Recent New York Times and Washington Post editorials about Venezuela made some remarks about economics that are well worth addressing. The NYT editors said that “Leading economists have suggested that Venezuela, which has the world’s largest oil reserves, could default on its foreign debt this fall.” The WAPO editors called President Maduro an “economically illiterate former bus driver”.
As I’ll explain, most of the economics profession has exposed itself as economically illiterate – or as too corrupt to use their literacy when the world needed it most. There is a rational way to identify “leading economists” – the ones whose track record may justify the designation – but the NYT editors clearly did not use any such criteria. Journalism, as practiced in the corporate media at its highest levels, is in a more wretched state than economics.
The collapse of an $8 trillion housing bubble in the USA, one that had been inflating for over a decade, was the primary cause of a financial crisis in 2008 that led to the worst global recession since World War II. At the peak of the bubble, the average family of four in the USA overestimated their household wealth by about $100,000. A bubble occurs when prices rise based on irrational or misinformed expectations about future price increases. When a housing bubble bursts and people find their houses worth way less than they thought, it should be obvious how disastrous that would be, not just for homeowners, but for an entire financial industry that bet on the bubble not existing (or perhaps assumed, rightly, that they’d be bailed out by Washington if it did).
In 2010, the Federal Reserve Board of Boston published a paper whose title should have been “Why do most economists totally suck at their jobs?”
But if twenty first century economics is so hopelessly primitive that it can’t see a major disaster coming just before it happens then anyone paid to be an economist should resign. The profession is like a security system that only functions after several gunshots are fired inside your house.
Fortunately, we need not come to such a dramatically harsh conclusion – not about basic economic principles at any rate. As early as 2002, Dean Baker, co-director (with Mark Weisbrot) of the Center for Economic and Policy Research, explained with great clarity that the US housing market was already overvalued by $2.6 trillion. Aside from a bubble, there was no credible explanation for house prices rising 30% faster than the rate of inflation from 1995-2002: no major demographic changes, no dramatic quality improvement in houses, no unprecedented increase in median family income and so on. Standard economic theory, plus arithmetic, was actually very useful.
Getting back to the “leading economists” cited by the NYT editors, one of them, Ricardo Hausmann, is a Venezuelan who has been based in the USA for many years. He very recently co-authored an essay about Venezuela’s foreign debt that received a lot of attention. What did Hausmann have to say about the massive threat posed by the US housing bubble when it should have been incredibly obvious during 2004-2006? Nothing at all it appears. [1] After the bubble burst, he conveniently dismissed the issue of precise “blame” as irrelevant and expressed hope that the US government could use the crisis to expand its financial power in the world. Who doesn’t want people who just trashed their own economy and the world’s to have more coercive power? Hausmann also peddled elaborate and thoroughly debunked theories that that Venezuela’s 2004 recall referendum had been stolen.
Big credit rating agencies have also been cited to justify the kinds of remarks Hausmann recently made about Venezuela. These agencies gave the highest possible ratings to mortgage-backed securities just before they were exposed as garbage in 2008. Worse, the industry has used its clout in Washington to block basic reforms that would make absurd ratings less likely in future. It helps that the corporate media typically reports their ratings without cautioning readers about the abysmal track record of these agencies.
The behavior of elite investors has also been cited to justify dire assessments about Venezuela’s economy. Reuters reported
“Venezuela’s foreign bonds are now seen as by the far the riskiest of any emerging market nation, yielding 13 percentage points more than comparable U.S. government notes due to concerns it may not pay off investors.
That is higher even than Ukraine, which is combating an insurgency.”
Venezuela’s bond prices also fell in response to Hausmann’s article about default. If investors are not highly skeptical of bond rating agencies, and if they can be influenced to any extent at all by an article written by Hausmann, then their judgment is obviously as unreliable as it was during the peak of the US housing bubble – and that’s without even considering political motives for their behavior.
