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Pavlina Tcherneva: Economists for Romney – A Closer Look

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Yves here. Paul Krugman already pounced on a major, and disturbing, deception on behalf of the Romney economics team: that Glenn Hubbard, Greg Mankiw, and John Taylor (along with Kevin Hassett) published a white paper which grossly misrepresented the research of multiple economists. In other words, they are willing to flat out lie to create the impression their policies ideas have wide-spread support among economists.

Pavlina Tcherneva makes separate observations about the key advisors in Romney’s camp and how well their ideas have fared in our depression-in-the-making.

She also makes sure to include Gary Becker, and with good reason. Becker was among the speakers at a keynote session at the Milken Conference in 2008 which I attended. It was the first time I’d seen toads hop out of someone’s mouth when speaking.

By Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Research Scholar at The Levy Economics Institute, and Senior Research Associate at the Center for Full Employment and Price Stability. Cross posted from New Economic Perspectives

Presidential hopeful Mitt Romney boasts support from the scientific community for his supply-side trickle-down economic proposal. It is outlined here, along with the list of economists endorsing the plan.

Several Nobel Prize winners grace the top of the list. Here is a quick look at some of these luminaries and their contributions to some of the most pressing problems of our time.

UNEMPLOYMENT: Robert Lucas

Perhaps no one bears more responsibility for the general apathy among mainstream economists towards the problem of unemployment than Robert Lucas. He is the economist who argued that there was no point in distinguishing between voluntary and involuntary unemployment because agents were ‘perfectly rational’ and the jobless essentially ‘chose’ their condition (1978, 242). (Yes, according to Lucas, even during the Great Depression, 25% of the working population opted for leisure rather than work!) This is not some minor claim, but a signature argument by Lucas and the entire New Classical School of economic thought to which he belongs. This is the school whose second core assumption — that of ‘continuous market clearing’ — together with the ‘rational expectations hypothesis’ has been used to render the condition of involuntary unemployment a virtual impossibility.

Why spend any effort looking for solutions to a problem which has been assumed away?

THE DOWNTURN: Edward Prescott

Edward Prescott is a prominent member of the Real Business Cycle School (a spin-off of the New Classical School), which also embraces the assumptions of continuous market clearing and rational expectations. Prescott and his colleague Kydland shared the Nobel Prize for “their contributions to dynamic macroeconomics”. They are the brainpower behind the most dominant mainstream macroeconomic model—the Dynamic Stochastic General Equilibrium model. Yes, this is the same model that failed to predict the latest crisis and prompted the Queen of England to ask “Why didn’t anyone see it coming?” This same DSGE model has no money, no default, no financial institutions, no debt… in other words, nothing of interest to those who are interested in the real world. Prescott too subscribes to the idea that the unemployed are simply substituting leisure for work during business cycles and that the government shouldn’t do anything about it. Indeed, all that the government safety-nets do is introduce moral hazard (as in, unemployment insurance removes the incentive to look for work). Prescott further maintains that if flood protection were not offered, rational agents would stop living in flood- and hurricane-prone regions.

Surely those troublesome food stamps that go to 47 million Americans disincentivize them from foraging.

THE EUROPEAN MONETARY UNION: Robert Mundell

Robert Mundell is the father of the signature theory (Optimal Currency Areas) that rationalized the design of the European Monetary Union. Under the OCA model, there is no reason for currencies to be connected to nation states. Indeed Mundell claimed that single currency areas would increase economic performance and efficiency. We all know how well this experiment turned out and even the mainstream today recognizes the need for nation states to control their own currencies for the purposes of policy making. The best analysis of the OCA model can be found in Charles Goodhart’s seminal article “The two concepts of money: implications for the analysis of optimal currency areas”, which is a required reading for anyone interested in MMT or wanting to understand why Europe is in such a mess.

FINANCIAL INSTABILITY: Myron Scholes

Myron Scholes (along with his collaborator Robert Merton) shared the Nobel for “developing a new method for valuing derivatives”. This method gave birth to the trading model used by Long Term Capital Management in the 90s. Remember LTCM? The hedge fund that almost brought the financial system to its knees in 1998 were it not for the Fed-orchestrated bailout. 10 years later derivatives trading managed to finish the job and produce a far bigger crisis. Scholes himself was accused by LTCH vs. US of using illegal tax shelters to hide profits from the hedge fund.

