Theory of Everything

There are two very large camps in the wonderful world of Physics. One group studies Quantum Mechanics which is basically the study of the behavior of subatomic particles; what are they made of and how do they work? The other camp is the more macro camp which studies the universe: Relativity, Inflation, Dark Matter, Expansion, Space Time...the big picture. For more than half a century, their respective findings and equations have been contradictory. Einstein, after winning his Nobel prize at a relatively young age, spent most of the rest of his life trying to resolve these contradictions into a generalized Theory of Everything. He did not get very far and neither have any of his successors.

In response to this, each camp has retired to its respective field and done ongoing research to further its own specialty while ignoring the fact that the two fields were incompatible. Science moves on; careers are made; papers are published and any theory which would reconcile this fundamental discrepancy has simply not appeared.

Physics is a "hard science". It uses the scientific method which we all learned (or should have learned) in elementary school. You observe something; you formulate an hypothesis; you design an experiment to test that hypothesis; your experiment proves or disproves the hypothesis. Wash, rinse repeat.

Economics is soft science. Yet, it finds itself in the same pickle when it comes to forecasting a solution to the instant political-economic mess. We recently dodged a depression but still find ourselves very slow to surface from a very long and difficult recession. The Fed spent and guaranteed trillions of dollars to avoid that depression. Interest rates are just barely above zero. As we peer over the edge of an abyss which is the dreaded double dip, the economists and political scientists find themselves in two camps--just like the physicists. One camp, the Keynesians, believe that more stimulus is needed. Print some more money and bail out the municipalities, the States, the corporations and whoever else is needed to get the economy growing again. They believe that the government is the spender-of-last-resort and the only group that can save the economy. We can deal with the deficits later. They claim that the first stimulus definitely worked (despite the 9.5% unemployment figure). Paul Krugman is their champion.

The second camp calls for a period of austerity; it is time to address the deficit before we find the national debt at 100% of GDP. When debt reaches 100% of GDP, almost all growth (say a nominal 4%) will go to debt service; hence, we have to grow at a nominal rate to tread water. We now have the highest corporate taxes in the world and all those corporate taxes barely cover the debt service right now. (Greece presently has debt equal to 150% of its GDP; even if it were to perform the herculean task of reducing its debt by 50%, all its growth would still go to paying the interest on that debt!)

This camp wants to cut spending, cut spending, cut spending. Of course, to cut spending in this fragile recovery state could lead to a new round of recession with even higher unemployment.

Both camps have good arguments for their points of view....just like the physicists. Unlike the physicists (who do hard science), the economists cannot design experiments to see which camp is right. The two camps cannot even agree on whether the first stimulus plan did any good. How can you know for sure? Each economic camp has its own set of equations, rationals and presidents to support its point of view.

Here is where it gets dicey. We have two distinct groups facing off in a polar standoff with no OBJECTIVE way to determine which school of thought is correct and no way to measure after the fact whether the success or failure was due to the intervention. Like the physicists, each camp will retreat to its respective arena and continue to push its respective agenda. For the physicists, it is hard science; for the political economists, it is ideology. The republicans will push to lower taxes, cut entitlements, reduce government; the democrats will push for more stimulus (especially for their specific special interests), increase the size and scope of government, and increase taxes (redistribute income) as a means to an end.

Hence, the recovery from this economic melt-down has simply hardened pre-established positions rather than brought the two sides together to work for the common good. Rham Emanuel said it best when he said: "A crisis is a terrible thing to waste."

More than a clash of ideologies, this is quickly becoming a clash of classes. A new culture war is brewing; if unemployment continues high and the bankers continue to draw obscene bonuses for almost destroying the economy, the existing polarization will look like grade school stuff.

Let's all hope that Washington develops some adult supervision and that we start to work together to sort out this mess. Everything depends on it. The clock is ticking.