2+2=4, But So Do a Lot of Things

During the past generation or so, we have mistakenly become convinced that economics is a mathematical science. We followed the “quant”

school of financial analysis off a cliff. Their mathematics proved the soundness of MBS and CDO’s by assuming a rate of mortgage default equal to the rate of corporate bond default. Hence, mortgages without a dime of equity were shown to be virtually risk-free. The math was correct. The economics was bogus.

Similarly, we hear that the national economy should run on the simple math

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of a private household. We reduce the national debt as if it was the family credit card. As with MBS, the problem isn’t with

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the math, but with the underlying analogy.

Here are some ways in which the United States differs from an ordinary household:

Immortality, a claim upon continental, global and even extraterrestrial resources, the prospect of

vast future fruits of public development and private invention, the ability to increase GDP by accepting new homemade viagra alternative immigrants, the right to collect taxes, to make law and adjudicate disputes, police power, sovereign credit, global preeminence in culture, finance and arms, the ability to extend our debts, to print currency and insist upon its legal status for all domestic purposes, to exchange that currency among other nations eager to take it, and the good fortune that people around the world will pay us to obtain the money we print.

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How does the family credit card enter into the equation?

In the tree of knowledge, economics does not branch from mathematics, but from politics. “2 + 2 = 4” is a mathematical proposition. The corresponding economic proposition is to discover the implication of 4. Is it 2+2, 5-1, 1×4, 2^2, 16/4, 4.1 rounded, (3X8)/6, (1/25)x100, or so on, out to the horizon. Four is not an answer, but a set of choices. It is helpful to remember that the father of economics, Adam Smith, was a moral philosopher. Economics is the study of choices and how we bear them.

So when we hear a drumbeat from advocates of austerity viagra 150 mg that the Fed cannot afford quantitative easing (i.e., buying bonds), and when Bill Gross, the world’s

premier bond expert, joins that circle, we should think about what they want and why they want it. We can be too easily dazzled by the math, and forget that the math is slave to the policy preference canadian pharmacy diazepam (see Excel error of Reinhart & Rogoff). For Gross, Ben Bernanke’s idea that low cost of capital should be used to increase demand for labor no prescription viagra forebodes the one true universal evil — inflation. But inflation isn’t such an evil to borrowers or

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to workers, and it isn’t evil to a company like LANDCO whose pursuit of asset resolution is helped by an expanding economy.

LANDCO’s interests are aligned with Fed policy to discourage the hoarding of capital, to urge it off the sidelines and back into the economy, spurring investment, expanding infrastructure, boosting employment and stimulating cialis and viagra all the fiscal good that comes of those things. Our rational self-interest weighs toward growth, against unemployment and deflation. Bond holders prefer a different choice, a monetary policy so inclined against inflation that it would quash the economy with austerity.

When Bill Gross argues that low interest rates discourage investment, we find that he puts the case exactly backward. Low interest is the effect, and aversion to investment (symptomized by a slow economy, low aggregate demand, high unemployment) is the cause. If

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the logic is flawed, beware the math.

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