Look On the Bright Side of Strife

by Will Wilkinson on December 3, 2008

This morning on Marketplace, I crib from Casey Mulligan and argue that we shouldn’t let the meltdown of the financial sector trick us into thinking that the real economy and the recession is worse than it really is. Also, government shouldn’t make it worse.

Viewing 10 Comments

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    Mulligan is just wrong. The real and financial sectors are intimately related as almost every economist knows: Centainly both Keynes and Hayek would agree on this point.
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    Mario, OK. So how do you explain the looseness of correlation between the performance of the financial and non-financial sectors? Or is his data wrong?
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    The problem is that data are all too abundant. Any association must involve lags, identification of the relevant and only the relevant variables, etc. I am not a macroeconomist. So as a relative non expert I place a lot of reliance on theories that seem strong to me. Furthermore, when so wide a spectrum of economists agree on the interrelation between real and monetary-financial variables, I am loath to dump all that on the basis of Mulligan's "lack of association." This doesn't mean I am not willing to be convinced by data. But I'd have to see a lot more -- plus good theory -- to change my mind.
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    Mario, Fair enough. I think there's a number of measurement problems here. One is what we're going to count as "financial markets". The nature of the problem of coordinating people with money with people who can do the most with the money is pretty obvious, and if those coordination mechanisms melt down, then so does the real economy. But Wall Street, etc. is not the only source capital for productive economic projects (e.g., there a huge number of private businesses) and many of those alternative sources are unmeasured by data on the performance of financial markets. If, per impossible, we measured the performance of the financial sector maximally inclusively, I think we'd have to find a tight connection between real and financial variable. But I think we ought to be able to agree that a fixation on Wall Street misleads as to the prospects of the real economy.
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    I agree that the fixation on Wall St is all out of proportion. But I do think that financial markets' performance has a huge impact on the "real" economy, primarily through credit. I'm no expert, but it strikes me that the full effect of the credit crunch may not be showing up in the data yet: economic news from month to month still seems to be trending solids downwards. I just saw on Calculated Risk for example that the non-manufacturing sector of the economy contracted 7% in November. Ouch.

    Mulligan seems to point mostly towards historical trends of dissociation between Wall St and the rest of the economy, but the current crisis is substantially different - because of the credit effects - from most stock-market downturns or general recessions. Not by any means an expert, but that's my $0.02.
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    Have you seen how the 'real economy' is doing, lately? I'm in Orange County, CA, which so far has weathered the economic storm better than most places. What follows is anecdote, purely anecdote.

    I have a friend who's managing an office, and is hiring for low-level data entry jobs.

    It pays, as best I recall, $9.35 an hour.

    He's received multiple applications from people with MBAs.

    (He doesn't actually care about his job, and mainly likes having the office so he can run BitTorrent at work all day and run parties in the office park for his friends over the weekend, so I've convinced him to let me stand in for him during job interviews -- I want to talk to these people in person and figure out what on earth drives an MBA to apply for such a sad position. So I'll know more then.)

    Again, this is purely anecdotal, but it's in line with everything else I'm seeing, and given the scope and complexity of the topic involved here, anecdotes can be a useful check on faulty interpretations of theory and macroeconomic data.

    When you talk to ordinary people -- in Orange County, in Los Angeles, in Washington DC, the areas I have the most experience with -- you don't get the sense that things are going well. A huge number of people I know are under-employed, even if they're not unemployed. A recent grad of a 5-year B.A./M.A. program at Georgetown I know, a smart cookie by any means, is currently working as a secretary. Small business owners tell me they're having a harder time getting capital.

