Published January 20, 2014
At a party the other day, I walked right into the middle of a debate about the effectiveness of Ben Bernanke’s monetary policy. It must have been Karma’s payback for something terrible I’d done, but before my margarita and I knew it, we were drawn into the fray with no hope of escape.
Apparently – unbeknownst to me – everyone and his brother is studying whether the former Fed chairman’s quantitative easing experiment worked or not. That got me thinking, which I prefer not to do while drinking. It ruins the buzz. Once those little synapses start snapping, it’s hard to get them to stop.
Anyway, the conclusion I ultimately reached is that macroeconomists are more or less clueless. I’ll explain how I got there in a minute, but first, I should probably take a moment to state my qualifications for commenting on the subject. (Long, awkward silence.)
Now that that’s out of the way, I should also say that I mean no disrespect to Keynes, Friedman, and the great Ben Stein, who once said, “Greed is a basic part of animal nature. Being against it is like being against breathing or eating” and without whom the words “Bueller? … Bueller? … Bueller?” would have no meaning.
The problem with macroeconomics as a science is this: It is impossible to do a controlled experiment, ergo it’s impossible to draw any meaningful conclusions.
In other words, you can implement monetary policy and observe real world outcomes until the cows come home and still have no idea what effect, if any, a single factor such as monetary policy had on the outcome.
Take the Bernanke debate, for example. To avoid deflation and another great depression, the Federal Reserve attempted to stimulate the economy by buying trillions of dollars of mortgage-backed securities, treasury notes, and bank dept. That’s known as quantitative easing. No, I don’t know why they call it that. They just do.
Now everyone is arguing about whether it worked or not and if a different strategy might not have worked better. Fair enough. First let’s start with what we now know, six years after this great experiment began:
We know that we are not in a deflationary trend. We know that our economic growth and job market are extraordinarily weak. We know the Dow and S&P 500 are near record levels. We know that our federal deficit is also at a record level. And we know that, during that time, America’s debt-to-GDP ratio rose from eighteenth to fifth highest in the world.
What we don’t know is the effect the Fed’s monetary policy had on the recovery. Even if we assume that quantitative easing affected those outcomes, we don’t know to what extent. We don’t know if our recovery wouldn’t have been stronger if we hadn’t bailed out the banks and, instead of passing those pork-filled stimulus bills, stimulated the economy with real shovel-ready infrastructure jobs such as building smart highways and oil pipelines.
The truth is, when you’re experimenting with the economies of nations, you don’t get to have a control group. You don’t get to alter one variable while keeping everything else constant. And you don’t get to repeat the experiment under the same conditions while altering a different variable or the same one by a different amount.
Granted, there will always be another economic crisis, but its causes and effects won’t be the same. Besides, the world and its markets will have changed so drastically by then that comparisons won’t be effective enough to draw any meaningful conclusions.
Finally, there’s one last data-point I didn’t mention. American companies are sitting on record piles of cash. Banks are still not lending, and small businesses are afraid to take risks. Why? Because CEOs, CFOs, and business leaders tend to be a pretty smart, savvy group. And, unlike macroeconomists, they won’t bet the farm on theories that can’t be proven.
The truth is, after all this experimentation with monetary policy, we don’t know what effect it really had and whether we haven’t dug ourselves a bigger hole than we were in before we started. We don’t know because we can’t know. And I’m not the only one who knows that. The smartest business minds in our nation know it too. And they’re as uncertain about America’s future as they’ve ever been.