To my fellow lab rats

The United States has intertwined two enormous experiments with each other: the auto-oriented development pattern and Keynesian demand-driven economics. Despite the fact that the two experiments are inseparable, the proponents of one are quite often the opponents of the other. This is an incoherence that is hard to reconcile.

Tuesday night at 6PM at the Sunshine Kitchen & Moonshine Lounge in Brainerd, MN, we are kicking off our first Operation More George project with the A Better Brainerd initiative. If you are in Central Minnesota and want to be involved in a series of low-cost, tactical interventions to bring some hope back to a neglected neighborhood, join us for that big event. If you are interested in starting your own local initiative or connecting your current team to our efforts so we can all learn from and help each other, send me an email so we can get you on our Operation More George list. And if you would like to support our efforts, we would be very grateful to accept your contribution.

This past week there was a development in the world of economics politics that, if I'm going to be honest with myself, put me in a foul mood for much of the past few days, despite my best attempts at avoiding it. The kicker came this weekend when my wife -- MY WIFE -- quoted Paul Krugman's scoff in a passing conversation. Hard to ignore that one. (And for the record, my wife is one of the smartest and most well-informed people I know, and since she doesn't read my blog I'm not pandering just demonstrating the depth of my torment.)

So what is this development? First some background.

I've often quoted and referred to a seminal work by two Harvard economists, Carmen Reinhart and Kenneth Rogoff, titled This Time is Different: Eight Centuries of Financial Folly. In fact, the book sits within arm's reach here on my exclusive bookshelf (I have a larger library in the other room but my favorites are all close by). It was an amazing (and thick) work meticulously detailing how governments and their economic advisors would convince themselves time and again that they had figured things out, that they could do things others had been unsuccessful at, that indeed this time was different. 

This was right up my alley because, of course, this time was never different. In fact, it always ended the same. Public debt levels would build up and, ultimately, there would be some type of default or inflation tax. Over and over and over again, national governments would unsuccessfully try and thread the needle between near term needs wants and long term economic health. Temporal discounting -- the primal human behavior that discounts the value of future goods, particularly when compared to present goods -- obviously comes into play.

The year after the book came out, the pair released a paper titled Growth in a Time of Debt. The research cited in the article put forward a proposition that, when debt levels reached certain levels (90% for an economy such as ours) that growth was inhibited. This was not a new concept or even a controversial one -- even an armchair economist can see that high debt levels can create a negatively-reinforcing feedback loop that inevitably stunts growth --  except for one aspect: the article insinuated that there was a precise threshold that formed a "rule" as such. From the summary:

Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies.

I'm reflexively allergic to attempts to make precise rules out of complex systems. This is the kind of stuff that gets climate scientists discredited, for example. When they said a decade ago that global temperature will rise by X percent and then it happens to fall by Y percent, some want to believe the underlying theory and look for a rational to explain the data, some try to falsify or change the data to fit the theory and others use the information to discredit everyone.

When someone takes a hyper complex system -- be it the economy, the climate or the human body -- and says that when X happens today then Y happens in the future, they are an arrogant fool, a naive fool or (worse) both. That doesn't mean we can't have rules of thumb, research to compute trends or theories to gauge probabilities of certain outcomes. It does mean that, when it comes to complex systems, our humility ultimately must overrule our desire for the comfort that comes from precise answers.

Unfortunately, the precision of the Reinhart/Rogoff article gave an undue level of smug comfort to those that believe that deficit spending and the nation's debt are the seminal problems of our time. Economic thought is deeply entwined with politics (which should really discredit both right there) and, since the U.S. is near the Reinhart/Rogoff "danger" metric for debt to GDP ratio, the article was widely referenced in what passes for our public discourse. Here are some samples.

Well....oops....the study was wrong. Not completely wrong -- high debt levels do correlate to lower rates of economic growth -- but Reinhart and Rogoff actually had an error in their spreadsheet that substantively changed the central finding which, along with some additional data brought in by new research, has discredited the 90% tipping point.

