Tuesday, November 2, 2010

Economists are not smart….

That is how Mr.Rao writes in today’s IE and it’s not entirely new in economics. But some key paras are worth to remember, in coming years (at least one can see how he is smart in believing “astrology”!!):

  • Economists can explain some matters. If you invest in education, healthcare and roads, then over time, your society is likely to become wealthy; if wages for chartered accountants go up, more young people will try to enter that profession; if you introduce rent control for housing, people will stop renting out and building in order to rent out — so many more propositions. But despite immense amounts of work — theoretical and empirical, good and bad — they just do not understand the workings of business cycles. Despite their sketchy knowledge, they are required not only to pretend to know more, but to prescribe actions which their political masters want to use in order to “control” the effects of business cycles.

  • When the eminent economist Raghuram Rajan was in India recently, yours truly asked him: why is the economy taking so long to respond to the stimulus? With his characteristic candour, he admitted that economists simply did not know why! What he does know and has brilliantly catalogued in his new book is that the unintended consequence of a prolonged low interest rate environment is that the financial sector indulges in excessive risk-taking and asset bubbles get created.

  • This time round, Ben Bernanke has taken interest rates virtually down to zero and he has kept them there so long that collectively markets may have forgotten that there is any time value for money at all!

  • As we lurch from one question to another, one thing is clear — economists do not understand business cycles and looking to them for so-called policy prescriptions to control or reduce the amplitudes of the swings simply leads us from one problem to another. The recipes of the past do not work now — a tragic reconfirmation of the Rational Expectations hypothesis. As an optimist and a believer in astrology, I, for one, am betting that Obama has a good horoscope and so irrespective of what he or Bernanke or others do or do not do, by 2012, this wretched business cycle will end. US unemployment will be down and Obama will be re-elected!

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