Home > Uncategorized > Simple economics that most economists don’t know

Simple economics that most economists don’t know

from Dean Baker

Economists are continually developing new statistical techniques, at least some of which are useful for analyzing data in ways that allow us to learn new things about the world. While developing these new techniques can often be complicated, there are many simple things about the world that economists tend to overlook.

The most important example here is the housing bubble in the last decade. It didn’t require any complicated statistical techniques to recognize that house prices had sharply diverged from their long-term pattern, with no plausible explanation in the fundamentals of the housing market.

It also didn’t require sophisticated statistical analysis to see the housing market was driving the economy. At its peak in 2005 residential construction accounted for 6.8 percent of GDP. This compares to a long-run average that is close to 4.0 percent. Consumption was also booming, as people spent based on the bubble generated equity in their homes, pushing the savings rate to a record low.

The existence of the bubble and the fact that it was driving the economy could both be easily determined from regularly published government data, yet the vast majority of economists were surprised when the bubble burst and it gave us the Great Recession. This history should lead us to ask what other simple things economists are missing.

For this holiday season, I will give three big items that are apparently too simple for economists to understand.

1)Profit shares have not increased much — While there has been some redistribution in before-tax income shares from labor to capital, it at most explains a small portion of the upward redistribution of the last four decades. Furthermore, shares have been shifting back towards labor in the last four years.

2) Returns to shareholders have been low by historical standards — It is often asserted that is an era of shareholder capitalism in which companies are being run to maximize returns to shareholders. In fact, returns to shareholders have been considerably lower on average than they were in the long Golden Age from 1947 to 1973.

3) Patent and copyright rents are equivalent to government debt as a future burden – The burden that we are placing on our children through the debt of the government is a frequent theme in economic reporting. However, we impose a far larger burden with government-granted patent and copyright monopolies, although this literally never gets any attention in the media.

See article on original site

  1. Chris
    December 6, 2019 at 7:36 am

    Very interesting. Any statistical source for point 2 and 3 ?

  2. ghholtham
    December 7, 2019 at 12:36 am

    The US housing market bust was the big element in the move to recession. Another was a doubling of the oil price in the previous year or two. The savings and loan crisis in the late 1980s plus the rise in oil prices following the first Gulf war had together put the US into recession in 1990/91. A similar combination 2006-7 was enough to warn some economists that a repeat was likely, especially as household debt was at 140 per cent of annual average household income, whereas in 1990 it had been only about 100 per cent, Given that combination, one could predict a recession and I speculated accordingly. What I, for one, did not know was the extent to which US securitized mortgages had been sold to banks all over the world. This added a banking crisis to the other elements and turned what might have been a 2 per cent recession into an 8 per cent recession.

    I am not sure it is true that “the vast majority” of economists” were surprised that the bubble burst. They were certainly surprised by the extent of the bust; the extent was the surprise not that it happened. Of course economists working for governments or banking institutions are not encouraged or even allowed to publicly forecast recessions for fear of self-fulfilling prophecies. Anyway it is considered bad for business.

    Economists like Richard Koo in Tokyo correctly forecast how slow growth would be following the recession, based on their experience of Japan after their bust in 1980 and the effect of traumatized banks cutting down lending. When it comes to forecasting, a knowledge of economic history helps a lot.

  3. Helen Sakho
    December 7, 2019 at 11:36 pm

    The bubble burst a long time ago. Banks never really have a crisis as such because they are always bailed out. Their crisis was and remains a decline in the rate of profit, nothing more, nothing less. Their profits must increase at an expanding rate, or they feel threatened!
    What we are leaving our children and all those who are interested in future developments is the burden of uncertainty about their own future wellbeing and the very survival of the ecosystem that should be a main consideration but hardly ever is.

    • Charlie Thomas
      December 10, 2019 at 9:10 pm

      thank you … infinite increase is only possible if there is infinite growth of resources. Sacrificial ecological systems threaten our future. We are part of the system not outside it or in charge of it.
      Economics as it is … is the problem. Ignoring the externalization of all other values is insane.

  4. Craig
    December 8, 2019 at 1:51 am

    Here’s some insights they also miss:

    1) The rate of change in credit must always go up or you go into recession according to Steve Keen, yet as that means debt service consequently continuously rises you’re stuck between a rock and a hard place in a rigged monetary system.

    2) This is the exact same calculus that C. H. Douglas correctly came to from his cost accounting micro-economic perspective characterized by his statement that “the rate of flow of total costs,.

