Thursday, May 22, 2014

Irrationality in economics and elsewhere

"It is a telling commentary on economic orthodoxy that it needed a whole subdiscipline - behavioral economics - and a raft of lab experiments to recognize that humans are often not rational beings." - Kaushik Basu of the World Bank and Columbia University, "The Ponzi Economy" Scientific American June 2014

That quote is a good introduction to this characterization by Paul Krugman of the archetypal cases of his Very Serious People, Erskine Bowles and Alan Simpson (Extraordinary Elite Delusions and the Madness of Commissions 05/21/2014):

Think about what happened to economic policy in the aftermath of the Great Recession. America was (and still is) suffering from huge unemployment and depressed spending, which wasn’t just causing great current hardship but undermining our long-run prospects by exiling productive workers from the labor force and causing us to forgo much-needed investment. And faced with this disastrous current reality, our bipartisan wise men decided that the crucial challenge was ... cutting entitlements [Social Security, Medicare, Medicaid, veterans benefits].

This didn't just totally misjudge the nation’s needs, it was also strangely incoherent even on its own terms. Yes, an aging population and rising health costs may eventually force cuts in benefits, although that's far less certain than Beltway orthodoxy would have you believe. But why, exactly, is it urgent to deal with the prospect of possible future benefit cuts by, um, cutting future benefits?

And for what it's worth, Bowles and especially Simpson are actually fairly ridiculous figures. If this is elite wisdom ...

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