Why We're Still Listening to Economists 30 comments
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Yves Smith’s Naked Capitalism blog had quite a good post this (Monday) morning about capitalists. She essentially asks why economists haven’t stepped forth and admitted that they were missing in action for most of the decade. She notes that none called attention to the dangerous practices and developments of the early part of this century and when things began to fall apart they were, in her words, “constitutionally unable to call its (the recession's) trajectory.”
It’s very good stuff and raises the question, at least in my mind, as to why we are now putting so much faith in their pronouncements. For it seems that despite the profession’s gross errors, they have stepped forward and said, “forget all of that, now let us show you how to fix things.” By all reports, we seem to have agreed that yes indeed they have the answers and we should follow them wherever they might choose to lead. In this case, that happens to be down a very expensive road.
But, just as there were a few Cassandras (Roubini, Shiller, Taleb) during the good times, there are now a few emerging who are speaking out for some sober assessment of our future course. A couple cases in point today are Kevin Hassett writing at Bloomberg and Gary Becker at the Becker-Posner blog.
Gary Becker, an economist at the University of Chicago, sets forth in his analysis the reasons that he feels the Obama stimulus plan as presented by Romer and Bernstein overestimates the positive effect on employment. He reasonably states his reasons for reaching this conclusion and in the process puts forth some fairly important considerations to keep in mind as the stimulus plan is implemented. For my money, though, a point he makes towards the end of his post is the most intriguing. He says:
As Posner and others have indicated, there appears to have been a huge conversion of economists toward Keynesian deficit spenders, but the evidence that produced such a “conversion” is not apparent (although maybe most economists were closet Keynesians all along). This is a serious recession, but Romer and Bernstein project a peak unemployment rate without the stimulus of about 9%. The 1981-82 recession had a peak unemployment rate of about 10.5%, but there was no apparent major “conversion” of economists at that time. What is so different about the present recession compared to that one, and to other recessions since then, that would greatly raise the estimated stimulating effects of government spending on various types of goods and services?
It is relevant in answering this question that the origins of this recession were in the financial sector, and especially in the excessive mortgage credit to sub prime and other borrowers. The widespread collapse of the financial sector, and the wholesale retreat from risky assets, clearly has called for a highly pro-active Fed. But it is not obvious why this should lead to greater confidence in the power of government spending stimulus packages. Of course, perhaps the prior emphasis on crowding out, and skepticism toward the stimulating effects of government spending, were wrong, or that recessions were too short and mild after the 1981-82 recession to call for Keynesian-type stimulus packages.
He doesn’t go as far as I will with this thought, so please treat this as my take, as I don’t want to seem to be putting words in his mouth. If President-elect Obama’s economic team doesn’t forecast unemployment on the order of the 1982 recession, and since we were able to weather that storm without an historic expansion of budgets and deficits, what is it that they currently see that argues in favor of their prescribed approach? Are we engaging in knee-jerk responses when graduated action might be more prudent?
Kevin Hassett’s article takes on the proposed plan from a different angle. His argument is that the assumption of debt by the federal government at the level proposed may forever cripple the American economy. Congress’s penchant for baseline budgeting will ensure continuing blockbuster deficits, leaving only the options of hyperinflation or massive tax increases as solutions to the problem.
He seems to go a little off course in that he concedes the need for dramatic action but then tends to dismiss it as ultimately of no help. It would have been useful had he completed the thought but his comments on business confidence are well taken, noting as he does, that businesses are unlikely to invest when faced with the long-term prospects of massive tax increases. Read this article mostly for the fine job he does on describing the impact of trillion dollar deficits.
There seems little chance that an incremental approach will be taken with respect to the recession. If nothing else, economists provide the perfect cover for politicians who always want to be seen as doing something even if it may be counter productive. Once again, the voices calling for a bit more thought are probably going to be drowned out just as they were during the boom and we’ll be off again following group thinking academics on a path to who knows where. Maybe someday we’ll learn.
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This article has 30 comments:
You are overlooking a key point made in the article you referenced as to why nobody "saw it coming".
Yves Smith wrote:
"Perhaps the conundrum results from the very fact that they are too close to the seat of power. Messengers that bear unpleasant news are generally not well received. And a government that wanted to engage in wishful, risky policies would want a document trail that said these moves were reasonable. "Whocouldanode" becomes a defense."
Looked at another way, the reason "we are now putting so much faith in their pronouncements" is because the only 'WE's who have choices to make are politicians and bureaucrats.
