The Model For Today’s Economist
Bernanke is a case study for the shortcomings of modern economists. Over four years, he has single-handedly disproven the supremacy of monetary theory as the overriding law of the economy. 0% fed interest rates and heavy rounds of quantitate easing have been the law of the land for four years and the economy continues to grind to a halt. Despite sitting on $1.6 Trillion of cash reserves, the banks aren’t lending money. Inflation has remained extremely low, defying all of the models of monetary economists everywhere. How could they have been this wrong?
To figure out this economic caper of the ages, all Bernanke has to do is go to his local bank and ask for a loan. His experience would probably be similar to that of a relative of mine who recently tried to procure a loan. This relative, armed with perfect credit and a deep ledger of collateral, recently went to his bank (one of the five biggest) to pull out a loan against a house he owns to buy a condo. He was rejected, for any amount of money against any amount of collateral. Having spent the last forty years of his life in the real estate market, my exasperated relative asked, “So what do you guys do here all day?”. The banker gave an ironic chuckle and said, “I honestly don’t know”.
The local loan officer would be able to tell Bernanke that there is little incentive to give out small business and real estate loans at such a low interest rate, because the return would largely be gobbled up by future inflation. He would say that despite the high reserves relative to historical averages, Dodd-Frank regulation requires that they give out fewer loans against those reserves. Even if Bernanke somehow convinced the bank to give him a loan, no one there would really even know how to lend under rapidly evolving (and expanding) rules that no one has had the time to learn how to navigate. The only loans happening are the federally mandated and subsidized loans to sub-prime recipients… Loans that the bank can then turn around and sell to the government. The impotence of Bernanke’s policies isn’t the grand mystery of the 21st century, it can be explained by any loan officer in the country.
So, you might ask, what then what about the improving home values and increased consumer confidence since Bernanke stared the third round of quantitative easing, or “Operation Twist”? The nature of the latest round is an over $40 Billion a month purchase of debt that includes sub-prime mortgages. When the government is buying $40 Billion a month (about half a Trillion a year) of a thing, it isn’t surprising that the price of that thing will go up… So what happens when they stop buying it?
Monetary economists aren’t the only ones who can’t seem to figure out how the economy actually works. Most economists suffer from looking at the economy as a single-variable system. Monetary theorists believe that the fortunes of the US economy rise and fall at the whims of the Fed Chairman. Keynesian economists believe that the economy is governed by demand, regardless of where that demand comes from. Right-wing tax theorists believe that the elixir of economic growth is a simple low tax rate. Though they all have important contributions to the overall equation, it is impossible for any one of them to predict an outcome without a unified multi-variable economic approach. Monetary policy, regulations, taxes, tariffs, and resources all play into the system, but no single one dominates consistently.
Much of the problem stems from the insulated nature of the economist’s world. Academia fiercely protects its subjects from the real life experiences. Though complicated models and comprehensive inputs are available for the creation of economic theory, they have no exposure to common sense that comes from hands-on experience. In the case of Bernanke, if he actually worked in the loan granting division of any bank he would have been able to see how ridiculous, and even counterproductive, his monetary policies were in the context of the Dodd-Frank regulation.
The same goes for any demand-side Keynesian economist. Put Paul Krugman in any company as the CFO for a year and he would discover the simple fact that there are a few more lines on an income statement underneath the “revenue” line. In an isolated system, increasing revenues would stimulate businesses to grow and hire new workers. However, in the multivariable real world, he would discover that revenue increases are filtered through the increased labor expenses associated with unions, increased medical costs of Obamacare, increased regulatory expenses, and the dramatically increased taxes (especially for over 50% of companies that file as a sub-chapter S corporation). It would become clear to him why, in spite of increased top-line growth, these companies are firing employees. He would also see a group of managers making investment decisions. He would quickly discover companies plan for future growth, and that they don’t act as mindless drones that only react to a temporary “stimulus bill” increase of the revenue line.
The right-wing tax economist would see that regulation and global influences can also have dramatic effects on the economy, even in the face of a tax hike. Clinton increased taxes, but the economy was able to grow with a retreating Japan, free trade agreements like NAFTA, and a new technological revolution. They also come up short when trying to explain the robust growth of the economy from 1950 to 1970, when the top marginal rates was as high as 90%. Though they strive to explain the loop holes that kept the real paid rates closer to 35% in the top brackets, the tax economist misses the growth story of the global economy at the time, and the technological and manufacturing advantages the US had over the rest of the world following WWII.
We are long overdue for a wave of practical economists. Six trillion dollars of elevated government spending and trillions more of monetary easing have yielded no results in the face of an onerous burden new regulations and tax hikes unseen since FDR’s reign of economic terror. It is only surprising that the results are much the same as what we experienced back then to economists stuck in single-variable economic models contrived in academic bubbles. Bernanke’s perception of the economy was created far away from the practical influences and simple lessons of the real world.
Unfortunately, the real world has to bear the consequences of his ignorance.