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Economists Finally See The Light!
By Shlomo Maital
With my new Ph.D. in Economics, in 1967, I quickly knew I was in the wrong discipline. My wife, a psychologist, helped me see that the basic assumptions economists made about human beings were ridiculous. As Nobel Laureate Daniel McFadden summarized them: “sovereign in tastes, steely-eyed and point-on in perception of risk, and relentless in maximization of happiness.” I also knew WHY economists assumed a world that did not exist. Without these assumptions, they could not build mathematical theorems about behavior. So the tail of math wagged the dog of reality. With my wife, I did some research applying psychology to economics, 41 years ago, in 1972, long before behavioral economics became fashionable (it was published only in 1978)* I also wrote a book on the subject, in 1982, but 31 years ago, no-one was interested. **
Today one can say that the mainstream of economics is behavioral. In a new paper by McFadden***, “he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behavior that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity. “ (Source: The Economist, April 27, 2013).
Almost none of the models and assumptions of conventional economics hold water in the face of behavioral research. For example: in microeconomics, more choice is always better than (or at least as good as) less choice. As The Economist notes: “Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by “default” into pension plans at preset contribution rates. Explicitly modeling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. It might also make them more skeptical of “revealed preference”, the idea that a person’s valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.”
And if conventional microeconomics, macroeconomics is completely out to lunch. Chief IMF economist Olivier Blanchard recently described macroeconomics as a “cat in a tree” – treed by the global financial crisis, unable to say decisively whether austerity (budget cutting) is good or bad or indifferent.
The behavioral revolution in economics came a bit too late. If it had come a decade earlier, if it had focused on key variables like trust and risk perception, perhaps economics could have helped forestall the global financial collapse in 2008, rather than contribute to it.
* Sharone Maital and Shlomo Maital, “Time preference, delay of gratification and the intergenerational transmission of economic inequality”. In Orley Ashenfelter and Wallace Oates, editors, Essays in Labor Market Analysis, (Halsted Press/John Wiley & Sons, New York: 1978, 179-199).
** Shlomo Maital, Minds, Markets and Money: Psychological Foundations of Economic Behavior, Basic Books: New York, 1982, x + 310 pages. (hardcover and paperback).
*** * D. McFadden “The New Science of Pleasure”, NBER Working Paper No. 18687, February 2013
Trying to Understand the Tsarnaev Bombers
By Shlomo Maital
I crossed the finish line at the Boston Marathon on Monday April 16, 2007, five hours after the starting pistol sounded. My wife and son were waiting for me; the Boston crowds cheered and encouraged me and all the runners, hours after most of the other runners had finished. It was an incredible experience, unforgettable, and it was denied to all those last April 15 who finished more than four hours after the start. Three lost their life, including an eight-year-old boy, Martin Richard, from Dorchester; and dozens were injured, some seriously. This is why I took the bombing very personally. What causes two people like the Tsarnaev brothers to inflict death and injury, on innocent bystanders, randomly? Media coverage shed no light on the matter; it was worse than uninformative. But here is what I have managed to learn:
What is the link between the Tsarnaev brothers and Chechnya?
The latest issue of The Economist has the first enlightening piece on the subject. Here is a brief summary: “Struggling to integrate in America (“I don’t have a single American friend,” Tamerlan, the older brother, once said), the Tsarnaev boys sought mental refuge in their native land. The internet and social networks that served as a channel created an illusion of engagement without experience or memory. The brothers never fought in the Chechen wars or lived in Chechnya for any length of time. Yet their lives and their sensibilities seem to have collided with its violent and tragic history. …. After the mass deportation of Chechens by Stalin in 1944, the Tsarnaev family landed in Kyrgyzstan, where the boys later grew up. Their grievances were stirred by separatists who declared Chechnya’s independence after the end of the Soviet Union in 1991. When Russia launched a “small victorious war” against Chechnya in 1994, nationalism was the main cause. By the end of the first war, 50,000 were dead, Chechnya was in ruins—and nationalism had been superseded by Islam.”.
