Tuesday, August 31, 2010

Macroeconomic Theory vs. Microeconomic Reality--Guess which one fosters more Serious Medicine?

What should be the focus of our economic policy?  Should it be tangible things, or intangible things?  For too long, SMS believes, Washington policymakers have preferred to think about the gauzy big picture, where grubby realities are veiled behind abstractions; thus policymakers, enthroned in marble palaces, can contemplate numbers and theories, not human beings and reality.   And if this policy bias--an emphasis on grand financial flows, as opposed to mere working and making--just happens to serve the interests of the rentier class, well how 'bout that?  That is, if the bubblemakers and bailouteers prefer Alan Greenspan or Tim Geithner to some manufacturer or wholesaler, maybe that’s not such a coincidence that top officials have thought about finance, not about logistics.  

Yet now that we have seen the damage we have done by an over-reliance on the FIRE sector (Finance, Insurance, and Real Estate) we can conclude that what’s needed, instead, is a granular sense of how physical things get made--even if that means someone's fingernails might get dirty.  We need a more practical emphasis on fostering a climate where more physical things get made, and consumed, for the betterment of our economy, and of our health.

Richard A. Epstein, a professor at NYU and the University of Chicago, as well as a fellow at the Hoover Institution, also finds time to writes for Forbes, where today he delivered a sharp critique, "Our Macroeconomic Fetish," aimed straight at the the macroeconomic theorizing of Paul Krugman and Laura Tyson, who have argued, repeatedly, that the deficit should be larger, in the name, of course, of economic stimulus.  As Epstein puts it:

Unfortunately, both eminent economists keep their heads in the clouds when they ought to plant their feet on the ground. Start with their odd definition of success. The unemployment rate is higher now than it was when the stimulus program began. The secret of our success, evidently, is that the number of unemployed did not go higher still. By dumbing down the definition of success, it becomes impossible for any stimulus program to fail, so long as there is some scenario worse than the one we had, which there always is. By that generous definition, no market has ever failed no matter how dismal its results.

The situation is only worse because while our Keynesian disciplines preach the need for more stimulus now, they offer no explanation as to how much stimulus is too much. The law of diminishing returns applies to every known human activity, including government decisions to prime the pump. Yet both Tyson and Krugman give us no hint about when to quit or why.

After dismissing Krugman, Tyson & Co. Epstein moves to his own prescription, which includes familiar calls for tax cuts, and then an unfamiliar emphasis on microeconomics. As in, macroeconomic theorizing back and forth is important, although just as the left is prone to think that any spending is good, so the right is prone to think that any tax cut is good.    But what matters most to Americans is whether economic condition are such that an entrepreneur feels inspired to invest and create jobs--in the United States.    Not paper profits on Wall Street, not jobs in China, but jobs here in the US.   

Epstein cites three microeconomic projects--housing, the labor force, and medicine.  But as he writes, we should, 

Start with the pharmaceutical and medical device industries, which are beset by an aggressive Food and Drug Administration that thinks that the path to public safety is to raise as many obstacles to the introduction of new drugs and devices as it is humanly possible to design. Longer clinical trials are only the first stage. Silly conflict of interest rules that lead to bad risk assessments is yet a second.

These policies are in turn complemented by the Obama administration's endorsement of extensive tort liability for products that comply with all FDA-mandated warnings, and attacks on the patent protection currently offered existing and new molecular compounds. The pharmaceuticals industry today is consolidating and downsizing. Effect on growth and jobs: negative.

The impact on jobs is negative, and so is the impact on our health.   And as Will Durant said, "The health of a nation is more important than the wealth of a nation." 

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