Noam Scheiber has a problem with Simon Johnson’s excellent Atlantic article comparing the current US economic crisis with the stuff he came up against in emerging markets while at the IMF (Baruch would have linked to it when he read it but everyone else had done so already). Johnson’s point is that the US agencies setting economic and fiscal policy and “Wall Street”, the US financial elites, are at least intertwined, if not one and the same. Sustainable recovery and prosperity can only come with a fully functioning banking system, but neither the banks nor the government are willing to take the radical steps necessary to get there, involving as it will the end of the cosy cohabitation. It follows that a very good way of avoiding Japan-like stagnation would be a more forcible separation. Here Noam sees “leaps”. He writes
The logical chain is typically something like: 1.) I’ve seen corrupt elites prevent governments from resolving financial crises in emerging markets. 2.) The finanical crisis dogging the United States shares some features with emerging-market crises–for example, overleveraged institutions enjoyed an outsize share of corporate profits prior to imploding. 3.) Ergo, it must be the case that corrupt elites are preventing the U.S. government from resolving the crisis
This line of argument is specious, says Noam, because
Logically, it’s like saying: 1.) Cancer patients don’t get well when they’re treated by witch doctors. 2.) The top oncologist at Mass General has lost a few patients lately–some of them inexplicably, under mysterious circumstances. 3.) Ergo, the top oncologist at Mass General was practicing witchcraft. Maybe, but it would be much more persuasive if you could establish causality.
That’s a reductio ad absurdiam too far. WTF does he mean “establish causality”? This is the nexus between politics and money: shady backroom deals, campaign contributions in brown envelopes, veiled ultimata, unspoken shared tenets between colleagues. Every party to every transaction in this nexus has gone out of their way to make it as impossible as er, possible to “establish causality”. It’s simply how these things are done, and I would say holds true in every country. Noam is asking for an impossible standard of proof, a level of immaculateness we don’t need to attain in order to responsibly act either in investing, economics and politics.
Look, there’s such a thing as pattern recognition. My boss can do it: he’s been analysing stocks for years, and when he picks one, he always comes up with these totally bogus reasons for buying it. Yet his picks tend to work, and mostly not for the reasons he said they would. He doesn’t always know why he likes these companies, here and now, but something in his lizard brain, trained over years in associating I don’t know what, charts and fundamentals or something, and subsequent outcomes, sees the setup and tells him it’s going up. Steven Colbert is right, up to a point: it’s the gut. My colleague’s only problem is he thinks too much, but that’s an aside which has nothing to do with the issue at hand.
We have more than enough examples of economic crisis in recent history to have an adequate “pattern database” for associating certain setups and outcomes. In agency theory, we have a conceptual underpinning of how organisational groups or elites can influence economic outcomes. And people at the IMF like Simon Johnson have a practical understanding and experience of dealing with these issues at a nuts and bolts level. Noam Scheiber’s objections here seem based less on objective scepticism, more on hope and this terrible, deadly sense of hubris and exceptionalism that has proven America’s fatal flaw time and again this decade.