What motivated them?
Washington Post: “The 19-year-old suspect in the Boston Marathon bombings has told interrogators that the American wars in Iraq and Afghanistan motivated him and his brother to carry out the attack, according to U.S. officials familiar with the interviews. … The officials, who spoke on condition of anonymity to describe an ongoing investigation, said Dzhokhar and his older brother, Tamerlan Tsarnaev, who was killed by police as the two attempted to avoid capture, do not appear to have been directed by a foreign terrorist organization. Rather, the officials said, the evidence so far suggests they were ‘self-radicalized’ through Internet sites and U.S. actions in the Muslim world. Dzhokhar Tsarnaev has specifically cited the U.S. war in Iraq, which ended in December 2011 with the removal of the last American forces, and the war in Afghanistan, where President Obama plans to end combat operations by the end of 2014.”
Where did they learn to build the bombs?
NBC News: “The surviving suspect in the Boston Marathon attack has told investigators that he and his brother got instructions on building bombs from an online magazine published by al Qaeda, federal law enforcement officials told NBC News. Dzhokhar Tsarnaev told investigators that the brothers read the instructions in Inspire, an online, English-language magazine that terror monitoring groups say al Qaeda began publishing in 2010. The magazine has twice included articles on building bombs with kitchen pressure cookers — the method investigators say Tsarnaev and his brother, Tamerlan, used in the Boston attack.”
Where did they get the explosives?
Slate magazine: “Tamerlan Tsarnaev, the elder brother suspected in the Boston Marathon bombings, bought two large pyrotechnic devices in February from a New Hampshire branch of a national fireworks chain, according to executives at the chain’s parent company. William Weimer, a vice president of Phantom Fireworks, said the elder Mr. Tsarnaev on Feb. 6 purchased two “Lock and Load” reloadable mortar kits at the company’s Seabrook, N.H. store, just over the border from Massachusetts. Each kit contains a tube and 24 shells, he said. Mr. Tsarnaev paid cash for the kits, which cost $199.99 apiece.”
Conclusions: Social networks are not a good substitute for friendship and social contacts. America offers immigrants endless material benefits and education, but its individualistic society may leave many alienated. It is exceptionally easy to learn how to kill people and make bombs and acquire the explosives to do so.
I realize this sounds incredibly naïve – but if you know people who are lonely, friendless, down in the dumps… reach out to them. The CIA apparently has a database with 500,000 (half a million!) names in it, all ‘suspicious people’, including the Tsarnaev’s. (When Tamerlan flew to Moscow, Aeroflot misspelled his name in English, so the CIA computers were never alerted). What are the odds that they can all be tracked? If you want to do something in the face of attacks like that at the Boston Marathon, the only thing I can think of is to seek out the people who potentially may want to harm others and offer them friendship and hope and understanding. You may be a lot more effective than the CIA or FBI.
Kids’ Creativity Is Declining: Is NCLB Responsible?
By Shlomo Maital
Can you test for creativity and measure it, like IQ, in individuals – especially kids? Dr. E. Paul Torrance developed the TTCT, Torrance Tests for Creative Thinking, in 1957. It is a fairly simple 90-minute set of tasks, extended in 1966. His tests have five activities: ask-and-guess, product improvement, unusual uses, unusual questions and ‘just suppose’. One task gives children a toy fire truck and asks them how they would improve it. One of his subjects, in 1958, found 25 different ways! Torrance used his TTCT to show that you CAN teach creativity.
Recently, strong evidence was found to support the premise that IQ and creativity are almost unrelated. Back in 1958, Prof. Torrance tested the creativity of a group of 400 Minneapolis children. In the 55 years since then, Torrance and his colleague Garnet Millar tracked the children, recording their patents, businesses, research papers, grants, books, art exhibits, software programs, ad campaigns – virtually everything. In turns out that Torrance’s creativity index predicted the children’s creative accomplishments as adults incredibly accurately. The correlation between lifetime creative accomplishment and childhood creativity is more than three times higher than the correlation between accomplishment and childhood IQ.
