Saturday, November 15, 2008

Obama, the economy, and false-cause fallacy

An AP story in the C-J on an AP poll where 72% express confidence that Obama will "revive the economy" (hat tip: Connecticut Post)...

Good luck with that! Either the 72% will be disappointed-- or they will suffer from false-cause fallacy (since Obama will not do anything to
cause the economy to revive).

The poll probably expresses economic ignorance as well: 36% say they want income tax cuts to be a top priority but 84% said strengthening the economy should be a top priority. Although he could cut other taxes (payroll, corporate, capital gains), I haven't heard him talk about that. And the public is not conditioned to think of tax cuts other than with respect to the so-called "income taxes".

What do they think Obama's going to do to strengthen the economy?


At November 16, 2008 at 12:00 AM , Blogger William Lang said...

I think the public thinks Obama will strengthen the economy primarily by not being Republican. (GOP to Detroit: Drop Dead.)

At November 16, 2008 at 12:44 AM , Blogger Eric Schansberg said...

To broaden/expand my initial comments on this, it should be said that presidents generally get way too much credit and blame for problems.

Aside from standard business cycles, there is little that presidents typically do which moves the economy significantly.

Bush and his Congresses probably qualify in trying to fend off a recession for the last year and almost certainly making things worse (and maybe, a whole lot worse). So far, it looks like Obama promises more of the same.

Going back 25-30 years for the next set of examples, I'd point to 1.) the Nixon/Carter Fed picks going with increasingly loose monetary policy (resulting in big inflation and eventually high unemployment early-on under Reagan), 2.) the Carter/Reagan deregulation push in key industries; and 3.) Reagan pushing much, much lower marginal tax rates.

Before that, you'd probably have to go back to Hoover and especially FDR prolonging and deepening the Great Depression.

At November 16, 2008 at 5:42 PM , Blogger William Lang said...

>it should be said that presidents generally get way too much credit and blame for problems.

This sounds like Republican spin, at the end of 8 years in the White House and the beginning of what looks to be a nasty recession.

>Before that, you'd probably have to go back to Hoover and especially FDR prolonging and deepening the Great Depression.

I can't resist quoting Paul Krugman's column from last week: "[There's] a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts."
(Franklin Delano Obama?)

At November 16, 2008 at 6:23 PM , Blogger Eric Schansberg said...

Since I'm not a Republican, perhaps that will help you take my word for it. (And I don't remember hearing GOP'ers give Carter credit for anything!)

In any case, do you see a problem with my analysis?

That's one more reason that Krugman should stick to his specialty! Looking at the data or even E100/200 levels of economic theory, it is incoherent to imagine that FDR's economic policies were helpful.

Getting more specific: how would Krugman explain why the 7th year of the New Deal featured 19% unemployment? How would Krugman expect wage and price floors, multiple tax increases, much stronger unions, restricted international trade, and a rapidly declining money supply to advance an economy?

I'll look at his article and may respond separately.


At November 16, 2008 at 8:32 PM , Blogger William Lang said...

Krugman says the New Deal economic stimulus program failed because it was too cautious, but the massive spending of WWII was sufficient to end the Depression. But I would be interested in your reaction to his column.

By the way, what's your specialty in economics? Should I disregard everything you say outside your specialty? <grin>

At November 16, 2008 at 9:06 PM , Blogger Eric Schansberg said...

I've specialized in teaching econ principles and upper-level micro. I'd be surprised if Krugman has ever taught Principles.

I'm not sure if other fields have an equivalent, but perhaps it'd be like doing wonderful research in some field of higher-level math, but not having a clue how to teach Algebra or not understanding Geometry very well. (Or perhaps a comparison to history or another social science would be more apt.)

One of the perverse/ironic things in Econ: the higher-tier research is so mathematical that an "economist" can have very little understanding of Econ and still be quite successful in the profession. For example, there was a guy with whom I went to grad school who had already earned a PhD or two (in Math and/or Physics). In a short grad school career, he cranked out 30-35 A/B-level pubs-- a staggering amount. (I've had about half that many which is very productive.) But he didn't know anything significant about econ; it was all a math exercise.

In any case, Krugman admits that the New Deal (and by extension, Hoover's policies) did not work and then speculates that it needed to be bigger. Note also that his emphasis in the article is long-term social/equity speculative what-ifs.

Yes, WWII ended the GD in a sense-- from a combo of ending the failed ND policies and what war and a conscripted labor force will do for a labor surplus.

At November 16, 2008 at 10:42 PM , Blogger William Lang said...

Krugman has taught Principles: 14.02 Principles of Macroeconomics.

A few years ago, I watched video lectures from an MIT introductory biology course. I was impressed when one of the lecturers, the prominent geneticist Eric Lander, introduced himself as a PhD mathematician who switched over to genetics. His lectures were lucid and fascinating.

At November 17, 2008 at 10:48 AM , Blogger Eric Schansberg said...

We're pursuing a tangent now. But it's interesting that Krugman has taught "principles" (albeit 10 years ago).

Looking at the syllabus, it's roughly equivalent to what we do in Intermediate Macro Theory. It could be that he didn't teach it at a low-enough level. Or it could be that this is what's best for MIT students. (I can imagine that they could handle that!) In any case, it takes me back to the idea of a relatively mathematical/technical approach to a topic that requires an intuitive understanding.

At November 17, 2008 at 11:21 AM , Blogger William Lang said...

Yes, there's a big difference in curriculum between an MIT and an IU Southeast. I remember the beginning of that set of biology lectures I watched from MIT. The lecturer began by saying that in high school, you may have taken a biology course that talked about how to identify plants, or how animals behave. But he said, in our course, we are going to learn how life works at the subcellular level. Thus began a 4 lecture summary of the needed biochemistry of biology. This was their intro course.

I don't know how well Krugman understands the intuitive level of introductory economics (I only grabbed the first link I found when I searched for his courses at MIT). But I would be totally astonished if Krugman didn't have complete control over the all of the foundations of his subject; the mathematics faculty at MIT I am familiar with certainly have that depth and breadth.

At November 17, 2008 at 11:34 AM , Blogger Eric Schansberg said...

Is there a potential analogy in math-- where someone would be well-respected in some small field within math research, but not be all that sharp with one of the basics (e.g., geometry or trig)?

Perhaps Econ is just different that way...

At November 17, 2008 at 1:03 PM , Blogger William Lang said...

No, that wouldn't happen in math; the folks who are accomplished in any (often narrow) specialty are invariably very solid with all of the basics. To borrow a metaphor from business, mathematics is very "vertically integrated."


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