Econometric Confusion
The study of economics is called the dismal science. It was called that by Thomas Carlyle during the Victorian era of England because another famous economist and demographer called Thomas R. Malthus had postulated that human population would always grow faster than man’s ability to grow sufficient food to feed itself. That was a very Dickensian outlook that was before the Industrial Revolution (first, second, third or fourth), when technology started to improve by leaps and bounds and man pretty much learned how to ramp up food production enough to disprove Malthus’ observation. However, Carlyle might still have been right because the production of food might have been conquered, but the distribution of that food to those who need it to live has not. That is, in some ways, an even more dismal reality. What is worse than having a problem? Having a problem that you can fix, but which you choose not to for purposes of greed or indifference.
I was first introduced to economics as a discipline in the Spring of 1972 when the country was suffering from the start of what would become our worst bout of inflation. It was mostly spurred on by the oil crisis and the awakening of the oil producing nations led by Saudi Arabia to the fact that they had more economic power than they realized if they banded together to form OPEC and get paid more for this scarce resource that was driving the world economic engine…oil. You could argue that American and British industrialists had invested in all that oil exploitation capacity and deserved to reap the reward, but sovereignty has a way of overtaking capitalism when, as Pearl Buck would say, “the rich get too rich and the poor stay too poor”. What seemed at the time like far-sighted industrial investment turned out to be short-sighted greed on the part of the American and British oil companies and it resulted in expropriation and eventual oligarchical price gouging by OPEC. Hence, inflation began to rear its ugly head. By 1980 inflation and high interest rates were the dominant theme impeding the economy and and that ushered in a sense that we needed to change things up to feel less dismal about our collective economic prospects. Enter Ronald Reagan and his Supply Side economics plan with Art Laffer leading the charge.
The normal course of events for most people is to study one thing in college and then take a job that has nothing to do with what they studied. That turned out not to be the case for me. I double-majored in economics and government and then got my MBA in finance. Strangely enough, my entire career I kept finding more and more use for my coursework in all three disciplines. I recall on my very first solo business roadtrip to Burlington, Vermont that I learned how much I needed my economics in my work. I had prepared diligently for the trip and knew everything about all the clients and prospects and I was solid on each and every product or service that we offered. At lunch on that first day, our largest client in town took me to lunch and the Chairman of the bank started off by asking me what my bank thought about the economic environment. It had never occurred to me to bone up on that current state of the economy and I had to stumble my way through an answer. From that day on, I swore that I would always be up on the global economic situation and always have a point of view (something everyone expects a New York banker to have).
While I talked about economics almost every day of my career for over 45 years, I usually didn’t talk about it much outside of work. Even with my friends who were in the financial field, I rarely, if ever, talked shop, and especially so when it came to macroeconomic policy. Macroeconomics is intertwined with politics and politics was something I tried hard not to concern myself with too much. I was more or less politically agnostic over those years. I have never been a registered member of either Party. I have voted in thirteen presidential elections at this stage of my life, starting when I was in college. Of those, I voted Democratic 10 times and Republican three times. Those three times were for Reagan and George H.W. Bush. That means that I am complicit in helping Supply Side economics take root as the dominant macroeconomic approach. But I never found macroeconomics coming into my personal life, whether before my Republican period, during or after. But then came Trump.
Trump suddenly changed everything. I have never attended an election night event in my life until 2016. That night, Kim and I had a party at our apartment on Staten Island to celebrate what we thought would be the election of the nation’s first female president. Needless to say, things turned out differently. I can still remember the wet blanket that was over the crowd as they filtered out of our gathering as the election results were coming in and turning more and more in favor of Trump. My protective mechanism had me suggesting that Trump would move more mainstream and not be as bad as all his campaign rhetoric implied. I now admit that I was very, very wrong. Since then, on an increasing basis, politics and macroeconomic policy has entered my regular personal conversations to the extreme.
That situation is now getting to a new level. I have been so concerned about what Trump would do in a second term, were he to prevail in 2024, and so impressed with what Biden has done in the three years of his presidency, that politics and macroeconomics have come center stage in my daily consciousness in a way unlike ever before. My recent discussions with conservative friends has made me increasingly aware of the conundrum with the dismal science. Today it was announced that the employment numbers were twice as good as the market was expecting. This incredibly strong performance was not a fluke, but rather a continuation of ongoing strong economic news. To my and many finance and economics followers’ way of thinking, Bidenomics has been a raging success both economically and socially. I don’t say politically because the right-leaning crowd and the uninitiated common man simply can’t figure it out. They so want it not to be so or else can’t feel it in their pocketbook, that they are knee-jerking by saying that these strong economic results are bad in that they are somehow overstimulating the economy and what, likely to cause more inflation and mounting national debt to burden future generations?
And that’s the conundrum. Give the economy too much steam and it overheats and causes inflation and rising interest rates as the Fed tries to counterbalance it. Give it too little momentum and we have a deflationary environment where earning stagnate and people go unemployed or underemployed and the general misery index rises. Tax too much and people feel demotivated at the margin. Cut taxes too much and deficits grow as social programs and fiscal spending languishes and the misery index goes up. Underinvest in capital spending and infrastructure and the engine sputters to a halt. Overinvest in capital spending and infrastructure and you risk wasting money or overheating the economy. What to do? You know the answer if even if you never took an economics course. You have to invest in capital spending and infrastructure if you want a growth economy and everyone wants growth. But you have to do it judiciously and be sure that its impactful. Supply Side economics is now throughly debunked after forty years of evidence that it simply doesn’t work and trickles next to nothing down. Keynesianism and what is getting called demand side economics to contrast it, but is mostly fiscal impetus is proving to be highly successful,just was it was for fifty years before Reaganomics (excluding the time in the 70’s when the oil shock turned everything on its head). The problem is that it takes people (in this case people on the conservative right) a long time to grasp and accept that reality because the opposite is both so ingrained and so seemingly self-serving. The econometrics are clear and . Even the self-interest is empirically provable to be wrong-minded. They will come around in time, but our divisive political environment make it hard to say when.