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Tuesday, October 19, 2004


an undeserving dismal scientist

this interview with newly-minted nobel laureate edward prescott is interesting from a couple of viewpoints. reading the thing indicates pretty clearly both the paper's and prescott's political stance. but what's interesting to me is the disingenuousness of the argument he there presents.

start with who he is: prescott is not only a professor but also an employee of the federal reserve bank of minneapolis (his photo on left). this precludes him from saying anything much that contradicts the government propaganda on the current state of affairs -- so he instead promotes generally the widely-accepted washington consensus viewpoints condoned by the fed, with no reference to context. (note that kerry is highly unlikely to shit upon the washington consensus -- yet prescott finds room to denounce him.) when he has been more specific, he's been adamantly pro-administration in his words.

understanding that prescott is so oriented -- an employee of greenspan's and ostensibly an economic republican -- should make it easy to understand why he doesn't address in any the united states' burgeoning debt, which (public and private totalled) now amounts to 400% of GDP -- a level no industrial nation has ever approached before -- or its fiscal deficit (5% of GDP) or its current account deficit or its foreign public debt ownership or its currency. all of the imbalances contained therein are affected - indeed, severely aggravated -- by the complete inability of the bush administration to cut spending along with taxes.

instead, of course, the bush administration has ratcheted up spending faster than any white house since vietnam while aggressively cutting revenues.

understand, i've no issue with prescott's assertion that tax increases mean slowing the economy -- i'm sure he's right. but that argument is meaningless until one acknowledges that such keynesian manipulation of business cycles by government over time effectively prevents the creative destruction of complete cyclical debt reduction, thereby allowing structural debt to accrete on balance sheets -- and moreover builds a moral hazard that encourages excessive private risk (which we see today in rampant consumer and mortgage debt by millions of blithe americans, who ask but cannot answer the question, "what's the worst that could happen?"). worse still, when refusal to cut spending yields massive public deficits and public structural debt in the interest of keynesian stimulus, the net effect may be to mitigate recession today at the irresponsible expense of intensifying depression tomorrow.

and yet that truth has not prevented greenspan and bush from combining to imperil the economic future of the country in ways inconceivable not long ago, in order to lessen the pain felt right now.

of course, humans being rational machines in his view, prescott would argue that we discount such information with our every decision, effectively pricing into our borrowing the risks involved. informed, rational people? i beg to differ. take a look at your electorate!

this sort of dislocation from reality infects much of the dismal science -- prescott has proven himself something of a ridiculous theoretical idealist in the past by adhering to the notion that NASDAQ 5000 was a rational event in accordance with efficient market theory. that's a point of view i find clinically insane, in defiance of both common sense and the emergence of behavioral economics.

nonetheless, the imprimatur of prescott's prize will coincide with his shallow promotion of only half an argument to reinforce the ideology of many in the bush administration who drew from the heavily-mythologized reagan years the perverted, stupid lesson that "deficits don't matter". that's all the more reason to hope that some other party than bush is placed in the white house.

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