Thursday, May 23, 2013

The Psychology of Being Wrong

Belief: If the Redskins lose their home game immediately prior to the Presidential election, the party in power loses the White House. Except in the case of President Obama last time, and in the case of Gore vs Bush. Despite the failure of the belief, some people still believe in the Redskin Rule.

Eduardo Porter writes in the New York Times an intriguing article about economists who have been shown by events and analysis to be wrong who cling to their wrong headed views and politicians who cleave to these same discredited views, despite all the evidence.

"That's my story and I'm sticking to it," is the Republican cry.

There are two Harvard economists (Reinhart and Rogoff) who  published a paper which said that economic growth stalls once government debt reaches 90% of GNP. When a graduate student took the time to comb through the numbers however, the professors were forced to recant and finally wound up saying, "Indebted nations grow more slowly." Not to admit wrong, just slide by the wrong as if we didn't really get anything wrong.

Beyond academia, the experiment in fiscal austerity playing out in Europe has convincingly demonstrated cutting back on government spending simply makes economies worse--as America surges ahead while Europe crashes and burns. 

Why do politicians stick with this intellectual garbage?  Why does David Cameron continue to say, "We will not be able to build a sustainable recovery with long term growth unless we fix this fundamental problem of excessive government spending and borrowing which undermines our whole economy"?

As Porter puts it:  "What explains the gap between theoretical victory and policy defeat?" The Keynesans demonstrate the correctness of their analysis time and again, but the politicians continue to ignore all that and press on with counter Keynesan claptrap about the dangers of government spending and debt.

One explanation, as Porter notes, goes back to the fabled grasshopper and the ants. We all learned it as kids. In the US, we all saw the Disney cartoon.  The ants work and save and do not spend without a thought about the future, and they are virtuous. The grasshopper is a wastrel, thinks not about tomorrow, only about today. "The world owes me a living," he sings in the Disney version, and he comes to grief for it, while the head down, don't live high ants are the virtuous ones who rescue everyone in the end. 
We think it morally repugnant to borrow and spend our way out of a recession.  

Another Harvard economist asks, "If the goal of government is to express the collective will of the citizenry, shouldn't it follow the lead of those it represents by tightening its own belt?"

The problem is the premise. The goal of even a representative republic is not primarily to express the will of its citizenry. The goal of a government is to provide for its people, to lead them to a better life and a more vigorous economy even if the citizenry is misinformed and wants to do the wrong things to get there.

Porter notes, "The other argument derives from a seemingly myopic conflation of the short and the long term: worried about the scary rise of Social Security and Medicare spending in future decades, voters demand budget cuts now."

The fact is our ability to predict economic future is demonstrably poor. If you are old enough, you remember all the talk about budget deficits in the past which evaporated with subsequent budget surpluses--especially during the Clinton years--and the cyclical nature of economics seems entirely forgotten whenever we find ourselves in a valley. The strange thing is even when we reach a peak, we seem incapable of looking back to all those valleys and remembering: Hey, next time we think we are stuck in the valley, just remember the view from up  here."

The fact is, the best solution to the long term viability of Social Security and Medicare is getting the economy rolling now, even if that means more government spending. 

The other fact is neither Social Security nor Medicare is really at risk. We have been borrowing from Social Security for years, it's been doing so well. These two programs are and have been strong for their entire history. The only time they are threatened is when Republicans start crying "The sky is falling" and causing financial panic.

Which in this country, does not take much.

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