The economic and market commentary dominating the financial press is often written in tones of linearity and cause-and-effect certainty — sometimes to the point of epistemic arrogance. Rarely is this analysis of economic data and macroeconomic forecasts couched in terms of their inherent uncertainty.
My ruminating on this theory lacked coherence until my recent reading of Alan Blinder’s newly published book, “A Monetary and Fiscal History of the United States 1961-2021.”
Professor Blinder has a unique perspective as an economics professor at Princeton, a former vice chair of the Federal Reserve Board, and a former member of the President’s Council of Economic Advisors.
The common thread running through his book is the integration of politics and fiscal policy with economics. What really grabbed me was how significantly economic, political, and fiscal policy thinking, philosophy, and dogma ebbed and flowed over time — and how influential a torchbearer can be.
Economic Theory or Policy May Not Have Time to Work
Strategic economic policy is not a matter of turning a switch off and on. The desired effect often can take years. An example would be a policy strategy that provides targeted tax credits to companies that hire new employees. The desired economic impact will largely depend on when and to what extent businesses choose to act and hire new employees. To evaluate its effectiveness, the policy must have time to work its way through the economic system and influence companies’ hiring decisions. Now, think about all that could happen within a few years after a new tax credit becomes law that could change or eliminate the policy – or influence hiring decisions:
- A new Congress with a new economic agenda repeals the tax credit
- A new president with a new agenda alters the job creation policy
- The Treasury Department issues tax credit regulations that are restrictive
- The economy, for other reasons, enters a recession and companies don’t hire
The integration of economic strategy, tax stimulus policy and changes in the political winds can work to alter or eliminate the policy. If so, was the economic strategy ineffective? Flawed? Or did it simply not have enough time to bear fruit? Perhaps it is impossible to know. In any event, the reliability of the strategy becomes unknown; maybe it should have been considered unknowable to begin with. That’s the point.
The Power of the Torchbearer
Investopedia defines economics this way:
“Economics is a social science that focuses on the production, distribution, and consumption of goods and services, and analyzes the choices that individuals, businesses, governments, and nations make to allocate resources.”
Think about the development of an economic, tax, budget, or social policy. It usually includes debates about philosophy, theory, political implications, modeling, and implementation – and trade-offs, which is where choices enter the picture. The give-and-take of policy development includes many choices, including those that are politically driven. Those choices can be significantly influenced by “torchbearers.”
Torchbearers are leaders, well-known experts, and power brokers who have the ability to persuade, influence, and maybe even cajole. Some examples would be presidents, Federal Reserve chairs, Congress members, economics professors, and political commentators.
It is not enough to be a president or a senator. One must have the unique skill to persuade, which can be dependent on the mood of the populace. Think about how “persuade” and “mood” are more in the realm of art than science, more emotion than math.
Now, think about how a persuasive torchbearer can sometimes convince that one senator to cast a tie-breaking vote, how the White House economic advisor can convince the president or how the Nobel Prize winner in an Ivy League economics department can influence policy.
The torchbearer, sometimes one person, can have a remarkable influence on the direction of social, tax, fiscal and economic policy. They are all integrated).
The leanings of Congress can change fairly quickly. Changes in the viewpoints of caucuses on social programs, deficit discipline, tax fairness, national security, education, trade, and economic performance can impact — maybe via a domino effect — the longevity or success of an economic policy or strategy. These changes, and thus the voting of Congress, are probably not capable of being envisioned or reliably modeled.
Even when economic historians evaluate the efficacy of a policy or strategy, it is difficult — if not impossible — to disaggregate all the forces that played a role in its longevity and effectiveness.
What Can Be Difficult to Model
Economic forecasts are based on models of how the economy is supposed to work – or at least how it is expected to work. Modeling is extraordinarily complicated, and economists have different theories and methodologies. It’s complicated not just because it deals with the future – but also because it deals with people’s choices. These are not just consumer decisions about what to buy or corporate choices about whether to expand. Choices inherently are partly driven by emotion and ever-changing circumstances.
The impact and timing of the relative prominence of economically sensitive issues and policies further complicate economic forecasts. They shift over time, and torchbearers can influence their relative importance, such as:
- Degree of government intervention in economic stimulus
- Government intervention in business, including regulations
- Isolationism, including military and trade
- Unions, including their influence on compensation
- Healthcare affordability, including drug prices
- Computer chips, source of and if considered a matter of national security
- Federal Reserve influence, e.g., money supply
- Degree of military superiority
- Tax, including fairness philosophy, wealth redistribution, and incentivizing.
The political winds are always changing, geopolitics inevitably change, the mood of the populace eventually changes, and the relative influence of torchbearers comes and goes. All of that, together with the above influencers, make economic modeling and forecasting extraordinarily difficult.
Some of the issues and related policies that Professor Blinder wrote about have changed a lot over the last 60 years due to all these influences — and likely will continue to change — were:
- Keynesian economics
- Fiscal policy vs. monetary policy
- National debt and deficit
- Tax policy
Just Part of Our Democracy
As defined earlier, economics is a social science that analyzes the choices that individuals, businesses, governments, and nations make to allocate resources. In one respect, “choice” is the connective tissue of democracy. Professor Blinder’s last word will be my last word:
“Ideas, events, and policy decisions interact, with causation running in every direction. Certainly, in the case of fiscal policy and sometimes in the case of monetary policy, politics also plays an important role… Looking back over sixty years of fiscal history, some of America’s major decisions look wise, others not so much. But regardless, the big decisions have always been made by politicians. That has not changed and probably never will. We call it democracy.”
