Thinking Too Little About Macro

Posted: April 3, 2012 in Current Affairs, Economics
Tags: , , ,

The contrast of stories on today’s New York Times front page cannot be more stark.

This story discusses the unemployment situation in the Euro Zone, which can not be more serious.  One set of facts will represent the whole — unemployment in Spain is 24 percent, in Germany 5.7 percent.  The second story discusses Obama’s attack on the G.O.P. budget, which he calls radical.  What’s going on?

The two stories are closely related because they each reference macroeconomics.  The Europeans decided to attack the recession and deficits with austerity despite the fact that economists from many corners of the world (ok, Paul Krugman and some others) called it a non-starter.  What they got was shrinking economies and rising unemployment, no surprise to the Nobel winning Dr. Krugman.

Republicans in Congress recently passed a draft budget ladled with draconian cuts that would accomplish the same things that the Europeans have.  The U.S. recovery, such as it is, owes its existence to the stimulus program put in place in 2009.  At the time there were calls for more not less stimulus from Democrats and at the same time less from the Republicans.  What we got was almost enough to give us a glimmer of hope in the election year.  Will it last?

It hardly makes a difference that the Americans and Europeans have now run a controlled social experiment — which is very hard to do — and that the evidence clearly favors stimulus.  In this election year, I don’t expect much to change but if I was Obama I’d make sure the country knows about that little experiment.

This does give me an idea though.  Stimulus means spending money you borrow at the bottom of an economic cycle in order to rev the economy.  But for many, probably most, people, deficit spending is counter-intuitive.  It doesn’t make sense.

This may be because we are thinking about economics with the automatic part of our brains.  In a piece I will publish tomorrow, I discuss Nobel Prize winner, Daniel Kahneman’s book “Thinking Fast and Slow” which analyzes what he called System 1 (fast) and System 2 (slow) thought processes.

It turns out that System 1 is what we operate with most of the time.  It’s the autopilot that lets us drive while on the phone and almost never have an accident.  System 2 is the process you use to do algebra and, well, understand Economics.  The irony is that System 1 doesn’t know anything about Economics or math in general, but people never seem to be troubled when they use System 1 thinking on tough subjects.  Just look at the Euros and the G.O.P.

We need more System 2 thinking in this world but politicians are increasingly trying to satisfy their fringe elements, a long tail to be sure, rather than the big middle.  How can we get everyone back to the center?  Take a look at Thomas Friedman’s recent piece from down under.

Bye for now.

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