Sunday, June 10, 2012

Why so many Economists remain Clueless

From a good summary of what ails Detroit:
The third lesson is moral. Detroit’s institutions have long been marked by corruption, venality, and self-serving. Healthy societies have high levels of trust. Who trusts Detroit? This is not angels-dancing-on-the-head-of-a-pin stuff. People do not invest in firms, industries, cities, or countries they do not trust. Corruption makes people poor.
(emphasis added)

Let's highlight that a little more -- People do not invest in firms, industries, cities, or countries they do not trust. Corruption makes people poor.

We have a tendency sometimes to view corruption too narrowly.  We see it as nearly synonymous with criminality.  It doesn't have to be.  A journalist who proclaims he is non-partisan is corrupt if he actually works to advance a political party or cause.  A politician is corrupt, not just when he takes bribes or sells government action in exchange for political power, but when he lies to the voters and misleads them as to his intentions or the impacts of his policies. That kind of corruption also makes us poor.

Note further, it doesn't even require corruption to create a loss of trust.  Investors will not invest and customers will not buy if they do not trust a company to produce safe products, even when the company is honestly trying to do its best.  Incompetence can also produce a loss of trust.  Of course, corruption and incompetence is the ultimate double whammy.

And this brings us to the United States in 2012 -- at least half the country has lost trust in the government and the leadership thereof.  Some are convinced that Obama is corrupt.  Others are convinced he's incompetent.  Some, both.  Either way, large numbers of investors, businesses, customers, and citizens have lost trust.  They don't feel that the nation is on the right track and they don't believe that it can get back on the right track as long as Obama is president.  People do not invest in ... countries they do not trust.

This is why the economic models don't work.  A fundamental assumption that underlies all the econometrics is that people will use available cash in a normal fashion, invest in a normal fashion, hire workers in a normal fashion, respond to incentives in a normal fashion.  But normal, in America, implies a certain level of trust that our government leaders aren't going to screw up so badly that they bankrupts us, our business, our government.  We no longer have that 'normal' trust.

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