    Sometimes you have an obvious wind-sock that'll tell you which way the wind is blowing, and that works fine. But when the 'wind' is an incredibly complex economic system, and nobody can quite agree on what it does or doesn't encompass, and its inner workings are hardly transparent, sometimes there's value in simply wetting your finger and putting it in the air.
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    J:

    Your anecdote about MBA's doesn't surprise me. While an MBA from, say, Wharton, Stanford, or CEIBS may be a ticket to the Overclass, an MBA from University of Phoenix (or, even, <insert most state universities here> is hardly worth the paper it's printed on. Unlike an MD or a JD, the real value of the MBA is the network it gives you access to, not the professional qualifications it gives, which is why many universities have exploited it as a moneymaker, duping people into thinking it's an easier ticket to prosperity than a "real" professional degree.

    I prophecized a few months ago that we were going to soon enter the era of the unemployed MBA- I just didn't know how soon that era would begin!

    To this end, I'm not sure we're overeducating our population, but we're certainly mis-educating them. Too many liberal arts degrees; too many MBAs; not enough doctors, nurses, scientists, engineers, and technical workers. However, this was the natural consequence of our "paper economy"- when you could get as rich as Midas with an easy biz-ad degree, why do all the work of Medical School, or getting a PhD in Materials Science? Leave that to the nerds, go make deals!

    Re-instate the gold standard. Let's build real wealth. Fire all the paper-pushers, and tell the MBAs to go back and get real degrees.

    (Note: I say all this as a holder of a BA in Political Science, which I consider equally worthless and regrettable.)
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    Nick, I agree with about two-thirds of what you wrote (and am glad to know I hold non-useless degrees!), though I'd offer the following correctives:

    1) While there are a great many jobs that you can prep for in school, there are also a great many jobs that you can't -- and a *good* liberal arts degree (as opposed to something overly specific) can often help build up adaptable ways of thinking that'll enable you to work well in those situations. Something that we'd often consider a 'non-liberal arts degree', like economics, might not actually help at this level -- as undergrad economics education tends to be more theory-based and triumphal than quantitative. Whether or not these people would be better off simply forgoing the college degree (assuming they wouldn't be competing against stigma by doing so), throwing themselves into the working world, and learning by experience is another question entirely.

    2) You don't really 'tell someone to go back and get a real degree', they respond to incentives. Also, we don't really have a shortage of people who have 'real degrees' if we straighten out our immigration policy and radically expand H1B visas. Immigrants with degrees tend to make better Americans than the native-born do, anyhow.

    3) The MBAs in question are from California, where you have a number of reasonably good schools - the UCs, Claremont Colleges, etc., even the Cal States, that produce a big chunk of the state's middle class. They're not for nothing, these programs. They do get connections that are disproportionately California-focused (I went out of state for school, so I'd like to think I'm reasonably unbiased here), University of Phoenix this ain't.
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    You make good points. The reason people (myself included) get BA degrees is because they're a ticket-punching exercise that is required by most employers- a "proof of competence".

    "You don't really 'tell someone to go back and get a real degree', they respond to incentives."

    Not being able to get a job is an incentive. (Or, for instance, being offered an $80K starting salary rather than $20K)

    I agree with expanding H1B visas (really, why should Vancouver get all the talent?), but that doesn't change the fact that we shouldn't be wasting our best brains in non-productive and frivolous industries, given the challenges that we have to overcome in the next century.

    "They're not for nothing, these programs. They do get connections that are disproportionately California-focused (I went out of state for school, so I'd like to think I'm reasonably unbiased here), University of Phoenix this ain't."

    True enough, though it doesn't change the fact that an MBA is much more dependent upon contacts and school rep than other professionals. Sure, a degree from Columbia Medical School is superior to one from the University of South Dakota Medical School, but you're still a fully-trained medical doctor, capable of finding high-paid employment virtually anywhere. The USD MBA isn't in the same position. Likewise, someone from USD Law School can take the bar exam and set up shop anywhere- while the Harvard Law student has clear advantages, the USD JD isn't as out in the dark as the USD MBA would be.
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    Ideology, ideology, all is ideology. Here lies our modern day Manicheanism. When will we see the Confessions?
 

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