Thursday, February 19, 2009

Economics and the Stimulus

Economic theory is extremely complicated. I know just enough to be dangerous and am glad that I'm not the one having to decide how to deal with the current economic crisis. That said, I think the Republicans got it wrong. Deregulation and lower taxes might work just fine in theory. In practice deregulation has created a land of opportunity for the ethically-challenged, with lower taxes just increasing their profit margins.

Economic theories are built on numerous assumptions. These assumptions are needed so that equations can be derived and whatnot. It's all very complicated but the bottom line is that real people screw everything up. Let's look at just a few economic assumptions.

1) Consumers maximize utility. In English, this means that people make the choices that generate the greatest satisfaction. Except we all know that isn't always the case. People generally do choose the option that they think will turn out best, based on the information they have at the time. That doesn't always work, which is why we say hindsight is twenty-twenty.

2) Perfect information. Economic theories assume that consumers know everything there is to know--that they have perfect information. This idea evolved long before we entered the information age. Now overload is just as much of a problem as too little information. Misinformation abounds. Ignorance is rampant. Fraudulent and deceptive practices thrive in a market where consumers simply don't know any better.

3) Regulation interferes with the ability of market forces to correct problems. The bad guys get weeded out because consumers wise up and take their business elsewhere. Or they change their ways and consumers are happy again. Except we all know it doesn't always work that way. If it did, rent-to-own, payday loans and car title loans wouldn't exist. If consumers had perfect information, they would never enter into these and other bad agreements.

Even the smartest economists are mostly guessing when they attempt to explain or predict economic activity. Yes, they are educated guesses. But in the end, still just guesses. The world economy is complex with countless forces acting on it. Some you can measure, most you can't--so you either assume them away or ignore them. You can use economic theory to argue any side of every issue. It's just a matter of weighing this data a little heavier than that data, and excluding everything else.

It's impossible to know exactly what it's going to take to get out of this crisis. If we knew, we wouldn't be in the crisis in the first place. We could invest billions for research to find out, but by the time we figured it all out it would be way too late. Some aspects of the stimulus plan will work better than others, but we won't know which ones until after the fact. It's guesswork--educated guesswork with conflicting views about what will make a difference and what won't.

I'm not going to worry about it. I feel much better about our prospects now that President Obama is in charge. If the Republicans don't like it, well, they had their chance. Now it's time for Cheney, Gingrich, Rove, Boehner, McConnell, Limbaugh and the other crusty old white men to just shut the hell up and get out of the way.

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