No, these are not some obscure economists pushing some obscure ideas. These are the men whose work has defined much of the mainstream economics profession and provided the ‘rationale’ for supply-side, trickle-down economic policy.

These are men whose ideas have stood the test of time and have failed. What can we expect from the economic plan of a man who has their support?

============

A bonus: Gary Becker

(Though Becker’s contributions do not bear direct relevance to the current crisis, it is emblematic of the warped logic used by many mainstream economists.)

Gary Becker is the economist who developed a pricing model for kidneys and other human organs. Since efficient markets solve all problems—economic or social—monetizing organ donation, in this economist’s view, makes perfect sense. He is better known for his theory on human capital investment. One extension of this work deals with the question of child-rearing. According to Becker, parents choose to have children because they fear that their retirement portfolios are inadequate to support them in their old age…hence, the kids. Some parents opt to have a few “high-quality kids”, while others – many “low quality kids”, depending on the family’s time preference. I am not joking and these are not my words; they are his. This theory has given birth to the “rotten-kid theorem”, which says that because of these financial incentives, parents are “altruistic” even (even?!) towards their spoiled-rotten and selfish kids, because they are essentially trying to maximize their own return. In sum, according to Becker, all social, economic, environmental, health, and other problems can be solved if all human activity is monetized and financial incentives are ‘properly aligned’.

(As I suspect every other rational parent has done, I too have been crunching numbers since I had my daughter 2 months ago. Would she yield the return I’m expecting of her or should I increase my contributions to my retirement portfolio? Ah, where is that perfect information when you need it!?)

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53 comments

  1. psychohistorian

    What a great posting!!!

    I was wondering what toads coming out of ones mouth looked like and it seems like Gary Becker fits Yves call well….what a hoot!

    The stupid whores that money makes of folks like this speaks volumes about the theology of economics as cover for the global inherited rich at the top of our class system.

    What would economics be without the animal spirits of the global inherited rich anyway?

    1. DANNYBOY

      “There is no reason to tell the truth when people want lies”

      Dan Friedman

      “There is no reason to tell the truth to peopple who want to lie.”

      ibid

    1. Mark P.

      Pavlina Tcherneva: ‘These are men whose ideas have stood the test of time and have failed.’

      Nicely put. Except you’re being far, far too kind in Myron Scholes’s case.

      Scholes is a failure and charlatan of world historical proportions, whose work lies at the very heart of the global financial collapse.

    2. Up the Ante

      They set aside their relation to their own lives’ realities and work on ‘what they want’, reducing everything to tangents, tangents, tangents ..

      .. disaffect vs. disaffect ultimately conspires to reduce everything to the disaffect tangent.

      Welcome to today.

  2. C

    Thank you for summing up my central beef with economics with so many nice examples. Its not that economics is wrong but there is a difference (typically ignored by worshipful politicians) between economic models and the real world. Sensible economists seek to model real world actions while those that are self-obsessed prefer to assume that the world will follow their model. Either way we spend too much time assuming these models are oracles when they are not.

    On a different note, your excellent comments about monetization by Gary Becker reminded me of this:
    http://www.salon.com/2011/04/05/my_father_the_objectivist/

      1. Up the Ante

        Very good. No need to reverse engineer America, they’ll take care of it for us.

        Far more than paraphrasing Kruschev.

  3. Max424

    Romney has 576 (and counting!) economists backing him. Wow.*

    Apparently, almost the entire economic intelligentsia** of this nation supports the notion that depressions are cleansing events, so why not support the candidate most likely to provide a never ending depression, thereby making the country, forever super duper unbelievably extra clean.

    *Aren’t college and universities still bastions of the –I would rather die on my shield than sell-out– liberal establishment? Giggle.

    **No, “economic intelligentsia” is not an oxymoron. Intelligentsia is synonymous with credentialed morons, where I come from.

  4. craazyman

    I Will Hire All 5 of these Guys

    At a market clearing price! I want to make that point up front. These guys have lucked out and made careers on the part of the demand curve that’s way up high and left of the y-axis. How can that be? Those are negative numbers on the x axis! That’s right. They are negative jobs, not positive jobs.

