2.2.09

COMPLEX ADAPTIVE SYSTEMS DO WHAT THEY PLEASE. I've made this observation before, sometimes to suggest the folly of macroeconomic management by the government. That's not the same thing as suggesting attempting to understand what complex adaptive systems do.

A professor of physics describes the difference.

Macroeconomists should realize that the inability of their theories to make accurate predictions means that they do not know what they are talking about. We non-economists should realize this also, and realize that our leaders, who are being advised by macroeconomists, haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.

Franklin Roosevelt is often given credit for experimenting with the economy in a scientific manner. He did nothing of the sort. Any experiment involving human beings has to be a controlled experiment, as in medicine. Half the patients are given the new medicines and the other half, the controls, either the old medicine, or a placebo. Then, and only then, can one tell if the medicine actually improves the condition over doing nothing (the placebo), or is making matters worse. In contrast, Roosevelt — and today’s economic advisors to the President, unfortunately — propose to apply their economic medicine to the entire economy. This is astrology, not science. The professors of economics have no true, experimentally confirmed knowledge of macroeconomics.

I'm not familiar enough with what experimental economists have been doing to grant or to rebut that conclusion. It certainly doesn't help that the Cato Institute and the Center for American Progress take differing positions on the usefulness of the fiscal stimulus, with signatures of economists famous and obscure.

I'd like to see popular consideration of the situation that reflected some awareness of what economists do understand. Consider an article that comes close to invoking the paradox of thrift.

As consumers remain squeezed, they're likely to keep delaying purchases of non-necessity and big-ticket items by, for example, driving their older cars longer instead of trading them in. On the retail front lines, the first half of 2009 will be "extraordinarily challenging," Wal-Mart's CEO warned last week.

In the search for a silver lining, one can take consolation in the rise of the personal savings rate in recent months. The rate, which is expressed as a percent of disposable personal income, rose in 2008, although in a very choppy fashion, by roughly two and a half percentage points, to 2.8% in November. This upswing in the savings rate reflects the fact that income growth has been exceeding that of spending, as the mounting anxiety of households over their job prospects and the dramatic shrinkage in the value in their stock market investments fuel a desire to save a bigger share of their current income.

The improvement in the savings rate, which in recent years has been consistently identified as a trouble spot for the U.S. economy, is a mixed blessing in the current environment as, by definition, it will keep on restraining spending and delay the prospect of an economic turnaround in 2009.

Indeed, the increased savings rate may be a virtuous thing, but the reason Americans are doing it is their bleakly pessimistic attitude toward the economy and where they think it's going.

Another article, which mentions the paradox of thrift, notes that something else might be at work.

Many economists think the savings rate will keep rising, perhaps as high as 6 percent or more.

So where's the money going? To savings accounts? To debt reduction?

No one knows for sure. But Robert Frank, Cornell University economist, says it doesn't much matter.

"For economic purposes, paying off debt and saving are the same," he said. "Incurring debt is negative savings; paying down debt is savings."

He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.

"The only way people were able to (spend heavily) was by harvesting cash out of their home equity, which was just an illusion," Frank said.

I do recall some defenses of the low savings-out-of-disposable-income rate in the United States as not reflecting the wealth accumulation in the form of securities and real estate. Pop.

Seriously, though, it's difficult to make or evaluate macroeconomic policy without good quantitative information. That's not something one can obtain by pointing a telescope in the general direction of Pluto and measuring the track it makes on the film.

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