The political system and its sycophantic media lapdogs love nothing better than a crisis. The knee-jerk reaction is toward "doing something", which naturally means grabbing more political power over the public at large in the name of fixing things.
The fact that decades of Keynesian policies are what brought about the problem are ignored. The fact that ever larger Keynesian responses will only serve to multiply into future problems is overlooked.
What matters to those in power is to get the glory today for addressing all the mistakes their system made in years past. The side effects which may appear tomorrow can be dealt with later.
As a doomer you're thus perceived as being wrong until the prediction sets in, however in the mean time, bubble or not, there's plenty of profit to be made which given current short-tern incentives means only a handful are ready to go along with that. Even if you had called this bubble in 2003 as a funds manager you would still have been forced to go along with it as the benchmark is set quarter-by-quarter.
As an individual who flips houses there's always the hope of being able to time the market properly and make a nice and tidy profit in the meantime.
In my opinion, anyone that does not go by his opinion in the money market should obstain from it and leave it to those that actually made their homework, too many people are too easily being influenced, too many people shy away from mental work i.e. actually have a look at the fundamentals, value and histoy behind everything. I'm just a graduate student who doesn't even study economics but I'll be damned if common sense and everyday learning and reading don't go a long way.
Take the Russian-Ukrainian dispute as an example, how was that not easy money?
My way of going on about this is to read a lot about what goes on, complement it with theory and ultimately make my own call and stand by it until its proven otherwise. Economists provide the numbers but the analysis is down to me. Weird to actually have to make something so basic clear.
----------------------...
Then things will probably work out just fine. Kevin Hassett?
In the pantheon of "bad calls" none is quite as celebrated as Hassett's book
"Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market ".
Yes, that's Dow "Thirty Six THOUSAND" . . . and the book was written in the year 2000, before the last tech bubble burst to rationalize the crazy valuations of the time as UNDERVALUED!
Memorable line: "Stocks are now in the midst of a one-time-only rise to much higher ground-- to the neighborhood of 36,000 on the Dow Jones Industrial Average"
Hassett is now mostly a political spokesman for Bush apologists, his Wall Street Journal article: "How the Democrats created the financial Crisis" is much more like Ann Coulter than it is like Gary Becker.
Hassett's observations about the current disaster should be read as:
1) attempting to shift the blame from the current Administration;
2) attempting to limit the power that the extraordinary bailout will give the new Administration;
3) political and polemical in character and analysis, rather than based on economics.
I really enjoy your writing and this piece is no exception. You may have read some of my posts where I've used the quote, "the majority is always wrong." It certainly can apply to your thoughts on current economists.
I keep wondering though, who are "they?" For instance, just what is "the list" of economists that Obama and staff are using? One reason economists can run for cover is that we really don't know who they are. "They" are usually covered a general statement and then one expert or the other is given the chance for their "sound bite." Sort of like the weather forecasters. We asked ourselves, "what is it supposed to do today?" How should "they" know?
However, I do disagree with the point of smith's article. The reason we are able to handle greater debt is because of greater income (GDP). Compared to other countries our debt to income ratio is quite modest mast-economy.blogspot.... in terms of our debt/income ratio.
With respect to our own personal finances which would we rather have happen: a drastic reduction in our income or a modest increase in our debt load? If you could take out insurance on your "income reduction risk", would you do it? Would you borrow modestly to pay the premiums on such insurance?
I believe I would, but I can certainly see why others would hesitate.
Whilst that is true, that is just a static assessement of the situation as the debt intake is worsening whilst at the same time problems at the income and spending side arise. I don't know where I read it (guess it was in the comment's section of the NYT) but government spending has risen almost two-fold since Bush came in, the projected deficit of 1.7 trillion had been just about 2000's government spending. The US has a tremendous standing and remains the world's biggest economical and military power the question that creditors ask themselves is how likely the US will shift its fortunes and turn the double deficit around.
Though the US has the by far highest GDP of any country that presents a problem as that makes any deficit large by other countries' standards, a 1.7 trillion deficit is about 60% of Germany's GDP, now that what I call a whopping figure.
dansdeepcreekblog.blog...
January 21, 2008: "This is a great time to buy a second home at Deep Creek Lake!"
"local developers realize that Deep Creek has always been in high demand and that prices will go back up this summer"
That's summer 2008 mind you!
Attention all readers go to website 24hGOLD , once on home page , Go to column on right called " most read articles " Go almost to end of column , Find article entitled " The New Gods of Finance will crush the middle Class ". It is by Bob Chapman of " International Forecaster ". This is a must read , for no BS as to what's happening + why .
