Economics As A Religion

Andrew Sheng turns into a satirist:

Economics is a religion, not a science

…But let us come back to the big debate: Should governments cut deficits or increase them to get jobs going?

My personal view is that if the United States suffers from fundamentally excessive consumption financed by excessive leverage, then simply increasing public debt to substitute for Wall Street losses does not make sense.

De-leveraging has to happen some time, either in the private or public sector and de-leveraging means cutback in consumption…

…The Keynesian argument that if the private sector lacks confidence to spend, the government should spend is not wrong. But Keynes did not spell out where the government should spend. Nor did he envisage that lobbyists can influence government spending to be wasteful. Hence, every prophet can be used by his or her successors to prove their own points of view. This is religion, not science.

One of my dreams is to write a film script about how Martians came to visit Earth in the year 2200, when the world is destroyed by a nuclear war.

As Martian archeologists explore the ruins, they notice that the tallest and the most important edifices left standing are the most magnificent. Deep in their basements, they find vaults made of tungsten steel that seem to protect the most sacred items.

In almost every city they find these buildings. When they manage to open the vaults, they find ashes of paper that could have been records of something important.

They think these are religious documents. Then, they discover some small coins, objects for which the Martians have no use. In each coin, they finally decipher the words: In God we Trust.

The Martians conclude that in the last days of Earth, there flourished an important religion that worshipped a god called Money, and these temples were called banks. They did not find traces of the priests, who were called economists.

There’s a lot more in the essay, which quotes Paul Krugman, Robert Rubin and especially Joseph Stiglitz on the current debate on the merits between fiscal stimulus and fiscal consolidation.

Where do I stand on this issue? I think fiscal stimulus or consolidation should focus on addressing long term issues, not short term employment problems – although there is, as Stiglitz points out, a moral “deficit” involved here. There are significant welfare and equity costs in allowing unemployment to fester.

I also don’t agree with Tan Sri Sheng’s opinion that bailing out the Wall Street banks was necessarily a bad idea – I don’t see any upside in allowing the international financial system to collapse back in 2008. That would have turned the “Great Recession” into the “Great Depression Part II”. The moral hazard problems of “too-big-to-fail” remain, but at least we’re around to address the issue.

Given the structural problems facing the Western economies, government spending should focus on funding investment that yields long term gains or economic restructuring, not temporary fillips to consumption and employment, i.e. tax cuts aren’t the way to go. Hence Obama’s new proposals for spending USD50 billion on road and highway rebuilding and maintenance are probably appropriate, but reinstating the Bush tax cuts that benefit the rich aren’t.

But I think the key takeaway from this is that government spending should not be a “one-size-fits-all” proposition that conforms to a particular theological doctrine economic school of thought. Each country has to see what makes sense for its own particular circumstances.