How Economists Are Still Getting It Wrong

I felt inspired to write a reaction to Krugman's piece in the New York Times Sunday Magazine about how economists "got it wrong" in predicting this current economic downturn. Krugman blames economists for thinking that financial markets always behave rationally and he calls for a return to a traditional Keynesian viewpoint, namely, that massive government spending can get us back to steady economic growth.

However, in the midst of his blah blah blah about the ideological divides in macroeconomics, he does reveal one thing about the economic perspective: THEY ARE STILL GETTING IT WRONG.

Both sides of the debate, whether neo-classical or neo-Keynsian, are so focused on growth that none of the economists are paying any attention to what we are producing. Economists only care that we are producing more stuff. It could be anything. Really. We don't care. As long as it makes GDP higher.

It could be green energy.

It could be digging a ditch and filling it in again.

It could be land mines (see below)*

It could be new financial derivatives that use life insurance policies (nothing like gambling on when grandpa is going to kick the bucket to advance the growth of GDP).

Whatever.

But that's just it.

Economists should care.

Huh?

Personal consumption now drives nearly 70% of our GDP. Economists don't want to tell consumers what to consumer because they believe that consumers have sovereignty over their own decisions and those decision will be rational (that is the whole point of this market thingy). But if highly educated financiers are prone to irrational behavior leading to epic swings in the market, why would everyone else be so cool, calm, and collected about consumerism.

We are not. We are easily influenced. We can be driven to purchase things we don't really need or maybe even want--yeah that's right, I am saying that sometimes people buy things that they don't really want (listen up economists--buyers remorse is real, just ask anyone).

So my real question is, what good is GDP growth if we just end up getting a whole bunch of stuff we don't want?

Or worse. A whole bunch of stuff that will make us worse off in the future. GDP can measure our size, but what we produce and consume tells a lot about our soul as a country. And as we have already seen, size does not protect us from failure; however, meeting our true needs as a society will certainly make us more stable. And advertisers in our free market, and the flocks of consumers that follow do not necessarily know what they need.

Economists are not paying attention to our needs. They assume they will be met as soon as GDP starts going up. And that is why they are still getting it wrong.




*We're number one in the world at producing weapons with $38 billion dollars in sales contracts just this past year. Yup, it's a real growth industry in an economic downturn--don't you think. And we are creaming the competition: #2 Italy at just over $3 billion in sales #3 Russion with the same. We have ten times that suckas! Wahoo! See (NYT article).