Notes From Underground: It Ain’t Rocket Science, Which Is Too Bad for the Dismal Science

There is an American expression: It Ain’t Rocket Science,which is meant to be a pejorative phrase to denote that if you fail to comprehend a somewhat easy concept you must have diminished cerebral capacity. I do not mean to imply this but rather use it to address some FED SPEAK over the weekend in which the American Economic Association provided lively discussion about the “SUCCESS” of the Fed’s policies for the last five years. There was point and counterpoint from highly acclaimed economists and thus ECONOMICS PROVED AGAIN THAT IT IS NOT A HARD SCIENCE. When Aerospace engineers build a spacecraft and design its mission they are sure of the spacecrafts return barring some unpredictable mechanical failure. AEROSPACE ENGINEERING IS PROVEN TO BE AN EXACT SCIENCE.

Many in the media would like to believe that economics is an exact science as the propagators of propaganda hide behind the formulae of the math-enhanced projections of Nobel economists. But as the discussions that filled the weekend financial news showed, high-powered thinkers armed with the same data can come to very different policies and outcomes and the result is certainly a dismal science. Adding scope to this view was the ramblings of New York Fed President William Dudley. At the AEA meeting on Saturday, Dudley  said, “… some key aspects of how the central bank’s bond-buying effort works remain mysterious.”

Further, Dudley said: “We don’t understand fully how large-scale asset-purchase programs work to ease financial market conditions–is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?” Dudley also acknowledges that uncertainty plagues the Fed when it comes time to unwind the massive buildup of reserves. So while the Fed’s highly paid mathematicians can solve the equations of massive data crunching they just cannot give certainty to the projected outcomes. When an aeronautical engineer designs a space shuttle to the international space station, its mathematical formula are 100% reliable on getting the craft to its destination and back to its specified return. THAT IS ROCKET SCIENCE. The Fed, on the other hand, ASSUMES A CAN OPENER.

***On Friday, Chairman Bernanke gave his farewell address to his peers at the AEA convention. It was a summation of the Fed’s success over the last five years and laid out much of the rationale behind the Fed’s efforts to prevent another 1937 and have a massive fire sale of assets that would result in a severe depression. But Chairman Bernanke does provide us with an important clue in which to help analyze the Fed. Bernanke notes that fiscal policy has been a drag on the economy and he succinctly notes: “Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.” To testify to the impact of the drag from fiscal policy, Bernanke compares the role of fiscal policy in the 2001 recession to what has taken place in the current economic crisis. In 2001, employment at all levels of government “increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs.” If Bernanke cites this as a reason for the slowness in the current recovery, we will have to be attentive to the government jobs in the unemployment report. If government jobs begin to increase the Fed may be prone to increase the pace of tapering.

***In tomorrow’s Financial Times  there is a story that U.S. Treasury Secretary Jack Lew is heading to Europe and his first stop is Germany where he plans to lecture the Germans on the need for increased efforts to pump up domestic demand. The FT article notes that Secretary Lew will “… renew pressure on Germany to boost domestic demand and embrace a deeper banking union….” If  the U.S. Treasury believes that they will have impact on the Germans in either of these policy efforts they must have spent the last few days in Colorado. The BUNDESBANK already believes that eurozone interest rates are too low for the German economy and risk igniting inflation. Bundesbank President Jens Weidmann will be vigilant in regards to the any government efforts to stoke demand through fiscal policy and really put upward pressure on German prices.

Also, the Germans were very successful in defeating the forces of a deeper banker union, which implied that the ECB and its major creditors would inherit the legacy debt of the troubled peripheral nation banks. The Germans are adamantly opposed to any banking union that implies bailing out European governments. The U.S. policy makers are living in a fool’s paradise if they believe what they publicly pronounce.

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8 Responses to “Notes From Underground: It Ain’t Rocket Science, Which Is Too Bad for the Dismal Science”

  1. Mike Says:

    Mr. Lew will head to Texas afterward to encourage them to get their pension obligations up to the standards of California, Illinois and
    New York.

    Mike

  2. Michael Greenberg Says:

    Bernanke said: In 2001, employment at all levels of government “increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs.”

    I would think this is a good thing…less government workers. How can Bernanke compare private employment with government featherbedding?

  3. yra Says:

    Mike –does not seem to be the issue from the Fed’s viewpoint—it is all about demand driven growth and the multiplier effect from government stimulus and the lack of government jobs is seen to be a drag–that is what Bernanke was implying about fiscal policy being a drag

    • Michael Greenberg Says:

      Yra- I know. My point was that Benanke’s belief in the multiplier effect, through government stimulus no less, is just wrong.

      A better multiplier effect would be to pay interest on savings and let the productive class put that interest money to work. Private individuals vs a few mandarins in Washington, DC.

  4. kevinwaspi Says:

    Yra-
    Excellent points on the drivel coming from the AEA confab, vs. the true sciences. “Physics Envy” is another of my favorite expressions of our social science, economics, today and some of its practitioners.

    Economists are sometimes referred to as “saltwater or freshwater, denoting a Keynesian leaning, for those populating academic institutions near oceans, or a classical, free-market approach associated with the U of Chicago, hence, freshwater. I’d like to propose a third descriptor, where the precision of aerospace engineering and physics is something that only the “Colorado Economists” can muster. Thankfully, some noted economists do not swim in this fog. As an example, I hope your readers the chance to see the John Taylor WSJ editorial this past week, “The Economic Hokum of ‘Secular Stagnation’ “

  5. yra Says:

    kevin–can you post the John Taylor piece—please

  6. kevinwaspi Says:

    http://online.wsj.com/news/articles/SB10001424052702304858104579263953449606842?KEYWORDS=john+taylor

  7. Notes From Underground: Two Previous Pieces That Maintain Their Relevance | Notes From Underground Says:

    […] January 5, 2014: It Ain’t Rocket Science, Which Is Too Bad for the Dismal Science […]

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