What’s even more interesting, and worrisome, is this: According to the “Flynn effect”, named after New Zealand Prof. James Flynn, with each generation, IQ goes up by 10 points. With creativity, a reverse trend was identified. American creativity scores are falling, according to researcher Kyung Hee Kim. “The decrease is very significant,” Kim says. He notes it is the scores of younger children in America, from kindergarten to sixth grade, for whom the decline is most serious.
In 2000, just after he was elected (or in fact, lost the election and then stole it thanks to Florida’s Republican State Supreme Court), George Bush pushed through the NCLB No Child Left Behind Act. While NCLB focuses on measuring and improving conventional learning skills, creativity is suffering. One wonders whether rule-based education, in which teachers teach kids to pass tests, is actually hurting break-the-rules creativity, even in innately creative young children. If this is so, there is cause for concern. America needs engineers who know how to make things others invent – but it also needs those who know how to invent things others will make. Surely we can figure out how to teach both, without ruining either.
Sources: Torrance, E. Paul. (1972). “Teaching for creativity”. Journal of Creative Behavior, 6, 114-143. And: The Creativity Crisis, July 10, 2010, Po Bronson & Ashley Merryman, The Daily Beast (Newsweek).
The Dan Plan: Can You Too Be Anything You Want to Be?
By Shlomo Maital
Michael Kruse is a Tampa Bay Times staff writer. He has been covering the adventures of Dan McLaughlin and “The Dan Plan”. Here is a summary:
“A year ago, Dan McLaughlin spent hours every day at the St. Petersburg golf course Mangrove Bay, putting, putting, putting. He was not quite a year into what he calls the Dan Plan. McLaughlin had decided at 30 to try to become a professional golfer on the PGA Tour. He had never played the game. He had almost no interest in the sport. What he really wanted to do was test the theory that anybody could become expert at anything with 10,000 hours of measured, deliberate practice. The resident of Portland, Ore., quit his 9-to-5 commercial photography job and started living, frugally, on about $100,000 of savings. He came to Florida because of the warmer winter weather.”
Malcolm Gladwell’s book Outliers showed, you may recall, that the secret of success for baseball players (Ted Williams), basketball players (Michael Jordan), violinists, and nearly everyone, is mainly hard work – namely, 10,000 hours of practice. Well, McLaughlin and The Dan Plan have invested about 4,000 hours of practice to date in golf. Results? Dan has a 7 handicap, which makes him better than 85 per cent of the amateur golfers in America.
The Dan Plan is succeeding, because McLaughlin has become a celebrity, with stories running on him in The Times, Business Week and nearly everywhere, tracking his progress. But what about Dan himself? Is he sticking to his plan?
After playing two rounds with McLaughlin, economist Steven Levitt of Freakonomics fame assessed his progress this way: “He is about 15-16 strokes per round away from being good enough for the PGA tour. That means he has to shave off about one stroke for every 500 hours of practice from here on out. “I suspect he can keep that rate of improvement for the next few thousand hours, but it will be a tough haul after that.” “I’ve learned a lot about patience,” McLaughlin told Portland Monthly, “but the most important thing I’ve learned is you’ve got to get the ball in the hole.” This ongoing pursuit for McLaughlin continues to be a question for the rest of us: Is talent made, not born? Can you be anything you want to be? Maybe he will make the PGA Tour, or maybe he won’t. But this, of course, is not ultimately about golf. “I’ve learned a lot in the past year,” McLaughlin said the other day on the phone. “But hopefully everybody learns a lot in a full year.”
Is he still totally committed to the Dan Plan? He answered the question by saying the same word four times. Yes. (He’s done 240,000 practice swings so far).
