Wrong-headed thinking

 

Wrong-headed thinking arises as the economy decays, as things more and more turn out worse than expected. The bad economy changes our approach to problem-solving. We come to position ourselves for the greatest advantage out of economic necessity, even if other people are hurt by it. More and more we think micro ("what's best for me") instead of macro ("what's best for us"). It puts neighbors at odds. And it is a source of polarization.

From mine of 7 Feb 2022 (revised)

Please note that by a "bad economy" I don't mean just a recession. Recessions only last a year or so. That isn't long enough to change our personalities and remodel our brains. However, when I google long-term economic decline, most of the results focus on recession, and only a few on depression. Finally, after three sittings, I found one search result that actually considers the long-term decline of growth.

That one hit is "Recessions are difficult, but stagnant growth could prove more challenging, Stanford economist warns", by Melissa De Witte in the Stanford News, dated 7 December 2022. The article is an interview with John Cochrane. You may know Cochrane from The Grumpy Economist blog.

From De Witte's article:

While recessions are difficult, they are temporary, says Stanford economist John Cochrane. What is more painful is long-term economic slowdown and stagnation.

My respect for Cochrane grew three sizes that day. I went back and read "Just how bad is the economy?", an old blog post of his from 2012. Cochrane says "long-run growth matters more than anything else." But, based on estimates of Potential GDP, he added: "All we can hope for is a modest recovery, and then anemic, sclerotic growth forever after that... We seem stuck at 2.4% growth forever."

Cochrane has a solution in mind. He does some simple growth accounting:

GDP = Productivity x workers

And he says "Rising productivity is the core of a 'growth' agenda as economists understand the word."

Concluding the post, Cochrane writes:

What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We're stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out.

He doesn't believe printing money will do the trick. He wants more pro-growth policy.

Funny thing, though. The same sort of slowdown happened in the 1970s: a slowdown of growth along with a decline in productivity. The economist Scott Sumner wrote about it. Sumner said:

The neoliberal revolution occurred precisely because growth was slowing almost everywhere in the 1970s and 1980s, and after 1980 growth slowed the most in those countries that reformed the least.

To boost economic growth, John Cochrane wants another neoliberal revolution. I have a problem with Cochrane's solution: It didn't work the last time we tried it. Scott Sumner explains:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

Sumner is saying that economic growth remained slow despite the neoliberal reforms. They only helped a little, he says. I would say it this way: Those reforms did not solve the problem. But Cochrane, who says long-run growth matters more than anything else, only wants more neoliberal reform. Cochrane wants pro-growth policy from the start. He doesn't want to think any more about it.

The problem I have with Cochrane is that his thinking is exactly the opposite of the thinking that is needed.  

Cochrane's plan is based on pre-existing knowledge. How did he put it? "Rising productivity is the core of a 'growth' agenda as economists understand the word." But that plan didn't work back in the 1980s, so we should not expect it to work now. What we must do is re-think the problem: Why is growth slow? If we don't ask the question and come up with a better answer, then we are only fighting the last war -- and we didn't win that time, either: "I am not denying that growth in US living standards slowed after 1973".

And so I say again:

There is a lot of that these days, a lot of evaluating the expected result and basing one's view on the expected outcome. This is exactly the opposite of the thinking we need. We need first to understand problems in terms of their causes, not in terms of the imagined result of some potential solution. The time for thinking about solutions is only after we grasp the causes.