Prognostication is a fool’s errand…maybe that’s why we economists like to do so much of it, especially this time of year.
John Maynard Keynes was no fool, but even he couldn’t help making forecasts. Keynes famously predicted, for example, that over time there would be such abundance of capital that investments would yield close to 0%, bringing about the “euthanasia of the rentier.” Though interest rates are now quite low, the rentiers are still, unfortunately, going strong.
Keynes’ willingness to engage in such forecasts is all the more interesting because, better than most economists – then and now — Keynes understood the pitfalls of economic prediction. As emphasized by my colleague James Crotty, among others, central to Keynes’ economic thought is the notion of “fundamental uncertainty.” That is, the economy is constantly in a state of flux, especially in times of profound structural change, so about the future “we simply do not know.”
This idea of “fundamental uncertainty” is, of course, a far cry from the “rational expectations” theory dominant in mainstream economics for so long: that a blanket application of the “correct” economic model “accurately” predicts the future (with the exception of some inescapable random noise). This idea is a key underpinning of the efficient market hypothesis that unregulated financial markets deliver optimum economic outcomes as investors with rational expectations make optimal long term financial decisions. Oops….
Nonetheless, the idea that “we simply do not know” the future was just the starting point, not the ending point, for Keynes’ understanding of how people make economic decisions, as Crotty has so well described. Keynes understood that people have to make decisions, one way or another, so they adopt a number of social conventions. For example, they assume the future will look a lot like the past, in the absence of significant information which would lead them to change their assessment. Per another convention, they follow the leads of others people believe are better informed than they are. Finally, they follow traditional rules of thumb right up until they stop working.
So what’s up for the economy in 2013?
We simply do not know. But, we can make some guesses, using some of John Maynard Keynes’ social conventions.
Begin by using the conventional standard of extrapolation: that is, we can predict that, economically speaking, 2013 is going to look a lot like 2012. As the “fiscal cliff” fiasco has shown, it seems clear that the dysfunction in the US government’s decision-making is, if anything, getting worse. There is little reason to believe that there will be much economic restructuring, investment, or stimulation led by the US government on the fiscal side in 2013. At the state and local level, a continuation of devastating austerity policies implemented via balance budget rules is likely to continue destroying human and physical capital, and diminish standards of living for millions.
In terms of monetary policy, Ben Bernanke and the central bank will continue to keep credit policy loose and keep short term interest rates low. The Fed will also likely continue to experiment with new ways of conducting central bank policy in order to cleanse banks’ balance sheets while stimulating spending and investment. There are much more radical actions that the Fed should take, as suggested by William Greider, Robert Pollin and others. But, the good money says it will continue to undertake incremental experiments in policy to promote employment and growth, which at best will be only moderately successful in the face of the strong counterforce coming from state, local and Federal fiscal policy.
Conventional extrapolation would also suggest that the US government will continue to ignore the greatest threats facing humanity, including global warming. Super-storm Sandy notwithstanding, the lure of corporate profits from natural gas and oil through fracking and other means will continue to block serious action on climate change. The creation of massive numbers of jobs through the development of renewable energy is not likely to be in the cards.
The fortunes of the US economy depend heavily on Europe. In Europe, If the future is anything like the past, the austerity buzzards will continue to pick at the carcasses of once thriving economies. The European governments could continue to muddle through, in which case the destruction will continue in a slow burn, rather than culminate in a cataclysmic meltdown.
In short, using Keynes’ convention number one — predicting that the future will look a lot like the past unless there is significant reason for it to change – doesn’t leave one with a lot of holiday cheer.
How much confidence is it reasonable to have in these predictions? This partly depends on what we do in 2013.
After all, Keynes, like Marx of the 11th Thesis on Feurbach, worked not just to interpret the world, but to change it. Keynes’ General Theory was written to try to change the way governments made macroeconomic policy.
Progressive economists have known for a long time what is needed to get out of the crisis. In November of 2008, after Obama was first elected but before his inauguration, a group of progressive economists got together in New York under the auspices of the Political Economy Research Institute (PERI) and the Schwartz Center for Economic Policy Analysis of the New School University and hammered out an economic plan, the key principles of which were endorsed by more than 60 economists. A Progressive Program for Economic Recovery and Financial Reconstruction called for programs that, four years later, are still needed. These included the following:
“Economic policy must aim to:
-End the downward global economic spiral and promote economic recovery via a massive, sustained and targeted spending program at home to create jobs.
-Assure that jobs created by the economic recovery package are good quality.
-Strengthen automatic stabilizers such as unemployment insurance and transitional assistance to those losing jobs.
-Keep people in their homes by establishing a moratorium on foreclosures, consider allowing families to rent their homes rather than face foreclosure, and by directing existing institutions or create new institutions such as a Home Ownership Loan Corporation to restructure mortgages.
-Provide financing to state and local governments so they can maintain employment and continue to provide basic services central to the well-being of families: such as education, police and fire protection and the maintenance of local infrastructure.
-Create jobs by investing in the transition to a green economy.
-Create universal health insurance to help families prosper and restore competitiveness to businesses.
-Provide a basic standard of living for all children.
-Use government powers and leverage to create a stable and efficient financial system that provides for the needs of people, communities and businesses, rather than a safe harbor for gambling, fraud and abuse that enrich a few while destroying the economy.
-Re-build the nation’s infrastructure with a large public works program.
-Promote economic cooperation, coordinated global expansion and aid to the poor countries who will suffer most from this crisis and whose prosperity can help restore long-run health to the global economy.
Modest progress has been made on some of these: with the imperfect but needed Dodd-Frank Financial Reform Act, the passage of the problematic but in some ways positive health care program, “Obamacare.” But in most other areas, there has been little progress and, in others, regress.
On the upside, the network of progressive institutions dedicated to formulating policy improvements has expanded and strengthened since the crisis hit four years ago: including, in the U.S. alone, older organizations such as the Economic Policy Institute, Center For Economic and Policy Research, Institute for Policy Studies and The Levy Institute, PERI and SCEPA, as well as new groups such as Econ4, and a plethora of media outlets, such as The Real News Network, Back to Full Employment, and, of course The Triple Crisis Blog.
So what’s up for 2013? Whatever else happens, we hope that you not only continue reading the Triple Crisis Blog in the coming year, but contribute to the discussion in any way possible. Together we can play an increasingly effective role in realizing the future we need. It might be a lot easier than simply trying to forecast it.
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