04 Dec The Dismal Science*

The Dismal Science

Economics has been called “the dismal science” for any number of good reasons. It was first referred to as “dismal’ in 1849 when Victorian philosopher Thomas Carlyle used the term derogatorily to refer – depending on your historical perspective – either to Thomas Malthus’ gloomy prediction that population would always grow faster than food sources, dooming humanity to poverty and hardship, or to John Stuart Mill’s liberalism in arguing that it was institutions and not race that would doom some nations to poverty and elevate others to wealth. Whichever historical version is correct, economists have been tarred for the past 170 years with the negative connotation of being “dismal scientists” – not real scientists at all, and most certainly not practitioners of “hard science.”

Hard science focuses its efforts on proving how the world works by using systematic study to ascertain structure and behavior through observation and experiment – the “scientific method.” Given the number of human variables that are virtually impossible to measure and by definition impact on the study of economics, economists have been labelled mere “social scientists” who necessarily cannot employ the methods used by true scientists such as physicists, biologists and chemists. After all, there are too many human beings doing too many uncontrollable, random things for economists to be able to draw universal rules from their actions and interactions. There are too many variables. There is no way to create control groups or to make side-by-side comparisons of different macroeconomic conduct. Economies change all the time and people react differently to each such change. Humans therefore provide a moving target with unpredictable outcomes (a subject touched upon in “Is this Time the Same” in the August 21^st TLR). Economists don’t have the ability to experiment with –that is, manipulate – human behavior under controlled economic conditions as practitioners of the other sciences are able to do. As a consequence, economics has been treated as a “soft” “social science” whose practitioners are unable to derive hard and fast rules of structure and behavior. At best, they can make only educated guesses. Economic practitioners therefore have been dismissed in much the same way as today’s meteorologists are dismissed. When Harry Truman complained about two-handed economists hedging their recommendations by advising “on the one hand” and “on the other hand,” everyone understood that he was referring to economics as an “art,” not a science. That’s was appropriate … at the time. Understanding complex human economic interactions takes an incredibly large number of observations over a lengthy time period to allow economists to formulate, test and modify hypotheses.

Perhaps there have been a sufficient number of such observations …, actual and computer-simulated. Perhaps that time therefore has come. The pleasant reality is that we are living in a unique period of human history in which there is a confluence of a late-stage agricultural revolution, a continuing industrial revolution, a more recent technological revolution, and a new biotechnological revolution. At the same time, there is unprecedented economic stability, what some have labeled secular stability. Perhaps that stability, that secular stability, is the new normal.

Fed Chairman Jerome Powell is preaching that gospel. As he said only last week, “Monetary policy is now well-positioned to support a strong labor market and return inflation decisively to the Fed’s 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} target. At this point in the long expansion, I see the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.” Which brings to mind a memorable line from the movie Groundhog Day: “What if there is no tomorrow? There wasn’t one today,” which might translate to: “What if there is no turn of the economic cycle? Shockingly, there hasn’t been one for more than 10 years.”

As discussed in the November 26^th TLR, “What if There were No More Recessions,” Central Bankers – the world’s leading economic practitioners with access to the world’s most powerful computers and to virtually limitless resources and data – may have taken the economic leap to hard science. How else to explain their enormous success in balancing America’s and the world’s coordinated recoveries from the Great Recession of 2008-09? A wealth of modern human experience coupled with the high-tech revolution may have allowed the world’s Central Bankers to uncover the Rosetta Stone of economic understanding. The fact is that Central Bankers shockingly have successfully managed the world’s largest economies over the past 10+ years. The accomplishments of “The Fabulous Federal Reserve” enumerated in the April 19^th TLR may describe how future historians will label early 21^st Century economists … and their economic policies. Economics no longer will be referred to as “the dismal science”; hereafter it may be known as “the bright science.”