In the political arena that the dismal science dwells, those who were beat mercilessly with the Reinhart/Rogoff-derived 90% scare are now having their day. To stay with the climate change analogy (and to give at least some of you an idea of my frustration), this is akin to the email revelations of a few years ago. Ultimately not going to change the body of work, but it sure doesn't help in the credibility department.

I've long been an amateur critic of Keynesian economics, not because I fancy myself an armchair economist (I am not even that) but because I don't buy into the aggregate demand argument as I watch it manifest on Main Street. 

It is hard -- perhaps impossible -- to argue with the core insights of John Maynard Keynes. In an economic slowdown, people lose their jobs, they consume less and save more, businesses do likewise and you have what is called the "paradox of thrift". What is rational for one person -- reducing spending in the face of uncertainty -- is devastating when we all do it. A minor slowdown can thereby become a recession which can then become a depression, all because people responded rationally.

The theory suggests that government can counteract this downward spiral by creating demand in the economy. If the private sector is going to spend less, the public sector can step in and spend more to offset that. This spending will stop the downward spiral and give the economy time to recover, at which time the government can reduce spending.

I remember reading Plato's Republic in high school and believing it was brilliant. A philosopher king -- how novel. In college I had a political philosophy class where I read a bunch of libertarian writings. Again, I thought it was brilliant. As an adult trying to learn about the world of economics, I read some of Karl Marx's critiques of capitalism and found them equally brilliant. 

So, am I the first Utopian Libertarian Communist? No. These are great theories and they each contain brilliant insights, but the world is not theoretical. It is a complex place made up of complex people acting out their days in complex ways. It defies neat and tidy theories.

(Note: If you forced me to side with one theory, it would be Darwin's. Specifically, the law of natural selection; the powerful notion that, over time, complex systems will create adaptations in an effort to continually optimize outcomes.)

So getting back to Keynes; here we have a beautiful and deeply insightful theory for how an economy works. It is a new and untested theory, but we go ahead and base our entire economy around it. We give all kinds of power and authority to people at the federal reserve -- none of which, I'm guessing, live in tract housing in the exurbs -- as well as unelected others to turn the dials and knobs they perceive, all in service of this theory. These are the best and brightest. We're told they can figure this out if we give them the tools and the flexibility to see it through. We allow them to double down again and again and again on their theories.

Then I step back and look at the results. The theory says we need more demand, but that means we pump more money into the growth Ponzi scheme that is bankrupting our cities. We create a huge housing bubble (which the theory makes us blind to) and then, when it pops, do everything we can to re-inflate it. We have high unemployment and stagnating wages, yet the money we are pouring into the economy is going into the same Old Economy business model that gave us WalMart, Goldman Sacs, Exxon and Monsanto.

How does the patient heal thyself in this system?

The greatest problem that our economy faces today is not a lack of growth but decades of unproductive growth. The cities that comprise our nation are financially fragile, many tipping on the verge of outright bankruptcy, most with no reasonable means to sustain their essential infrastructure system, let alone their other obligations. We've stripped our cities bare of most production jobs and transformed our local economies into a function of government, finance and consumption.

How is this a problem of demand? How does an application of Keynes' theories fix any of that?

So my frustration -- and writing this has been good therapy, thank you -- is that we are a country that has intertwined two enormous experiments with each other: the auto-oriented development pattern and Keynesian demand-driven economics. Despite the fact that the two experiments are inseparable, the proponents of one are quite often the opponents of the other. This is an incoherence my mind struggles to reconcile, a torment only made worse by the tarnishing of a body of work that I find compelling.

Modern economic theory has become a religion without a god. I'm sick of living in someone else's lab experiment. Let's instead build a nation of strong towns.

You can get more of Chuck Marohn's insights by reading his book, Thoughts on Building Strong Towns (Volume 1). It is a primer on the Strong Towns movement and an essential read for those wanting to get up to speed quickly.

You can also chat with Chuck, Nate Hood, Andrew Burleson, Justin Burslie and many others over at the Strong Towns Network. Join the ongoing conversation on how to make yours a strong town.