In contrast to natural sciences, the consensus view among “experts” in fields like economics and history is often worthless and completely at odds with objective evidence. Similar remarks apply to the value of prestigious credentials and stature among economists (just consider Alan Greenspan). That makes it extremely important for non-economists to seek out dissenting views and actually explore arguments. For example, Hausmann’s claims about Venezuela’s solvency have been rebutted by one of his former co-authors, Francisco Rodriguez, and a similar analysis of Venezuela’s economy was made by Mark Weisbrot in July.
Rodriguez, no fan of Maduro’s government, said that “the public sector’s net debtor position – the result of subtracting its external assets from its external liabilities – is no larger than 3.5 per cent of GDP.” Both Weisbrot and Rodriguez agree that Venezuela’s exchange rate system has driven its problems with very high inflation since 2010. In fact, before the inflation spike in 2010, Weisbrot was saying that thepresent exchange rate system should be replaced with a “’dirty’ float – in which the government does not set a target exchange rate but intervenes when necessary to preserve exchange rate stability.”
Unfortunately, even if the economics profession were greatly reformed, we could not rely on corporate journalists to report the consensus among economists accurately. Just look at the how the overwhelming scientific consensus about global warming has been obscured. Highly concentrated wealth and power inevitably degrades the quality of many professions: journalism and economics are among the most vulnerable.
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[1] During the bubble years Hausmann promoted a “dark matter” theory that argued that the USA’s current account deficit posed little risk to the global economy. Dean Baker recently explained why the trade deficit (generally the largest component of the current account deficit) helped sustain the housing bubble.
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2 Comments
This sounds a lot like farm economics. Farm commodity prices “lack price responsiveness” “on both the supply and the demand sides for aggregate agriculture.” In other words, deregulated ‘free’ markets don’t work, but it’s hard to find that reported anywhere. What we hear is that we should be “competitive.” That means is that the US should lose money on farm exports. We’re the dominant exporter, and we’ve long had a bigger farm commodity export market share than OPEC in oil. We’re the dominant exporter. Unlike OPEC, however, we haven’t seen profit as something we want to try for. Instead, over 60 years US farm prices (minimum price floor programs) were lowered, then eliminated. It’s then covered up by the pretend issue of subsidies, which is the farm theory for the WTO. Countries can and do protest against subsidies, claiming that they lower farm prices. They don’t do so in any practically significant way, as various bodies of evidence show (the historical record, econometric studies, evidence from other countries that cut subsidies, data on price inelasticity).
Beyond that we’ve been seeing mainstream media reporting on record high farm prices and incomes in recent years. We’ve had neither (well under half of record farm prices). Well, I guess Bloomberg and the rest think that you can speak of “records” without adjusting for inflation. You know, “Wages are skyrocketing! Housing prices! Just look back at the 1950s!” “$7.25 minimum wage? Hey, it was only $1.25 back in the 60s! That’s a 480% increase!” According to Daryll Ray, farm economists know the facts of farm price inelasticity. It then comes down to what they think should be done about it. Yea, like having the US lose money for about 30+ years in a row (i.e. wheat, cotton, oats, barley, sorghum grain, USDA, “Commodity Costs and Returns,” vs full costs, or 25 of 26 years if you add corn, soybeans and rice). Ray points out that free market economists were correct three times in the 20th century, for a few years each, but then compares that to a clock that’s broken. It’s still correct twice a day. He summarizes the views of the various groups of economists in Appendix B of “Rethinking US Agricultural Policy.”
What do you think of the economics being done at the University of Missouri, Kansas City, mainly under the label Modern Money Theory or MMT. One of its proponents, Prof. Randall Wray claims he did see the global financial crisis coming and said so.
http://neweconomicperspectives.org/2013/11/bow-bubble-larry-summerian-endorses-bubbleonian-madness-paul-krugman-embraces-hansenian-stagnation-thesis.html
And the original article here http://www.levyinstitute.org/pubs/ppb_82.pdf
The mainstream media coverage of this is of course virtually non existent as they are proposing many policies to reign in the effects of “capitalism”.