    3) Economists have iconoclastically analyzed and de-bunked macro-economics 15 trillion times from the middle….and almost totally neglected and/or totally missed that the real problem is the monopolistic monetary and financial paradigm of Debt Only, that’s ONLY AS DEBT…WHICH ALWAYS MUST GO UP….WHICH WHEN ALL FACTORS ARE CONSIDERED ALWAYS INCREASES COSTS….WHICH MEANS THE SYSTEM IS COST INFLATIONARY…WHICH MEANS A MEANS (READ MONETARY AND FINANCIAL PARADIGM CHANGE) MUST BE FOUND TO COUNTER THE PRESENT PARADIGM…NOT JUST TO CREATE AN EQUILIBRIUM WHICH IS PALLIATIVE, STATIC AND LAGGING, BUT TO CREATE “THE HIGHER FREEING, INTERACTIVE, DYNAMIC, FREE FLOWING AND ETHICAL MONETARY DISEQUILIBRIUM, AND BENEFICIAL PRICE AND ASSET DEFLATION WITH A HIGH PERCENTAGE DISCOUNT/REBATE MONETARY POLICY AT BOTH THE POINT OF RETAIL SALE AND NOTE SIGNING….WHICH IS THE VERY EXPRESSION OF THE NEW PARADIGM OF DIRECT AND RECIPROCAL MONETARY AND FINANCIAL GIFTING.

    Economists are extremely intelligent, but when it comes to paradigm perception and solutions they tend to be “dipsticks”. exceeds the rate of flow of total individual incomes simultaneously created to liquidate them.”

  5. Craig
    December 8, 2019 at 1:56 am

    Sorry, here’s the correct sequence of the post. No apologies for the CAPS.

    Here’s some insights they also miss:

    1) Macro-economically the rate of change in credit must always go up or you go into recession according to Steve Keen, yet as that means debt service consequently continuously rises you’re stuck between a rock and a hard place in a rigged cost inflationary monetary system.

    2) This is the exact same calculus that C. H. Douglas correctly came to from his cost accounting micro-economic perspective characterized by his statement that “the rate of flow of total costs exceeds the rate of flow of total individual incomes simultaneously created to liquidate them.”

    3) Economists have iconoclastically analyzed and de-bunked macro-economics 15 trillion times from the middle….and almost totally neglected and/or totally missed that the real problem is the monopolistic monetary and financial paradigm of Debt Only, that’s ONLY AS DEBT…WHICH ALWAYS MUST GO UP….WHICH WHEN ALL FACTORS ARE CONSIDERED ALWAYS INCREASES COSTS….WHICH MEANS THE SYSTEM IS COST INFLATIONARY…WHICH MEANS A MEANS (READ MONETARY AND FINANCIAL PARADIGM CHANGE) MUST BE FOUND TO COUNTER THE PRESENT PARADIGM…NOT JUST TO CREATE AN EQUILIBRIUM WHICH IS PALLIATIVE, STATIC AND LAGGING, BUT TO CREATE “THE HIGHER FREEING, INTERACTIVE, DYNAMIC, FREE FLOWING AND ETHICAL MONETARY DISEQUILIBRIUM, AND BENEFICIAL PRICE AND ASSET DEFLATION WITH A HIGH PERCENTAGE DISCOUNT/REBATE MONETARY POLICY AT BOTH THE POINT OF RETAIL SALE AND NOTE SIGNING….WHICH IS THE VERY EXPRESSION OF THE NEW PARADIGM OF DIRECT AND RECIPROCAL MONETARY AND FINANCIAL GIFTING.

    Economists are extremely intelligent and erudite, but when it comes to paradigm perception and solutions they tend to be “dipsticks”.

  6. December 8, 2019 at 12:28 pm

    The gist of Baker’s article seems to be that economists, struggling to see how the economy works, consider neither what it does nor what is going wrong and what to do about it. Pretty basic mistakes.

  7. Jeff
    December 9, 2019 at 4:55 am

    “2) Returns to shareholders have been low by historical standards — It is often asserted that is an era of shareholder capitalism in which companies are being run to maximize returns to shareholders. In fact, returns to shareholders have been considerably lower on average than they were in the long Golden Age from 1947 to 1973.”

    This is a non-sequitur. Returns to shareholders across all companies are driven by the ratio of dollars seeking to buy goods that become revenues to the dollars seeking to buy assets to claim those revenue dollars. There is no conflict between individual companies maximizing the dollars they send to shareholders and overall dollars sent to shareholders going down across the economy any more than there is a conflict between the problematic cows in a tragedy of the commons situation seeking to eat too much grass and overall grass being nibbled down to the point where photosynthesis approaches zero.

    Low returns to shareholders across the economy does not point to shareholders appointing less greedy CEOs, but rather the opposite.

  8. Craig
    December 22, 2019 at 8:25 pm

    Life is an emergent quality of the cosmos. And “emergent” qualities in both the hard and social sciences have historically been a sign that there is a missing insight that explains them.

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