Friday, February 13, 2009

Multipliers and Imbalances and Weights, Oh My!

By the way, these days everybody thinks they're an economist. President Obama

It's Friday the 13th. Centuries ago a group of Monks/Warriors turned Bankers known as the Knights Templar were arrested on secret orders from King Philip the Fair on a Friday the 13th in October, 1307. Philip owed the Knights quite a bit of money- what better way to cancel a debt than to outlaw your banker- and besides, their raison d'ĂȘtre as warriors and bankers, the Crusades and the financing thereof, had ended in failure.

Another dream of Globalization bites the dust. I suspect today's Bankers are hoping they are treated somewhat better than the previous financiers of Globalization. Imagine what one could discover from the CEOs who just visited Washington if they had faced a Medieval Inquisition?

Today's Bankers are made of much softer stuff. I doubt one would need waterboarding to get them singing, a simple threat of making them ride the NY subway to work each day would likely be sufficient.

But enough of the trip down history's lane, today's post is about the perils of economic debate in the public arena- like the scene from the Wizard of Oz, pundits are faced with the terrors of the unknown on a dark road, but instead of Lions and Tigers and Bears, it's Multipliers and Imbalances and Weights.

Take the debate between the Left and Right in America on tax cuts vs. increased spending. The Right, despite evidence of the past 8 years (which, as an aside does not debunk any theoretical argument in favor thereof, more on that later) would have us believe that tax cuts are the true Yellow Brick Road, while the Left would have us believe that all public spending is stimulus.

While past results are no guarantee of future returns, as I had to learn to pass my Series 3 exam- humans, after all, are not stones- the multiplier effect of the Bush era tax cuts has been limited mainly to increased building of economically unproductive mansions in Greenwich, Connecticut, exorbitant payments to prostitutes- haven't these guys heard of Bangkok?- and increased profits for Caribbean Junkets. Tax reductions on the upper class would have been much more simulative if today's rich had behaved more like the Protestant Ethic imagined- live frugally and reinvest.

This behavior could, of course, change and the upper class could dispense with their retained income in accordance with the Protestant Ethic derived assumed weights in Right Wing econometricians' imagination. The theory behind the virtue of tax cuts rests on the assumption of wise dispostion of the additional funds they control.

While I agree in principle, given the dire need for US infrastructure improvement, and the lack of initiative shown by the private sector in that regard of late, with the decision to shift the flow of funds away from the upper class and towards such projects, the returns from such spending will depend on the guiding vision and the efficiency with which the funds are spent. If the Left Wing fund distributors prove as greedy as the Right Wing Financiers, the effects wil be the same.

Funds spent to rebuild and improve suburban roads and malls will, in my view, have a much lower multiplier on growth than funds spent on more energy efficient goods and people transportation. Funds spent to construct new schools with lots of new technology will, in my view, have a much lower multiplier effect than funds spent on attracting and retaining better educators. More teachers, fewer bankers is my motto in that regard.

Alas, economic debate in the public arena is driven more by dogma than empirically based multipliers.

The final boogeyman on the dark road of depression is Imbalance (External)- a condition which arises when a nation imports far more than it exports. Recall the cries of outrage from our foreign trading partners occasioned by the phrase "Buy American" in the stimulus legislation.

To the extent that one cause of the financial malaise is the burden of funding the US Current Account, "Buy American" could be just what the economic doctor ordered.

Alas, a reduction of that imbalance (as occurs with any major shift in the flow of funds) will lead to profit reduction for some. Thus do recessions become depressions. The need for change becomes obvious and yet few want to change- trading a few extra quarters of profits for the life of the corporation.

Oh well, as Dorothy learned on her way back home, this too shall pass. Perhaps, to expedite the process, we could throw a bucket of water on the Bankers on their next trip to Washington.