I’m not sure that you can be anything you want to be. But I am sure that a great deal of persistence and hard work will achieve any reasonable goal. In my work with entrepreneurs, the key quality THEY cite for success is not brains, or creativity, but simply persistence and resilience.
Economists’ Research Sinks Europe
By Shlomo Maital
What if you were a distinguished Harvard Economics professor, formerly IMF Chief Economist, who studied the link between public debt and economic growth? What if you found that debt above 90 % of GDP kills all economic growth? What if EU nations acted on your research, and relentlessly imposed austerity on their economies, to slash spending, reduce debt and spur growth?
What if your research was simply wrong?
Whooops! Sorry. Oh well.
Kenneth Rogoff is a highly respected macroeconomist who together with colleague Carmen Reinhart, found that for 1946-2009, in the 20 advanced economies, high public debt destroys growth: *
Public Debt / GDP
> 30% 30-60% 60-90% 90% +
Average GDP growth: 4.1% 2.8% 2.8% -0.1%
Rogoff is no armchair theorist. He is one of the world’s most experienced applied macroeconomists. I respect him highly.
That is why it is so painful to learn that his research has “coding errors, selective exclusion of available data and unconventional weighting of summary statistics [that led to] serious errors.” This is according to a study by UMass (Amherst) economists Thomas Herndon, Michael Ash and Robert Pollin, who tried to replicate the Rogoff study.** Here is what the corrected table should be:
Public Debt / GDP
> 30% 30-60% 60-90% 90% +
Average GDP growth: 4.2% 2.9% 3.2% 2.2 %
Now, doesn’t this table STILL show that debt hurts GDP growth? Not really. Because in the 90% + group are countries that are chronically mismanaged by their leaders. It is not the debt that costs that one per cent of GDP growth, but the way the money raised by the debt is wasted.
EU nations apparently used the Rogoff table to justify their austerity (spending cuts), especially the UK. Republican Senator Paul Ryan used the Rogoff data to justify his radical austerity budget proposal. Whoops. Sorry. Error.
What if we replaced historical economic research (which reflects an era utterly different from the current one) with common sense? What if we said, countries, like businesses, can borrow money, provided they invest it wisely to grow their human and physical capital and build future assets? Especially during times of high unemployment, when demand is weak?
Austerity has failed. Economists are partly responsible for this, when instead they should have offered plain common sense. When Rogoff gets it wrong, all the economic idols have feet of clay. Political leaders: You listen to economists, even wise ones, at your peril. British PM Cameron may pay the price in the next election.
* Reinhart, C.M., and Rogoff, K.S. “Growth in a time of debt”. Working paper 15639, NBER, 2010.
** T. Herndon, M. Ash, R. Pollin. “Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff”. PERI, U. Mass (Amherst), working paper no. 322, April 2013.
Deep Uncertainty: It’s Personal!
By Shlomo Maital
I speak to groups of MBA students regularly and often think of what knowledge I can impart that will help them plan their careers and lives. I found a superbly helpful article in an unlikely place: EOS, Transactions of the American Geophysical Union. The article is: “Shallow Versus Deep Uncertainties in Natural Hazard Assessments.” The authors are very close to me: Prof. Seth Stein, distinguished geophysics professor at Northwestern Univ. and the late Prof. Jerome Stein, former Brown Univ. professor. Jerry is my wife’s uncle and Seth is her cousin. Jerry passed away recently, and this article in EOS, written with his son Seth, is one of his last publications. Jerry was a highly productive scholar to the end, and his last book * showed how America’s Central Bank, The Fed, could have avoided the disastrous financial collapse of 2008-11. Jerry and I agreed that former Fed chief Alan Greenspan bears much of the blame for that collapse.
The article is about why scientists find it so hard to assess the risk of natural hazards, like earthquakes. (Italian scientists were recently prosecuted for failing to forecast an earthquake there). Here is the gist of the argument.
