the aftermath of the war production, the lack of global competitors or some such rot, anything to deny any consistent Keynesian approach.

Meanwhile, there is Sargent's fellow prize winner Chris Sims who (Henderson, WSJ, ibid.) :

"undercut the large scale Keynesian economics models and....found the traditional Keynesian methods just not good enough"


One of Sims' complaints in the same piece was the government extending unemployment benefits for another 99 weeks, which "filled him with dread".

Oh really? It must be nice to merely be filled with dread while sitting on one's duff in a nice comfy office in the halls of academia- ruminating on the rarefied realms of macroeconomics. And meanwhile, the unemployed whose homes are now near foreclosure, and whose hungry kids cry out for food before bedtime each night, experience REAL dread as they face another possible cutoff date!

Jeebus, these two make me want to cold cock someone! But maybe it's already been done in a kind of surreptitious manner, given that all their pseudo-sophisticated efforts and models may be for nought. As The Economist has noted, in their review of the new book Thinking Fast and Slow (by Daniel Kahneman), that species paraded as 'Homo Economicus' (Economic Man always invested maximally in the most rational choices) is largely a figment of economists' imaginations. Or to use The Economist's words:

"Mr. Kahneman, an Israeli-American psychologist, has delivered a full catalogue of the biases, shortcuts and cognitive illusions to which our species regularly succumbs. In so doing he makes it plain that Homo Economicus - the rational model of human behavior beloved of economists - is as fantastical as a unicorn."

And I already gave examples of this irrational propensity in a previous blog referencing Kahneman's work, e.g.

http://brane-space.blogspot.com/2011/10/rational-limits-of-human-brain.html

Now, the question for all who have been paying rapt attention is as follows:

How far, or to what extent, shall we trust a model based on "rational expectations" theory, when the subject (humans) don't evince rational economic behavior at all?

And if the answer to that question in any way suggests or evinces minimal ballast or credibility, then exactly what was that Nobel Prize in Econ worth?

Inquiring minds want to know! Especially before our congress critters proceed to use these models to shaft us even further -so the 1 percent can own us even more!