    If a dude gets lucky, really lucky, he might get paid 500 or 600 thosand a year to philosophize about economics. Or more, even, with consulting fees. But those numbers are at, like, x = -2999 or x = -3847 or more.

    These are jobs-destroying jobs. That’s why the x axis number is negative. When you look at the entire supply/demand curve you see the market for philsophgers of economic actually clears at -$35,000/year when x is positive, I will hire all 5 of these guys, at a market clearing price, if Romney loses. Which he probly will, unless he releases his taxes and it shows he never paid his tithe to the mormons. ouch. that would be embarrasing. I can’t critize since I didn’t give 10 percent to charity either, but I’m not in the 1 percent.

    I could be if all these 5 guys would come work for me as philsophers of ecoomics at the market price! How could they complain about that? That’s one per day, with Saturday and Sunday free to waste time. Although, to be honest, I think it would be 7 days a week of wasted time, if it weren’t for the money. But it’s work, and sometimes you have to pretend that it’s worthwhile, especially when you’re there doing it.

    1. craazyman

      This is really beginning to make sense.

      You can only have high paying jobs for philosophers of economics like these guys — jobs that pay 500G or 1 million or more — if they’re waay up the demand curve in the north east quadrant of the Cartesian coordinate plain where x numbers are negative.

      that means each one of their jobs, if you map it down to the x-axis (the quantity axis) costs society thousands of jobs.

      I think this really is making sense now. You have to conceive of negative jobs and negative salaries to make sense of this stuff. Sort of like imaginary numbers in math, like the square root of negative 1. Holy Cow, this could be a breakthrough for labor market analysis.

      If these guys want to work for me at the market clearing price for philosophers of economics, which is minus $35,000 per year at a positive jobs number, I’ll hire them all and even all their assistants too!

      1. craazyman

        ooops. another mistake. should be “north west corner” of the cartesian

        I need to calm down and take a few deep breaths. I’m overwhelmed by insights!

        1. craazyman

          Pavlina, do you want to co-author a paper on negative salaries and negative jobs? It could be a breakthrough!

          Those dudes you mention, they’re up the demand curve like it’s Yukon Territory (waaay North West)on the Cartesian system (if you believe in Cartesian thinking, which I frankly don’t, but forget that for now).

          The graph shows for every one job they have, that’s several thousand jobs lost in society.

          I think the demand curve flattens out going west once it gets past negative 52,000 jobs. So when somebody pays these guys even another $100 grand a year (up the y axis), it wipes out tens of thousands of jobs (going west on the x axis). Think “high elasticity of destruction”.

          You can reach my office here:
          Profeser D. Tremens, NFL, GED
          University of Magonia
          PO Box 8

    2. Up the Ante

      And to think all 5 of those guys start out their day balancing the ‘needs’ of their employers with what they ‘feel to give’.

      Heh.

  5. jake chase

    The world divides into people who talk (and write) bullshit and people who do what they must to survive. The bullshitters need clients who can pay. Why would anyone else support an economist or a journalist or a pundit? Only the deluded think these guys matter. They are no different than sportswriters or the people who create advertising or television shows. I stopped listening to all these clowns thirty odd years ago and have not missed a thing.

    1. Chris Cook

      Agreed re bullshit, which is why I thought that Yves had a typo when she referred to ‘toads’ rather than ‘turds’.

    2. Up the Ante

      Rather absolute to lump journalists with that group, too absolute.

      You must acknowledge some dependency on the journalist product.

  6. ECB-Watch

    Everybody fails to notice or mention (why?) Hubbard is portrayed as a villain in the documentary Inside Job.

    ‘According to Becker, parents choose to have children because they fear that their retirement portfolios are inadequate to support them in their old age’

    Widely observed in undevelopped parts world. Financial logic works the opposite way in the developed part: more kids means less able kids (college etc.). No selflessness here, but maximization of lineage’s ‘return’. If that’s too hard a truth to swallow for the author, there are more suitable avenues for her to pursue than making judgments on morality.