If you recall your college statistics, the chances an event will occur can be modeled, or simulated, with a jar of colored balls. Red balls signify an earthquake. Black balls signify no earthquake. If the chance of an earthquake is, say, one in one hundred, put 99 black balls and one red ball into an urn and then draw a ball. This is simple. All scientists need to do to assess natural hazards is to figure out how many red balls and how many black balls are in the urn.
But – wait! Not so fast. What if the probabilities are changing? What if an earthquake last year changes the probability of an earthquake next year? What if the probabilities are changing over time? (Some earthquakes relieve underground pressure caused by shifting tectonic plates and reduce the probability of future earthquakes; other earthquakes signify that a series of shocks will occur, as the plates shift, and increase the probability).
To use our “earthquake predicting urn”, we need to change the mixture of red and black balls. We need to put some balls back after we draw them. But – how many? Do we add more red balls? More black balls?
In the diagram above, the flat green line shows a risk, or hazard whose probability is constant. All we need to do is figure out what that number is: 1%, 2%, 5%? That in itself is tough.
But suppose the risk is changing over time. Does it look like, say, the craggy red line, which has an upward trend line around random fluctuations? Or does it look like the craggy blue line, which has a constant probability fluctuating randomly around the trend line? Sometimes dice are used to reflect uncertainty. But it’s far worse than that. Because in life, the number of dots on the dice are constantly changing and we’re not really sure how or when.
The red and blue lines reflect what Stein & Stein call “deep uncertainty”. It is deep, because, a) we have great difficulty estimating the risk, or probability, of the event itself, and b) we have to understand whether the risk is changing over time, whether the event influences future events, and if so, how and how much.
Combining a) and b) means we have double uncertainty. Climate change, note the authors, is an example of deep uncertainty.
What does this deep uncertainty mean for policy makers? If we use standard risk assessment models, that assume constant risks (like the green line), when the risks change with time, we are using wrong models. Deep uncertainties cannot be assessed by estimating probabilities. Those probabilities are moving targets and we’re not sure how or where they’re moving. Assuming expert knowledge when it does not truly exist is a recipe for disaster. It is perhaps why economists are such disastrous forecasters, because they pretend to foresee the future with accuracy. They are using fixed dice, instead of ones with changing dots. As the editor of EOS writes, “in a world where models are becoming increasingly complex, where calculations involve supercomputers and terabytes of data, the Steins’ model gives you x-ray vision into the black box of hazard assessments”. Economists pretend the black box that is our economy is transparent. It’s not. It’s black.
Jerry’s book uses stochastic optimal control, a powerful mathematical tool used to guide rockets. Each millisecond, rockets’ optimal trajectory must be recalculated, because of unforeseen forces that buffet it and push it off course, even slightly. This is how we should have run our monetary policy, Stein notes; if we had, we would have seen danger signals long before 2008. This is how we should run our lives, I believe. Recalculate your trajectory frequently, because unexpected forces are always buffeting our plans. A wonderful Yiddish saying goes, a mentsch tracht, und Got lacht… A man plans, and God laughs.
What does this deep uncertainty mean for my MBA students? All of us, especially young people, face deep uncertainty in our personal lives. All the skills and knowledge we are acquiring can become obsolete in the blink of an eye. Once a whole layer of managers crunched data. Today they’re gone; software does it instead.
What this means for MBA students is this: You need to develop above all two key qualities: flexibility, and resilience. Flexibility, to adapt to rapid unexpected changes and respond to them wisely. Resilience, to take a blow and bounce back, when a sudden ‘hazard’ materializes and causes you financial and professional harm. These are qualities and skills that can be learned, developed, and practiced. But no MBA program I know teaches them. In a world of deep uncertainty, the world Stein and Stein describe, those with flexibility and resilience will endure and prevail.
