Economics – The Dismal Science

Economics is called the dismal science since the topics it normally deals with recession and inflation are not pleasant, ergo, dismal. Economics is not really a science. A scientific method cannot be applied in this field since there is no way to formulate a controlled experiment. There are many variables that cannot be measured satisfactorily in order to establish cause and effect. Often, we hear conflicting opinions from so-called experts. How do we know who is right? Who do we believe? This brings to mind the old joke. How can you tell the difference between an economist and an econometrician? An econometrician uses computers to forecast incorrectly. At the very least, economists should be referring to empirical evidence to support their conclusions. Unfortunately, either we get essays by economists without supporting documentation, or we get erroneous conclusions based on supporting documentation. In my opinion, these are the real reasons economics is the dismal science.

An illustration of an erroneous conclusion based on supporting documentation is Paul Krugman’s column “Failure to Rise” in the February 13 New York Times. He discusses President Obama’s stimulus plan and chastises the republican response by referring to it as “deep voodoo”. He states, “In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.” It is remarkable that of all the possible shortcomings that Mr. Krugman could have referred to regarding President Bush’s policies, he chose to single out his tax cuts. There is ample empirical evidence that marginal tax cuts stimulate demand. (Refer to my blog dated February 11, where I quoted Professor Robert Barro from Harvard). Mr. Krugman makes no mention of President Bush’s excessive spending or the feckless SEC during his tenure that let financial companies increase leverage from the usual 13 to 1 to 33 to 1. Mr. Krugman will not discuss the ramifications of excessive spending since he believes that Obama’s $787 billion stimulus package is too timid. That’s right. He believes that America is settling for “half measures”.

As a guide to figuring out what we should do to stimulate our economy, many economists have studied the Japanese stimulus plan that was designed to combat their economic malaise during the decade of the 1990s. Economists tend to be divided into two camps. The first group concludes that the Japanese plan did not spend money fast enough and the total amount of money was inadequate. The second group believes that the spending was poorly directed and, therefore, a colossal waste. According to an article in the February 5 New York Times by Martin Fackler “Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits. More recently, the governing Liberal Democratic Party has increased spending again to revive the economy and the party’s own flagging popularity.” This article also pointed out that Japan accumulated the largest public debt in the industrialized world which totaled about 180% of its $5.5 trillion economy during nearly two decades. Despite this massive spending, many economists concluded that Japan’s economy finally started to see improvement only when it cleaned up its debt-ridden banking system, and there was an increase in its exports to China and the United States.

Will President Obama’s stimulus plan be effective? Is this spending plan targeted correctly? Are we spending too little? Are we spending too much, thereby, leaving an enormous tax burden for future generations? Economics is a dismal science. However, based on strong empirical evidence regarding the successful tax policies of President Kennedy, President Reagan and the 2003 tax plan of President George W. Bush, President Obama should have followed their plans. Instead, his plan provides one-time tax payments that will not have the lasting impact of marginal tax rate reductions for individuals and businesses that were so beneficial in improving the stock market and economic growth in the past.