Monday, April 6, 2009

Irrational exuberance

Something which has always fascinated me is people's ability to believe things because they are the general consensus, often in the absence of (or to the contrary of) direct empirical evidence or logical analysis. Sometimes it's an intentional and well-considered delusion, such as the willingness to believe in religious beliefs in the absence of any method of proof or ability to substantiate any of the claims. Sometimes it's cultural, such as willingly adopting beliefs of a group to fit in. Sometimes it's a defense mechanism, like the unwillingness to accept inevitable negative outcomes. And sometimes it's subconscious and pervasive, like getting caught up in group-think conclusions because that's what everybody else thinks, or that's the way it's always been in someone's experience.

The last of those seems to happen a lot when it comes to economics, or other "high level" macro trends which people don't think they can understand. Also, however, in those cases people can think they do understand, and have a rational basis for their beliefs, when in reality their beliefs are nothing more than cultural consensuses which have been repeated enough that they became "common sense", and seemingly circularly justified (eg: it's true because everybody thinks it's true).

For example, consider this article, which points out a very interesting (but unrelated) point about how the actual unemployment rate is much higher than the reported rate. There's an interesting quote in the article, from one of the underemployed, which is oft-repeated by various other individuals, so much so that it seems to be the common "wisdom" in the US currently:
“The economy will come back some day, but the unknown is whether it’s sooner or later,” said Hueser.

Let's examine the premise, that the economy will come back some day, and see whether or not through logical analysis we can deduce at least if it will likely be sooner or later. We know that the US has the highest production costs for manufactured goods, high business taxes, strict environmental laws, and decades of over-consumption; all of these contribute to a negative business environment. We know that the business environment is getting worse: taxes are going up, new energy taxes are being considered, health care costs will increase once medical care is socialized, and unions are looking to make gains under the current government. We also have a banking system which will take years to fix (due to the government's efforts to nationalize the banking industry and hide problems), and a housing market which will similarly take years to bottom out. We have a trillion dollar "stimulus" pork spending package, but that does little to help demand in the private industry, and is mostly for government expansion of helping states delay fixing gaping budget gaps (both of which will cause more problems next year, when the stimulus money is gone). On top of all that, we have a $11 Trillion national debt, which is projected to grow by another $10 Trillion in ten years, even before all the unexpected extra wasteful spending outside of the normal budget procedures.

Given all that, I'd say it's unlikely the economy will recover any time soon. If Obama is allowed to instigate full socialism, I think analysis of other countries which have gone down that road would enable someone to reasonably conclude that the economy will not ever recover (at least in the sense of back to where America was prosperous and people outside of the government were wealthy). It's pure irrational exuberance to state that the economy might recover "soon", yet people accept it as a possibility without thinking about it. It's like claiming that housing prices might bottom out in the next year: it's a fanciful idea, but there's no rational basis to support even the possibility; yet people are allowed to still claim it without ridicule, because it's ingrained in the group-think. There are many more examples, of course, eg: socialism can work, this politician will be good for us, government bailouts are necessary, terrorists can't hurt us because they are far away, etc. They are all flat wrong (or at least with no rational basis to support them), but yet people keep coming back to thinking they could be right.

Fascinating, these cognitive impairments we humans have...


  1. What's more interesting to me is how people talk about "the economy" as if it were a complex machine under the hood that they don't understand the workings of. The economy is the people of the world providing goods and services that satisfy each other's wants and needs. It's lame to sit and wait for "the economy". Find a need that's out there and fill it, and then your part of the economy is instantly improved.

    The claim that the economy will improve is not just argumentum ad populum. The policies that you list do not guarantee a bad economy: high taxes, protecting the environment, over-consumption, forward-looking energy policy, guaranteed access to healthcare, and labor-friendly policies. In fact, we had some of these things to a much larger extent during WWII and the post-war boom that followed it. The post-war boom were good times economically.

    This is not to say that all of those things are good policies. It just means that they don't per se prevent a high level of economic prosperity.

    I'm guessing in ten years things will be good: Real per capita GDP will be up. We'll have a better idea what we'll use for energy when the oil runs out. Income inequality will be no worse. Education and healthcare will improve. We'll be at least paying the interest on the debts we're running up. And regressives will have finally worked out that "terrorism" is not an effective way to get people emotionally fired up anymore.

    I'm sure we'll have a whole new set of problems, but we'll probably make progress on the current ones.

  2. While it's true that all those things don't preclude economic prosperity, there's also compelling historical evidence to suggest that each of them impairs it. It certainly not a guarantee that the economy will be worse in a few years, but it's certainly enough to call into question to presumption that it will necessarily recover magically on its own. The fact of the matter is that America has been living above its collective means for a while, and even after we work through the excess, our economy would not naturally be as strong as it has been, even before the various things we're doing to damage it in the future.

    As the ten year predictions, it's hard to say (in my opinion); so much depends on political factors which are hard to predict. As much as I'd like to be Hari Seldon, I'm just not there [yet]; however, I'll take a few guesses. I'll guess government as a percentage of GDP will be higher than it is currently. We'll have some "alternative energy" R&D spending, but most of that money will get diverted into special interest "climate change" proponent pockets. We'll have about the same income inequality, with more people being rich from government connections than from business success. Education will be worse (more waste, equally bad performance); health care will be better (cheaper, lack of R&D will not have caught up to service), but more scarce (less doctors, more overcrowding, possibly mandated waiting periods and queues). We'll still be running up deficits, the national debt will be over $21 Trillion, the dollar will have lost at least 30% of its current value (relative to assets, not other currencies which will also be down). We'll probably have sustained at least one other significant terrorist attack, for which we would have retaliated with the strongest possible verbal blustering at the UN.

    In addition, we'll have a whole new set of problems too (such as the unfunded Social Security and Medicare liabilities growing on the budget sheet), but they will still be put off for "more pressing" problems. The government will be running the banking and auto industries, generating large annual losses, but still "employing" people there. ... and the beat will go on.