Jun 10 2009

Economics for Dummies

Nice find by Quincy Pundit, which explains in a way anyone can understand just how far off President Obama’s unemployment predictions have been since the stimulus bill was passed:

Now, Obama’s policies aren’t to blame for all the job losses themselves. He’s really only exacerbated a correction that was already coming, by taking Bush’s plan to prop up investors’ debt with tax dollars and kicking it into overdrive.  We’re going to get high unemployment no matter what the latest political whiz does, for one very obvious reason:

We’ve borrowed trillions of dollars over the past 50 years to support a consumption level consistently higher than our production level.  Now we’re running out of people to borrow from, so we’re having to cut back about 25% or so, to a consumption level we can afford.  We’ll either do that out of choice (which will cause deflation) or because the government prints a lot of money, making our dollars less valuable when we go shopping (inflation).  Either way, we’re now buying less stuff, which means less stuff gets produced, which means fewer jobs.  Nothing here I haven’t said before.

One thing that caught my eye, though, was those two graphs.  First of all, notice how fast the unemployment line is climbing in that second graph?  In the President’s prediction, unemployment was supposed to be leveling off and starting back down by now.  Instead, it’s climbing at least as fast as before and showing no signs of changing.  But beyond that, notice how the prediction was that it would settle back down to a nice even 5% in a few years (just in time for the next election)?

That’s what mainstream economists call “equilibrium,” and it seems like a particularly silly idea to me.  The theory is that if you leave an economy alone, it will always seek equilibrium, a point in the middle of the spikes and valleys where it will level off.  So when they make predictions, they always factor in this “pull” toward equilibrium.  On top of that, they’ve all agreed that the equilibrium point puts unemployment at 4-5%, inflation at 2-3%, and so on.  It just does.  So if unemployment is 10%, the first thing they assume is that if they do nothing, it’ll work its way back to 5% someday.  And if they do something that will drive it up to 15% temporarily, that’s okay, because it’s going to get back to 5% anyway, and maybe their change will help it along.

That’s why, when you look at any mainstream economic prediction, the prediction always gets better as it gets further away—because of the assumption that it will naturally seek equilibrium.

The problem is: even if this were true in a laboratory setting, or in a completely free and isolated market like a barter system on a deserted island, that’s no reason to think it applies to the US economy.  Even if our economy were trying to reach equilibrium, there are numerous forces pushing it one direction or another.  Government at all levels takes trillions of dollars out of the economy and dumps somewhat fewer trillions back in where it wants to effect some social change or another.  Foreign trade and global investment move wealth and jobs in and out of the country (mostly out these days).  Immigration, legal and illegal, affects the value of jobs and products domestically.  Wars affect the movement and prices of goods, most notably oil.  The economy doesn’t exist in a vacuum.

So, even if you believed, like the President”s predictions suggest, that we could just do this stimulus and then stop right there and sit back and watch the economy struggle and then return to equilibrium…that’s not going to happen.  There will be grand new plans next year and every year, new trade agreements, a new push for amnesty for illegal immigrants, and so on.  If the economy is trying to normalize at some reasonable middle point, we’ll never know it, because it never gets left alone to do so.

I think the last time I talked about this, I predicted unemployment would hit 25%: Great Depression levels.  If we keep up the spending and having government take over industries, I might revise that to 30%.  We’ve already doubled in the last year, and that’s if you accept the government numbers, which don’t count a person who works one hour every two weeks.  I don’t think there’s much government can do to improve the situation–there’s no magic way to pay off 50 years of debt–but it certainly can make it worse.

Enjoy your summer!

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