“On two occasions I have been asked, ‘Pray, Mr. Babbage, if you put into the machine the wrong figures, will the right answers come out? …I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.’” – Charles Babbage, Passages from the Life of a Philosopher.
Crunching Data to Fix Prices
The central issue plaguing today’s economy is the blatant disregard by governments worldwide for the free exchange of goods, services, and private property rights. Whether it’s a quest for power and control or a misguided belief that they’re enhancing the economy, the motivations remain uncertain.
Nonetheless, the disarray spawned by modern economic policies is abundantly clear. Transactions are constantly disrupted by layers of governmental intervention affecting payment prices.
Taxes, tariffs, wage regulations, and subsidies all play a role in this disturbance. However, the primary disruptor is the central banks’ meddling with money and credit markets. Their incessant efforts to manage the economy by manipulating these factors distorts the pricing of everything else.
While U.S. government intervention is less rigid than a Soviet-style command system, both share a common theme: price manipulation is at their core.
The Soviets utilized Five-Year Plans and the Theory of Productive Forces to dictate everything from wheat planting to potato pricing. In contrast, the U.S. approach often operates behind the scenes. The Federal Reserve allows the government to avoid the complexities of adjusting individual prices, even though subsidies and appropriations still play a role.
In essence, the Federal Reserve—a non-elected board—analyzes economic data each month to determine the price of the economy’s most crucial commodity: money. This decision compels all other prices within the economy to shift and distort to accommodate the Fed’s interventions.
Guided by Garbage
The Fed operates under the principle that by artificially lowering the price of money, it can stimulate what it terms ‘aggregate demand.’ The theory posits that cheap credit will encourage individuals and businesses to borrow and spend more, thereby reviving the economy. This idea promises increased profits, job creation, and rising wages, leading to a fresh cycle of expansion. Sounds appealing, doesn’t it?
In reality, however, the outcomes can be devastating. While low credit costs may temporarily stimulate an economy with moderate debt, they become ineffective once total debt saturation is reached. At this point, the economy cannot sustain its debt burden, rendering further credit additions futile. Similar to over-fertilizing an already flourishing crop field, the benefits of additional credit diminish significantly, and in fact, often hinder future growth.
The aftermath of the Great Recession illustrates that excessive cheap credit does not fuel economic health, but rather inflates asset prices, leading to severe distortions. Simply put, addressing an issue of overwhelming debt by piling on more debt only exacerbates the problem.
Moreover, the methodology of using data to pinpoint alleged deficiencies in aggregate demand and excess supply is inherently flawed. Metrics like unemployment, GDP, and inflation are often manipulated to align with government expectations.
For every significant indicator, there are numerous footnotes and qualifiers. Hedonic price adjustments, price deflators, seasonal adjustments, and the disappearance of discouraged workers significantly influence the reported figures. So, what value do they hold?
Those familiar with computer programming understand the term “garbage in, garbage out.” It indicates that the quality of output is directly tied to the quality of input. If flawed data is fed into the system, the outputs will equally be flawed. The radical monetary policies enacted by the Fed, aimed at improving the economy, are fundamentally based on unreliable data.
Garbage In Garbage Out Economics
Savvy economists recognize that economics is not a fixed system to be engineered; it is a dynamic and evolving system that flourishes under certain conditions. These include private property rights, stable money supply, and minimal government interference, such as free trade, low taxation, and balanced budgets.
Therefore, the objective of economists should not be to intervene in the economy but rather to step back, reduce market barriers, and implement policies that facilitate efficient economic operation.
Undoubtedly, the current state of price fixing and “garbage in, garbage out” economics has reached a point of absurdity.
“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation,” states a recent FOMC statement.
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Indeed, it is pure garbage.
Sincerely,
MN Gordon
for Economic Prism
Return from Garbage In Garbage Out Economics to Economic Prism