    1. DANNYBOY

      Can I return my MBA back to Columbia? Will Hubbard refund my tuition? Will it, at least, get me off the Donor’s List?

    2. Jose Guilherme

      I agree that the attack on Becker weakened rather than strengthened Tcherneva’s otherwise very good article.

      Despite its typically ridiculous and pompous name, the “theorem” by Becker on kids may well have some explanatory power concerning birth rates.

      Whereas the Lucas RE theorems are pure and simple crap, of the kind that could be invented only by ivory tower academics eager to please TPTB while wondering what to do with their unlimited leisure time.

      It’s better for heterodox economists to concentrate their attacks on the mainstream’s ridiculous assumptions and flawed logic, IMO. That’s the correct method for exposing their snake oil “science”. No need to invoke value judgments that by their very nature are always subjective.

      1. Up the Ante

        The author’s criticism of Becker is good. You are essentially in criticizing her presentation saying that unconscious economic impulse trumps hers ?

    3. LucyLulu

      I thought in the undeveloped world, parents had more kids so they could have more help getting the crops in from the fields. Or is that someone else’s theory?

  7. The Gizmo51

    During the Great Depression the government started a lot of programs aimed to aid the unemployed and vulnerable but today since it’s the vulnerable and unemployed’s own fault for being vulnerable and unemployed the government should be concerned about tax cuts not programs for the unemployed and vulnerable. The rich need that safety net of tax cuts to promote growth and well being among the rich. What a difference 70 or 80 years make!

    1. Up the Ante

      The Conquered Tribes Conqueror wishes to shed his responsibilities.

      For the tribes it was/is alcohol, for these its …

  8. Goin' South

    These fellows–and they’re all fellows–and their “reasoning” remind me of Ptolemy’s absurdly complex apologia for a geocentric view of the universe.

  9. Gil Gamesh

    Becker is a crony of the horribly destructive federal judge Richard Posner, who, along with Easterbrook and other acolytes of the Chicago School, have corrupted several generations of US lawyers with their vicious nonsense. Tools of predatory capitalism, and well rewarded for their work. Hopefully, when the peasants revolt, Becker’s and Posner’s heads will wind up on spikes, to be spirited up and down Lake Shore Drive.

    That neo-classical economists propound theories that make medieval theologians seen common sensical in comparison is not the problem of course. Rather, it is that they provide post-hoc justification for the politics and policies of class war, i.e. the relentless efforts of US elites to destroy labor and immiserate American workers.

    1. JurisV

      This reply is not meant as a defense of Richard Posner in any sense.

      Posner has recently realized that his views on deregulation that he has supported were, in fact, based on a mistake.

      “I was an advocate of the deregulation movement and I made — along with a lot of other smart people — a fundamental mistake, which is that deregulation works fine in industries which do not pervade the economy,” he said in the appearance on Spitzer’s “Viewpoint.” “The financial industry undergirded the entire economy and if it is made riskier by deregulation and collapses in widespread bankruptcies as what happened in 2008, the entire economy freezes because it runs on credit.” The quote is based on an interview of Posner by Spitzer on Current TV.

      From: http://www.huffingtonpost.com/2012/08/24/richard-posner-deregulation_n_1828256.html

      Is this an indication that his brain is not totally dead after all?

      1. smellslikechapter11

        I am no fan of Psner. I agree however he does seem to have the character to change his view when it does not conform to reality as can be seen in his commments in the interview and some other stuff he has written since 2008.

        More apropos to this post is Posner’s comment in that interview that economics has become too mathematical and that economist do not understand how finance really works.

        It is interesting to note that this market clearing nonsense about people lecting leisure instead of work fits right in with Romney’s latest screed about welfare.

        I can see the welfare queens and their pimps coming, better hide your children. Guess some things never change.

      2. Hugh

        Someone today noted that the NYT’s Book Review had conservatives reviewing conservative works and to change things up conservatives reviewing liberal ones as well. In the August 19, 2012 Book Review this seems to be true. Posner reviews a work by the Skidelskys father and son on Keynes’ contention that greater productivity would lead to shorter working hours and more leisure time. Posner’s analysis is totally dishonest and ends with him questioning whether the proles would even know what to do with more leisure time. The idea of having a life or life moving at a more sedate pace, or god forbid that people might even dream a little is absolutely beyond him.

