By Michael Every of Rabobank
Damascene Conversion
Today is all about US CPI. I’m not sure why given markets, and President Biden(!), believe G7 central banks --except Japan-- are going to cut rates soon, despite: sticky services inflation; the Red Sea crisis not being ‘In Deep Blip’; other brewing geopolitical crises, from fears of Iranian nukes to Armenia asking to join the EU(!); our base case of a Trump election victory, with inflationary higher tariffs forcing the Fed to stop cuts; and what's trying to play out in the global financial architecture, which gold and Bitcoin point to.
Nonetheless, when you get messages like this:
*ECB'S KAZIMIR: UPSIDE RISKS TO INFLATION ARE "ALIVE AND KICKING."
*ECB'S KAZIMIR: DISCUSSIONS ON EASING SHOULD ALREADY START, THE ECB WILL USE THE WEEKS AHEAD FOR THAT.
... it's clear what the direction of travel is, regardless of how logical that is.
Pre-CPI, there are things to think about. Like the Boeing whistleblower who apparently decided to shoot himself dead in-between damaging testimony underlining why their planes keep falling apart. Or former US Attorney General Lynch allegedly lobbying the Pentagon on behalf of a Chinese drone maker. Or former senior Trump aide Conway lobbying Congress on behalf of TikTok. Or Peter Turchin, of Cliodynamics fame, telling the Financial Times that the US is in a much more "perilous state" than Russia.
Bridging the thrust of those stories and CPI itself, allow me to share news of a Damascene conversion from Angus Deaton, Emeritus Professor of Economics and International Affairs at Princeton. Writing on the IMF website, he argues ‘Questioning one’s views as circumstances evolve can be a good thing.’ As Keynes put it, by contrast, “what do you do?” ('Become a lobbyist' appears one answer.)
Specifically, Deaton notes, “The [economics] profession knows and understands many things. Yet today we are in some disarray. We did not collectively predict the financial crisis and, worse still, we may have contributed to it... Recent macroeconomic events… have seen quarrelling experts whose main point of agreement is the incorrectness of others. Economics Nobel Prize winners have been known to denounce each other’s work at the ceremonies in Stockholm.” Yes, and some of us laugh at the Stockholm Syndrome process. As a result, he adds, "I have recently found myself changing my mind, a discomfiting process for someone who has been a practicing economist for more than half a century.”
Notably, he does not include "the corruption allegations that have become common... Even so, economists, who have prospered mightily over the past half century, might fairly be accused of having a vested interest in capitalism as it currently operates.” Power corrupts, and absolute power corrupts absolutely: who knew?
Yet Deaton notes economics is clearly wrong on:
Power: “Our emphasis on the virtues of free, competitive markets and exogenous technical change can distract us from the importance of power in setting prices and wages, in choosing the direction of technical change, and in influencing politics to change the rules of the game. Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.” 100% true. 100% ignored.
Philosophy and ethics: “In contrast to economists from Smith and Marx through Keynes, Hayek, and even Friedman, we have largely stopped thinking about ethics and about what constitutes human well-being. We are technocrats who focus on efficiency. We get little training about the ends of economics…. When pressed, we usually fall back on an income-based utilitarianism. We often equate well-being with money or consumption, missing much of what matters to people… when efficiency comes with upward redistribution…our recommendations become little more than a license for plunder.” I'm shocked there is gambling in Casablanca!
Empirical methods: “Historians, who understand about contingency and about multiple and multidirectional causality, often do a better job than economists of identifying important mechanisms that are plausible, interesting, and worth thinking about, even if they do not meet the inferential standards of contemporary applied economics.” It depends on the historian, but absolutely.
Humility: “We are often too sure that we are right. Economics has powerful tools that can provide clear-cut answers, but that require assumptions that are not valid under all circumstances. It would be good to recognize that there are almost always competing accounts and learn how to choose between them.” Wouldn't it!
So, Deaton is having second thoughts.
He’s now pro-, not anti-union, and notes they "need to be at the table for decisions about AI. Economists’ enthusiasm for technical change as the instrument of universal enrichment is no longer tenable (if it ever was).”
He’s sceptical of the benefits of free trade to US workers and “the claim… that globalization was responsible for the vast reduction in global poverty over the past 30 years. I also no longer defend the idea that the harm done to working Americans by globalization was a reasonable price to pay for global poverty reduction because workers in America are so much better off than the global poor. I believe that the reduction in poverty in India had little to do with world trade. And poverty reduction in China could have happened with less damage to workers in rich countries if Chinese policies caused it to save less of its national income... I had also seriously underthought my ethical judgments about trade-offs between domestic and foreign workers. We certainly have a duty to aid those in distress, but we have additional obligations to our fellow citizens that we do not have to others."
Deaton is also rethinking immigration. “I used to subscribe to the near consensus among economists that immigration to the US was a good thing, with great benefits to the migrants and little or no cost to domestic low-skilled workers. I no longer think so. Economists’ beliefs… are shaped by econometric designs that may be credible but often rest on short-term outcomes. Longer-term analysis over the past century and a half tells a different story. Inequality was high when America was open, was much lower when the borders were closed, and rose again post…1965 as the fraction of foreign-born people rose back to its levels in the Gilded Age.”
He then concludes that “Economists could benefit by greater engagement with the ideas of philosophers, historians, and sociologists, just as Smith once did.” Except Smith was a moral philosopher we paint as an economist. There's a big difference. Deaton adds, “The philosophers, historians, and sociologists would likely benefit too.” But only if economists think in the broader terms the authors of the Classical period did - or like Turchin does today.
As an example of how this isn’t the case --on top of the downsizing > outsourcing > "Oops, no national security!", or "Oops, my products fall apart!" news around us-- a leading UK university just shut down an associate professor for asking questions with an internal email rejecting her appeal to freedom of speech that read: "Note that I am an economist and modeller and have no idea who John Stuart Mill is"(!) Indeed, how many working economists today know Mill, Marx, Smith, or any of the classical economists?
Keeping it neoclassical instead, could we draw a correlation between those who don't read the classics and how inaccurate their long-run economic forecasts keep proving to be? I know what the R2 there is. But no time to do it, of course. We have CPI to wait for.
That's as Portugal shifts to the right, with one in five voting for the far right; The Economist runs an op-ed from Trump's former USTR Lighthizer arguing in favour of US tariffs, pointing out the faulty mainstream economic assumptions saying they don't work; China ups the ante on its own mercantilism further, to G7 pushback and Global South applause; and Australians are spending half their income on their mortgages, yet rate cuts will likely see house prices rise to offset (someone needs to read Henry George).
Yes, 'Questioning one’s views as circumstances evolve can be a good thing'. And what do you do?
