Macroeconomics is bullshit.

by Mark on October 18, 2014 · 0 comments

Macroeconomic issues dominate the news and political discourse, but it is all bullshit. What is macroeconomics? It is the study of an economic system as a whole. This is in contrast to microeconomics, which studies individual components of the economy, such as an individual, a household, or a business.

Macroeconomics essentially tries to understand the economy as a black box. It ignores the underlying motivations of the billions of individuals that make up the economy. Important details get lost. It tries to model an entire economy with equations such as aggregate demand, which is a measure of the size of the economy:

Aggregate Demand = Consumption + Investment + Government Spending + (Exports – Imports)

Want to grow the economy? Simple! Just have the government spend more! It’s right in the equation! Of course this is bullshit. Before the government spends money, it HAS to take money from someone through taxation or borrowing (or it can print money, which effectively takes money through inflation). Money taken from others obviously cannot be spent or invested by them, so we are essentially substituting government spending for private spending.

The fact is that no one – not even an enlightened bureaucrat (*cough*) – is going to be more careful about spending your money than you will. Want to grow the economy? Then let people keep their money and spend or invest it themselves.

“Jobs Saved” Bullshit

A few years ago, President Obama and other politicians trumpeted the millions of “jobs saved” by the American Recovery and Reinvestment Act of 2009 (AKA ARRA, or the “stimulus package”). Do you know how they calculated the jobs that were supposedly saved?

First, they started by ASSUMING that the so-called “stimulus” actually stimulated economic growth! You read that right. There is no way to know what economic growth would have been without ARRA, so they just assumed that it MUST have created growth!

Even before the law was passed, they had pulled a “Keynesian multiplier” out of the air that would determine how much growth all this wonderful new government spending would create. For example, if GDP ended up being $15 trillion after the “stimulus,” then they would just assume that GDP would have been $14.5 trillion without the “stimulus” based on their predetermined impact of government spending on economic growth.

From this assumption about the additional GDP caused by the “stimulus,” they then made another assumption about how many additional jobs that the additional GDP required. This is how they determined the “jobs saved.” It is complete and utter bullshit.

Microeconomics saves the day.

Macroeconomics is bullshit, but luckily microeconomics is still very helpful. This is because microeconomics is concerned with how individuals and entities respond to incentives, including the incentives created by government policies.

Think, for example, about how investors make investment decisions. Investors require a higher rate of return to compensate them for taking greater risks. For any given level of risk, investors will require a certain prospective rate of return before they will invest. If an investment opportunity does not provide an adequate rate of return, then the investor will not invest (or they will sell or liquidate their investment if they have already invested).

A businessman might start or expand a business when he believes that the business will earn a 20% return on investment, but he might pass on the investment if the return is expected to be only 15%. The 15% return is simply not a big enough reward to justify the risk.

This means that any economic policy that reduces the prospective rate of return on a business (such as higher taxes or increased regulation) will necessarily reduce the number of businesses started and expanded, as well as total capital investment. Each time an economic policy reduces the rate of return, more investors decide the rate of return does not justify the risk.

With fewer businesses started and expanded and with less capital investment, you can then guess that there would be lower growth, fewer jobs created, and lower wages. In fact, research bears this out. Studies show that taxes on capital (especially the corporate income tax) have a strong negative impact on economic growth, and the corporate income tax is borne almost entirely by workers in the form of lower wages. These results are exactly what we would expect from a microeconomics perspective.

Activate your bullshit detector.

Begin to pay attention to anyone who speaks in macroeconomic generalities rather than microeconomic specifics. It’s all bullshit.

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