Good quote from John Mauldin:
Human beings seek certainty. We actually get an endorphin rush when we get an explanation for something we do not understand. Whether it’s religion, politics, philosophy, a crossword puzzle, or economics, we want to be able to come to a definite conclusion that we think is correct. There is psychological rest in certainty, along with the physiological rewards). Models, even flawed ones, give us the illusion of certainty. We need to be careful of what illusions we cling to.
Economics becomes quite a problematic discipline when it tries to create mathematical models that are supposed to guide political philosophy and praxis. So many assumptions have to be made to get to a result, that basing policy on a simplistic model is dangerous.
One size does not fit all, and past performance really does not indicate future results. The entire economic environment must be taken into consideration. We cannot extrapolate simplistically from the Reagan or Clinton years and say, “If we just reverted to those policies, we could get the same results.” Only if you could change all the other variables that are beyond the control of the government!
Models can be useful, but they are not exact. They give us a sense of direction. Using them is more like navigating by the North Star than using a GPS system. The more variables that enter into the actual situation, the less likely we are to be able to come up with that one “easy-button” policy prescription.
In the end, the only real tool we are left with is common sense, guided by our models and an appreciation of history. We “know” that, in general, the lower the price the higher the demand. If you tax something, you will get less of it.
We get that we can’t let financial institutions run amok. There have to be some protections for the public. Debt is useful until it becomes a burden, and we have to be careful in how we use it. We can come up with dozens of such truisms, based on common-sense wisdom.
We elect politicians and then expect that somehow the world will improve in accordance with their promises. What we really need to do is try to see what general direction they are leading us in and base our votes and our personal decisions on whether we like that direction. But to trust an economist, or even worse a politician, with a model? That can be dangerous.
Let’s close with a quote from my favorite central banker, Richard Fisher, who is president of the Dallas Federal Reserve.
“It will come as no surprise to those who know me that I did not argue in favor of additional monetary accommodation during our meetings last week. I have repeatedly made it clear, in internal FOMC deliberations and in public speeches, that I believe that with each program we undertake to venture further in that direction, we are sailing deeper into uncharted waters. We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which w e now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before.”
We indeed have not been on this cruise before as a nation and as a world. We know what happens when one country or another runs up against the limits of borrowing power. But when the bulk of the developed world does? Another cruise, indeed.