        The takehome is never believe that some mouthpiece of kleptocracy and oppression is “honest” simply because they occasionally change their mind about some aspect of the kleptocratic project without rejecting the whole of it.

      3. Up the Ante

        “Is this an indication that his brain is not totally dead after all? ”

        It probably means he was attemting to ‘re-form his rear’, as it were, and pardon the expression.

  10. Heretic

    Thank you finding this article Yves. I like this descriptive sentence’ that you use:
    ‘Becker was among the speakers at a keynote session at the Milken Conference in 2008 which I attended. It was the first time I’d seen toads hop out of someone’s mouth when speaking.’
    After watching some Ayn Rand videos, I would say the same thing about her.

    FYI to other NC readers, Yves statement refer to a passage in Book of Revelations, where Satan sends false prophets to decieve the world. These false prophets who speak lies (ie toads) that spread throughout the world.. Perhaps the blind obsession with power and material wealth, the false promises of the religion of neo-classical economics and Objectivism, is The Beast of the present age.

  11. Susan the other

    Pavlina Tcherneva’s writing is succinct. Clearly, these wizards are part of the plan. Romney has to look like he is a popularly elected president. That his economic ideas are solid and that a majority of voters agree with him. It’s all theater. I don’t think Romney would have gone through this shit storm of a campaign if he had not been promised he would win. And when he does he’s going to say the election was his “mandate” and he is going to “spend his political capital.” Sound familiar. The only thing left to understand is why the 1% are dedicated to destroying this country. Their intent is evident in all their actions and words.

    1. Hugh

      Milton said it best:

      “To reign is worth ambition, though in Hell:
      Better to reign in Hell than serve in Heaven”

      I have said this before, but kleptocracy has no brakes. The rich and their servant elites will loot to a collapse and then loot the collapse. In the end, it is more about control than what is controlled.

    2. Up the Ante

      Romeny is the Hollowed-Out Roman Historian.

      A savage describing the environs of a black hole, and he thinks its his.

      He also thinks he’s an American.

      Memory does not bring to mind ANYbody who takes such empty-looking pictures. A notable thing in its uniqueness and newness.

    3. Up the Ante

      “The only thing left to understand is why the 1% are dedicated to destroying this country. Their intent is evident in all their actions and words. ”

      They would have us believe they are saying ‘the Evil Empire’ is a scaled continuum, and they are fighting it. This of course makes no sense as they are ‘the empire’, 1%, and they’re ‘fighting it’, Themselves.

      Self-contradicting absurdity and has a lurid quality to it. Very poor taste. Nouveau riche & the police state.

  12. LucyLulu

    Wow! What total crap. Hard to believe these articles were written by academia. They could have passed for high school submissions. Granted they may have been needed to be easily understood by the general public but the articles were full of misinformation, improbable math, and faulty logic, e.g. comparing apples and oranges. I read most of them twice trying to get a handle if the problem was blatant dishonesty or careless errors.

    He wants to eliminate the estate tax. How wonderful for his children. Single most beneficial tax law he could pass for himself. He wants no repatriation taxes or penalties while lowering corporate taxes to 25%. Why pay US taxes when one can pay Irish taxes and then later repatriate? He will free up credit for lending to small businesses. How? He doesn’t say. We already have ZIRP. Pay banks to lend or will Uncle Sam lend to small businesses?

    We can find out after the election. Until then, trust him. He’s paid no less than 13% in taxes every year and he denotes 10% to his church. That’s all “you people” need to know.

  13. digi_owl

    “Surely those troublesome food stamps that go to 47 million Americans disincentivize them from foraging.”

    I think we can replace forage with pillage…

  14. kaj

    Sorry to see whore-Hubbard not mentioned by the writer, nor, Mnkiw and Taylor. All three need to be roasted like genetically modified corn over their methane-ignited campsite fire. Then the old whores Greenspan and his loyal acolyte Bernanke, the procreators of this banking crisis? Economics as a discipline has gotten very tirsome and become mishapen by both ideology and math., though many continued into it because of their love of math. — pure theory as in grad school.