Thanks to Seth, a geophysicist, and the late Jerry, an economist, for making this so clear. I dedicate this blog to Jerry’s memory.
* Jerome L. Stein. Stochastic Optimal Control and the U.S. Financial Debt Crisis. Springer: New York, 2012, 157 pages.
Helping Others: It’s In Our Genes!
By Shlomo Maital
Oren Harman is a professor of the philosophy and history of science at the Hebrew University. He is only 39, but has written wonderful books understandable for ordinary readers like myself. His latest book is The Price of Altruism. It is about George Price, an American science journalist.
Price happened upon a mathematical equation developed by a British biologist named William Hamilton, that shows how altruism – helping others without gain to oneself — can thrive even when animals (including humans) are totally selfish. You help others because by the laws of evolution, it helps YOU survive. Price, a talented mathematician, simplified Hamilton’s equation. And then, he did something extraordinary – he practiced what he preached. He began a career of helping others in London, giving away all his income, his possessions, everything. In the end, tragically, he killed himself with a pair of nail scissors in January 1975.
There is a deep conflict within economics about altruism. There are two polar approaches, that of Gary Becker and that of Amartya Sen. Nobel Laureate Becker provides theory and evidence for his “rotten kid” theorem, which shows that highly selfish children may behave outwardly selflessly toward family members, because inwardly they expect a high return on their investment. In contrast, Nobel Laureate Sen challenges the behavioral foundations of economics built on extreme, narrow self-interest and a distorted interpretation of Adam Smith’s Wealth of Nations. He speaks of “obligation”, a type of altruism generating advantage for someone whose wellbeing does not and cannot directly impact the agent’s own wellbeing. It is obligation, not rotten kids, that drives behavior, Sen claims. [Only Economics can simultaneously award Nobel Prizes to scholars who present conflicting theories].
What did Adam Smith himself write? Here is a passage from his 1759 book, Theory of Moral Sentiments: “The plaintive voice of misery, when heard at a distance, will not allow us to be indifferent about the person from whom it comes. As soon as it strikes our ear, it interests us in his fortune, and, if continued, forces us almost involuntarily to fly to his assistance.”
Was Smith naïve? Are we purely selfish creatures? Or do we fundamentally care about others? What economists assume about human nature makes a huge difference to the policies they promote.
Reader – what is your view?
If People are Getting Smarter, Why Are Nations Getting Dumber?
By Shlomo Maital
James Robert Flynn is a New Zealand scholar whose research discovered a phenomenon now named after him, the “Flynn effect”: “the substantial and long-sustained increase in intelligence test scores measured in many parts of the world from roughly 1930 to the present day.”
When intelligence quotient (IQ) tests are initially standardized using a sample of test-takers, by convention the average of the test results is set to 100 and their standard deviation is set to 15 or 16 IQ points. When IQ tests are revised, they are again standardized using a new sample of test-takers, usually born more recently than the first. Again, the average result is set to 100. However, when the new test subjects take the older tests, in almost every case their average scores are significantly above 100.
Flynn published his findings in 1987 * and since then has written articles and books on it. In a recent book, Flynn noted that for the first time, women have pulled ahead of men in IQ!
Let’s suppose that people really ARE smarter than they once were. What’s the problem with that? What bothers me is, if people are smarter, why are nations dumber? Why do we have the EU debacle, the Irish, Portuguese, Spanish, Italian and Greek crisis, the global financial collapse, Iraq, Afghanistan, Rwanda, the Mideast conflict, the Congo, Zimbabwe, the Arab spring-turned-to-winter…? If we’re so smart, why do we act so dumbly as nations?
One of the world’s leading psychologists Robert Sternberg has weighed in on the Flynn effect. He makes two key points. First, what we lack is not problem-solving intelligence, but ethical intelligence. The global financial crisis was engineered by super-smart bankers and financial wizards with zero ethics. Second, what we lack is not IQ but wisdom – the way to use that IQ that truly benefits humanity. Sternberg’s model is called WISC, which says that to succeed, we need four elements: Wisdom, Intelligence, Systems Thinking and Creativity. Intelligence alone won’t do the job.