But that is not what many economists in the private sector believe. They don’t accept the omniscience apparent wisdom accomplishments of Central Bankers …, or the computational power of their super-computers …, or the potential benefits that their access to data may create. Understandably so. After all, as TLR itself has said (for example, in “Managing the Economic Cycle (Parts 1 and 2)” in the May 8^th and May 10^th TLR), it’s difficult to accept that the economic cycle that has driven human behavior for the past two thousand years somehow may have been repealed. This time cannot really be different …, can it? (To the contrary are “Tales from the Economic Dark Side” in the October 11^th TLR and “Is This Time the Same?” in the August 21^st TLR.) As more than one commentator has pointed out, “Every bubble has a belief system, a unifying narrative. This time it’s that the central bankers are all powerful…. It’s this idea that there is a free lunch when it comes to printing money…. We can have our cake and eat it, too. We don’t have to feel the pain of a recession or the pain of a severe bear market. Anytime we get close to a downturn, central banks can just print money. Of course, we know that’s sheer nonsense. There is no free lunch. Polices like negative interest rates and Quantitative Easing are doing damage to the underlying economic engine. They misallocate capital, discourage thrift and promote fast money over slowly building wealth. At the end of the day, central banks are not all powerful. They are not immune to the laws of economics.”

We don’t really know, do we?

Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, has labeled those holding such views, and who have held them almost since the beginning of the 2008-09 Financial Crisis, as the Armageddonists.

There are any number of Armageddonists, many of whom are prominent economic forecasters and money managers with a history of success (see “Expiring Canaries” in the November 13^th TLR). Some are concerned that the world is hooked on debt and subject to liabilities that cannot possibly be repaid. They point to more than 10 years of easy money that has left the world with $250 trillion of government, corporate and household debt, almost three times global economic output and equal to ~$32,500 for every man, woman and child on Earth. They are concerned that there is more than $16 trillion of negative interest rate sovereign debt, enormous government deficits, unaffordable pension liabilities in the U.S., Japan and the EU, crippling student debt in America, and overleveraged emerging market companies. Others focus on geopolitical risks: the trade and capital wars between the U.S. and China (see “The Failure of American Foreign Policy” in the September 30^th TLR), the risk that the U.S. and China are Destined for War (see “Red Storm Rising” in the April 12^th TLR), American tariff barriers being erected against the EU, South America and Asia, the rise of populist movements creating instability throughout the EU, Africa and South America, Brexit, Russian, Venezuelan, North Korean and Iranian sanctions, an aggressive Turkey in an increasingly unstable Middle East, and an America retreating from post-WWII global leadership. And then there are those who focus on zombie companies in China, forest infernos in the Amazon, Southeast Asia and California, floods in Venice, sky-high mortgage debt in Australia, and the recent default scare in Argentina.

The Armageddonists all are correct in their concerns. What they point to indeed are realities. However, the world could grow out of each of these real and potential Armageddons. It would take gradual and consistent economic policies by the world’s leading economies … coupled with continued Central Bank management, evidence for the success of which already exists.

What is of more than passing interest is how entrenched each school of economic thinking is. Those who have been economic bulls have also been stock market bulls. They are not shaken by the Armageddonists’ realities. Those realities most certainly should give them pause. Those who have been Armageddonists have been economic bears … and they continue to be bears. They not only find no comfort in the continued growth of the world’s economies, they find such modest performance to be an indication of economic erosion. The world accordingly not only is polarized between political, religious, racial and ethnic adversaries, it’s also economically polarized. Few adherents of any view are prone to hearing, let alone adopting, the views of others. In remaining entrenched in their views, each side ignores the approach taken by John Maynard Keynes: When the facts change, I change my mind. What do you do, sir?

The world is undergoing unprecedented change. The economic incentives and beliefs that drove human society for millennia are rapidly changing. We are in uncharted territory. The possibilities are endless.

Finally (from a good friend)

*┬® Copyright 2019 by William Natbony. All rights reserved.