Friday, December 5, 2008

Brad DeLong doesn't get how to do the structural side?
Tom Smith

And here you have it, straight from Professor DeLong:

The Obama administration is going to be rebuilding and reconstructing five major sectors of the American t [economy]. It has no choice--there is no other option. It has to remake:

  • Autos
  • Housing finance
  • High finance
  • Energy
  • And the big one—health care

On what principles and through what procedures is this extraordinary exercise in structural economic reform policy going to be accomplished? I get how to do the macroeconomics of Obama administration economic policy. I don’t get how to do the structural side

The structural side, for you non-macroeconomists, is the part of the project that involves actually doing something.  So if you are talking about going to Mars for example, the macroeconomics would be "we need a vehicle to take us to Mars."  The structural part would be such matters as, figuring out whether a rocket could get you there, how you build a rocket, finding out who could build it, all the way down to the effect of wind sheer stress on the little bolts that hold the fueling hoses to the gantry on their way up to the second stage fuel tanks, and whether the expense of the bigger bolts is justified.  That is, in short, finding out if it is possible, in the sense of actually being able to do it, in the sense of like, actually doing it.  But don't worry, the macroeconomists have figured out we need a vehicle.  It is very good, essential really, to get that settled.  And we know from that classic Towards a Theory of Vehicles that a vehicle is a thing that takes you from point A to point B.  This much is uncontroversial.

So all we have to do is carry out an "extraordinary exercise of structural reform" on high finance, and then housing finance, and then the energy sector and of course, last but not least the health care sector, which is by itself what, 16 percent of GDP?  Oh yes, I almost forgot, the auto manufacturing sector.  Did we leave anything out?  Anybody have any ideas how to do this?  Anybody?  Come on, you've done the reading haven't you?  Isn't there somebody here who knows the answers?

My guess is we shall have to do with policies, and that those policies shall have to be imposed by agents working with firms.  Yes, that should do it.  Of course, we should take incentives into account.  They're important.  And how should we decide these policies?  Perhaps with procedures?  Administrative agencies?  Rule makings?  Comment periods?  Motions for en banc review of a final judgment issued by the US Court of Appeals for the DC Circuit?  Anyway, this is all just implementation.  Not to worry.  Time to get to work!

Lest my irony be lost on new readers, let me come out and say, it is not possible for our government or any government this side of the pearly gates to "structually reform" these sectors of the economy.  It is possible for them to try and to spend lots of money doing it. The reason Professor DeLong does not know how to do it is that nobody knows how to do it.  The reason nobody knows how to do it is that it is impossible to do.  As the Hayek despised by these guys has noted, you could spend your whole life studying how bread gets to the market, and still not really understand it.  But somebody is supposed to understand how to "restructure" the US auto industry so as to make it, uh, profitable?  Do we still care about profits, or is that something we need to reform away from as well?  We can let people try to do it, but the idea that Congress or some federal body can just decree there is going to be a profitable American auto industry and  that it is going to make cars people want to buy and it can make money selling to them, is risible.  We are very lucky if we can figure out after the fact what has happened.  The idea that we can just decide what we want to happen and then make it happen, on the scale of whole industries and economies, is sheer fantasy.

One just has to hope the Obama economic team is not so clueless, that they are not so far up in macrovariable land.  If they are, we are in even more trouble than we know already.  Obama's a lawyer, not an economist, so perhaps there's hope.  Imagine saying that, but there it is.

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Tom Smith


To restructure Autos you need to be sure of your steel supply, so restructure the iron and steel industry too. That'll mean restructuring coking coal. Of course, that has an impact on steam coal, so you may wish to restructure electricity generation. And so it goes. Good luck. We did this in Britain under the 1945 socialist government and it was a bloody disaster.

Posted by: dearieme | Dec 5, 2008 10:23:15 AM

I admit, I'm an economics student, and this whole crisis and all the idiot responses I've heard from macro-economists have put me off macroeconomics as a system of study, that's for sure.

Posted by: Elena | Dec 5, 2008 11:54:42 AM

I remember Britain restructuring around Leyland in the seventies and eighties to save their auto industry. They eventually lost Leyland along with billions of pounds of capital. That capital might have been used productively elswhere in the economy. Buying jobs in autos cost jobs in the economy at large.

Posted by: Fred | Dec 5, 2008 11:56:50 AM

Elena-- don't be put off economics as such. It's just that part of the macro field that thinks they can successfully plan economies. I read PPE at Oxford in 1979-81, when Thatcher and Hayek were something only some students could like, and I thought economics was just dreadful and made no sense. It was all this British civil service planning nonsense. Then I was exposed to more Chicago style thinking at Yale law school, of all places. That was a completely different story. So many things started to makes sense. So it's not economics, it's just some of the economists! Besides we are going to need all the good economists we can get to clean up the mess the bad ones will probably make over the next few years.

Posted by: Tom Smith | Dec 5, 2008 12:18:28 PM

OK, here's a sincere (but naive) attempt to toss SOMETHING into the ring. Obama is friends with Google. Maybe Google can make some sort of giant social networking marketplace where unemployed people and people with needs can contact each other, and form connections (using Google search algorithms) to exchange money for work.

Sort of like e-Bay, but instead of selling products you would have workers auctioning skills, and investors offering investment capital, and consumers bidding to satisfy their needs.

So when the 5 initiatives above all collapse, a new economy without all the old cruft can be built. Maybe every person in the whole country can work as an independent contractor.

Posted by: Unsquander | Dec 5, 2008 5:55:25 PM