The Dismal Science…..

Well this is quite a change – over the years hardly anybody has asked me questions about the economy or economics; not so much as one question about the Laffer Curve – hard to believe. Not only is economics today’s coffee topic, some people are actually interested. One wise guy from the end of the table is declaring the profession worthless, and this guy was a philosophy major of all things. Talk about fishing with no bait……..

Half a lifetime ago when I was an economics major at the U of M, I had an econ professor named “Crazy Ed” Coen. He got his nickname because he had kind of a wild, Albert Einstein look to him. A frequent occurrence in his class would be this: Crazy Ed would start at one end of a series of blackboards writing some completely confusing math theorem to prove the economic theory of the day. After 45 minutes and several chalk boards, Ed would frequently come up with the wrong answer. Completely covered in chalk dust, he would turn and face his class for the second time of the day and ask “Does anybody know what the #%*@ is going on here?” The answer for nearly all of these future economists was a resounding I-have-no-idea. Of course there was always some hotshot in the front row that would eagerly point out where he went wrong (their initials were never M.S. if you get my drift), and Crazy Ed would live to teach another day.

Little did I know that his question would be so pertinent to economics a mere 28 years later. Does anybody really know what is going on here? The economics part is not easy to nail down – it’s really a messy social science much closer to sociology than people might think. The US and global economy is so intricate, complicated, powerful and just so darn big that it really is not possible to come up with neat and tidy conclusions. The simplest explanation is that econ is the study of how people react and make decisions given their economic circumstances both at the individual level (microeconomics) and at the aggregate level (macroeconomics). (Shoot, you are not supposed to use the word you are defining in the definition of something). OK, I better get to the point because the philosophy major just hung up his cup and is heading for the door.

Here’s where I am going with this: analyzing the current economy is as much about psychology as it is about numbers. Consumers’ fears become self-fulfilling prophecies as they stop buying things or making investments which, in turn, reduces demand for goods and services which lowers manufacturing and other economic activity which results in layoffs which makes consumers skittish and reluctant to spend money and you can see where this is going……

Let’s take the housing bubble. It’s clear that in many parts of the country, property values were vastly inflated before the recent downturn. Well, the “correction” as economists call it, has pretty much taken place. The excesses have been wrung out of the system and housing is now more accurately priced according to the fundamentals of supply and demand. Why no rebound in real estate activity? Media reports would lead you to believe that it is because there are not sufficient sources of mortgage credit. Coming from somebody who works in this business I clearly disagree – mortgage money is available and the credit policies are reasonable for most people. I think the real answer is people just don’t feel confident enough to make those kinds of financial decisions yet. When enough people feel confident in their lives, jobs, etc., their actions (combined with others) will finally get the economy going again, but not until. Studying that sounds like psychology to me which may have been useful in figuring out Crazy Ed Coen.