* James Flynn. (1987) “Massive IQ gains in 14 nations: What IQ tests really measure”. Psychological Bulletin 101: 171–191
When Economists Flounder, So Do Our Economies: Few New Do’s from Lew
By Shlomo Maital
In 1965, as an economics student at Univ. of Manchester, I recall seeing a remarkable wood carving on display in the Seminar room, by Harry Johnson, who later became an eminent U. of Chicago professor. It was a two-headed dog, and one head was biting the other.
This, today, is a perfect portrayal of Economics. Half of all macro economists support austerity (budget cuts). Half attack it. And each half has strong arguments and experts of great stature.
So what? Let the economists squabble in their seminars, let each head of the two-headed dog bite each other, so what?
Problem is, when economists flounder, so do our leaders. The new American Treasury Secretary Jacob Lew is touring Europe, telling the Europeans to quit the austerity and start spending again, like America did. His evidence: America is growing, Europe is not (France’s GDP grew not at all in the last quarter).
What did the Europeans say? They listened, and politely (the French are always polite, the Germans not always) said, get lost, Lew. An inspired newspaper editor might write the headline: Few New Do’s from Lew.
As Anne Lowrey reports in today’s Global New York Times *: “Mr. Lew pointed to evidence that increased government spending and looser monetary policy had helped the United States recover at a much faster pace than the Continent has. But even as some European leaders expressed concern about rising unemployment and deepening recession, it was clear that Europe’s political constraints — and Germany’s insistence that bringing down deficits and reassuring lenders was the best route to sustained growth — were preventing a more expansionary approach from taking hold.”
Economics wrecked the world twice. First, by its wholesale endorsement of free unregulated markets, that led to the 2008-12 crash. Second, by its utter impotence in figuring out what to do to clean up the mess. I wish I had studied medieval Swahili literature.
* Lew’s Visit to Europe Reveals a Wide Policy Divide By ANNIE LOWREY
Why Japan’s ‘Solution’ is Win-Lose – and In the End, Lose-Lose
By Shlomo Maital
In his Foreign Policy blog, my friend Clyde Prestowitz [President Reagan’s chief trade negotiator and an expert on Japan] draws attention to Central Bank of Japan Governor Kuroda’s drastic new policy:
[Kuroda] and the bank are going for broke by buying as much government debt as necessary to create an inflation rate of 2 percent. The initial move will have the BOJ buying twice as much as the U.S. Federal Reserve has been buying in its quantitative easing campaign to get the U.S. unemployment rate down to 6.5 percent. But the BOJ has also promised to go far beyond even this uncharted territory if necessary to get to the targeted 2 percent inflation rate. The major question now is whether this will work or whether the country will just wind up broke. Already the move has pushed the value of the yen against the dollar down from Y76/$ to Y96/$ for a devaluation of a little more than 25 percent over the past few weeks.
Great news when the world’s 3rd largest economy (it lost #2 to China) gets its motor running again? Perhaps. But there is a catch. When Japan devalues its currency to boost exports, somebody loses THEIR exports, because THEIR currency gets more expensive. What if EVERY nation tried this? We’d be back in the 1930’s, when competitive devaluations destroyed world trade.
Job creation is the chronic disease left in the wake of the 2008-12 global financial crisis. Many governments are trying to export their unemployment, like Japan. This is short-term win-lose, which ultimately becomes lose-lose when every nation tries it. The only solution is to spur trade with a globally coordinated policy, win-win.
Is what Japan is doing LEGAL, according to free trade agreements? It is indeed. Those agreements, Prestowitz notes (and he should know) do NOT deal with currency fluctuations. This is a huge loophole that Japan is driving its truck through.