  15. Michael

    “Long-Term Capital Management” A bunch of ostensibly very bright people actually name their operation “Long-Term Capital Management” and then take less than four years to cataclysmically implode. I suppose in finance four years counts as “long-term.”

  16. Adam K.

    On top of nonsense papers and researches lots have been written lately of the modern sophism phenomena, academia for hire to the highest bidder. Niall Ferguson, Fareed Zakaria are just few names from a long list of thinkers and academics, specially from the field of economics who created a brand of themselves and sell and adjust their views according to market demand. This trend, and the fact that most of them come from the top tier schools, has a disastrous effect on how the populace reacts and considers academia and scholarship in general and their publications. When a tea partier claims that there is no such thing as global warming and scientists are faking it, it is hard to answer to such accusations knowing what we know..

      1. Up the Ante

        The Koch Bros. have informed us the red crayons will be unavailable this year. We now “know” this.

        :)

  17. Hugh

    The thing to keep in mind is that almost all economists, including the pouncing Krugman, are charlatans working for a kleptocratic overclass. The jury is still out on MMT. They get a lot of things right about money, but their theory is constructed upside down, going from money to societal needs which at best looks awkward and at worst looks made up, rather than going from societal needs (and resources) to how these play out at the level of money (and in terms of a fiat currency).

    1. Calgacus

      An absurd, misguided criticism – like an astronomer criticizing an entomologist for not studying stars, eventually denying the existence of beetles.

      MMTers have it absolutely the right way. Everybody understands what you are saying about resources. The problem is that the bad guys & their academic mouthpieces have been making up preposterous fairy tales, Big Lies about money for centuries, and have succeeded in making the vast majority believe their nonsense. A primary technique being to confuse finite resources, commodities, things, the “real”, with money, debt, relationships, coordination, the nominal/financial. What you are arguing for is a step backwards, a movement toward the “neoclassical” view.

      1. Hugh

        Sorry, no. A frequent criticism of MMT is how hostile its practitioners are to any criticism. Well that and how awful they are at explaining their own theory. But another and pertinent criticism of MMTers is how neoliberal they come across when they actually apply it to policy. The Jobs Guarantee comes readily to mind. As originally announced, it would have had a depressive effect on wages and commoditized workers into a labor stock for employers. Hard to imagine a jobs guarantee more neoliberal in outlook.

        Yet another criticism of MMT which your comment elicits is the whack-a-mole nature of it. If we analyze MMT as a monetary theory, we are told that it is so very much more than that. But if we take these other aspects into account, then we are told we are being unfair and that MMT was never meant to beyond its monetary roots.

        I was being general in my comment but if you want specifics, I think MMTers should take an introductory course in philosophy. If they read a little philosophy, they just might learn how an argument and a theory are constructed. As it is, MMT is a mess in both its intellectual construction and presentation. This is a self-defeating and unnecessary state of affairs. But as long as MMTers act like a bunch of oversensitive prima donnas, I don’t see it changing.

  18. Jason

    That is a horrible distortion of Becker, wow. Nevertheless, there has been much work on the idea that, in the absence of accessible savings or insurance schemes, parents may choose to expand their family such that they have people to look after them in their old age, I actually did something like this in my dissertation and found relatively strong empirical evidence of this. Whether it is distasteful or not should have absolutely no bearing in academic debate.

    Secondly, DSGE is not a model, it is a way of modelling (i.e. it is dynamic and is stochastic), you can have anything you want in it, and I have seen DSGE models with money, debt, banks etc.. So that whole paragraph was complete nonsense, although given the two sources used were a wikipedia page, I’m not really surprised.

    1. UnlearningEcon

      No, it’s not a distortion of Becker, those are quotes. There may be some truth in it but the absurdity of the language is indicative of quite how far away economists live from the real world.

      Some DSGE models include banks, but they are mere intermediaries who don’t have much macroeconomic impact. You cannot ‘have anything you want in it;’ it is incredibly rigid and falls apart if more than a couple of agents are in it or a few assumptions are dropped.

      Also, it was unable to foresee the crisis and can only model it with post hoc modifications that have been tweaked until they produce the preordained results economists want.

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