Friday, October 09, 2009

The human rights component of deficit financing - Lateline interview with Texan econometric purveyor

I've just sent the following feedback to the ABC's Lateline program, which featured a Texan Professor of Economics. You will note I was singularly underwhelmed both by his proffering and the lack of rigour displayed by the interviewer:

"I just watched an interview between Ticky Fullerton and a Professor of Economics from Texas. It pretty much summed up why the world economy is in such a mess. When this type of voodoo econometrics is applied to deficit spending and private Vs public expenditure and respective impacts on productivity, you get the sort of nonsense that this fellow was peddling.

There was no analysis of the effects on long term productivity from targeted public expenditure on key areas of human capital development, including education, health, R & D, and from capital investments in key infrastructure upgrades to roads, ports, railways, airports etc etc. The problem in the US is that so little emphasis has been placed on the role of the public purse in the maintenance of these crucial areas of the economy (leaving it to the private sector to exploit for profit) their public education and health system have become increasingly moribund and inefficient. You cannot get a decent education or health care unless you have money in the good ole USA.

Essential transport infrastructure is in a parlous state in many parts of the US because of a failure of the private sector to invest and the vacation from the field by the public sector. Tax returns have been incrementally reduced by predatory federal and state policies that allow the rich and corporations to minimize their tax. A huge slice of the US structural deficit relates to defence spending, much of which is transferred from the public coffers to private companies who have tax concessions and subsidies coming out their ears.

It is easy to go on and on about the problems with the analysis put forward by this 'academic'. It is a shame your interviewer seemed to know so little about the reality of the US economy to allow this nonsense to stand. You keep trotting these dry rot economists out as if they are the purveyors of all wisdom on the subject of deficit financing and the cost-benefit of public expenditure. They are not and the pity is that their construct has poisoned development policies for decades through institutions such as the IMF and the WB.

We are now reaping the benefit of their obsession with reducing public investment in human and other essential capital, food security, community development and civil society; encouraging governments to leave the welfare of their people to the mercy of a 'globalized' market.

A sensible and balanced mix of private and public investment makes sense; well regulated financial systems and markets make sense; the provision of essential services (not subject to private profit imperatives) under public funding makes sense. An appropriate redistribution of a fair proportion of private wealth through public investment in the common good makes sense.

It would be encouraging if a little more intellectual rigour was applied to these interviews! However, thank goodness for the ABC because the vast majority of the media have completely abandoned the vital ground of balanced, investigative journalism. The health of our democracy has not improved in the process."

The failure of 'pure market & rational individuals' economics has been amplified by Paul Krugman, recent Nobel Prize winner for economics. His essay in the New York Times is worth a read. He concludes:

"So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right."


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