Some people will look for economists they agree with and latch on to what they say. Only latching onto those economists when those economists make calls they agree with.
Some people will look for economists who were most recently right and latch on to what they say.
Some people(like Yamu above) look to all the data and make their own choices.
What doesn't change is the media and the buzz is going to always be with the majority. Right now the majority is the "end of the world is coming mentality" and that mentality is magnified by the media and the internet. The answer to Mr. Becker's question above is people right now are irrational. Sure, stuff sucks, its getting worse and right now there is no good news even near the horizon...but wait, unemployment is quite a bit lower than 80-81(spare me the shadowstats.com numbers-perhaps the numbers are on par)...but either way in 1981 people were not incessantly calling the situation the Great Depression 2 and a big reason is the media and the internet. Right now a doom story is king and the doomier the better.
In a perfect world, we would have paid off the 10T debt via the 60-70T of USA citizen wealth earlier this year...perhaps 5T more for the morgage mess...Seems a better alternative than losing 20T in household worth and still remaining in a 15T hole...
On the bright side:
-The US still has 40-50T of household wealth(to refute the person who claimed the US is Iceland...not in this thread).
-The US is still the #1 economy of the world...Much of the world still needs the US as badly as we need them to finance our debt.
-The US land holdings(think Alaska) could easily pay off the current US debt and go quite a way to Medicare and SS that people always trot out as the REAL issues...
-The US is still the #1 military power. If things really got that bad and wars went back to wars over resources and land and money, the US would be in a good position(also, with the recession, recruiting problems of the boom times is a problem of the past).
I'm not a prognosticator, as the past year should show no one, even if generally right is correct over time, or even pretty close, but I have faith in people as a whole, so its hard not to be optimistic...because to be a successful pessimist things have to end up terribly and really there isn't any win in that.
I'll suggest that perhaps we have become a bit more coddled, and the notion of accepting short term pain to ensure a healthy long-term recovery is not as palatable today as it was in 1982.
The problem with most economists, however, is that they are employed in academia or by corporations. As such, they are essentially under psychological and social pressure to conform. Imagine the poor economist at Citi or Wells Fargo that tells the CEO, during a meeting, that if the bank continues on the path they are on they will cause the end of the civilized world as we know it. Well, I think the poor economist would be added to the millions of new unemployed in our nation in short order.
If you do have an opportunity to watch the YouTube video of Shiff, (I'm not saying I support everything Shiff has to say) you need to keep in mind that he is an independent -- look at the pressure to conform he is under in those interviews!
The other thing you have, in the upper levels of the economics community, is that they are almost detached from the real world. Most of them run in circles that are devoid of contact with the everyday people or problems they are supposed to address or solve. I saw many of them at a conference in San Francisco and it was as though most of them were on a different planet.
The last point I want to make, and I think it is cause for great concern, is that only one theory of economic recovery is being pushed by world governments: Keynesian. I'm not sure it really worked as advertised in Japan or during the Great Depression, yet it seems to be the cure de jour of all the economy’s ills. So, on the surface, it seems that other ideas and dissent are being stifled in academia and government.
Yeah, but what do you expect? My experience when it comes to economic matters is that most people think the problem is that the middle class does not have enough purchasing power; their model is based on consumption, thus they want to government a)to redistribute money and b)create it out of debt.
It starts at school with teachers going on about that and all it takes to further push this into people's minds is a few acknowledged publications and intellectuals who have a similar stance. They don't understand that money itself is nothing, it's what it represents,i.e. productivity, that matters.
The weird thing is that most people spend more mental energy on getting a good deal for their milk than their money.
Remember, people will go to their utmost to make sure that their world-view is being supported, we even have a mechanism called RAS for that. Which is also why the internet has fostered people re-iterating their world-view by accessing sites that mirror it, instead of visiting opposing ones. At the end of the day however, what you lose in taxes through stupidity you can gain by playing that stupidity in the markets.
Just wanted to comment on your posts...
First of all, as massive as it sounds, even a $1 trillion bailout package for Obama is absolutely nothing in terms of the problem. I don't think many people have a grasp on how fast our economy is sinking; the loss of wealth is running about $1-2 trillion a month (maybe more on all assets).
Economics is much the same as physics -- If you drop a knife, it will fall to the ground. If you put something in it's path, you will stop or slow it's fall, but some or all of the energy will be disturbed to the object in its path. This goes to point one (above) -- The object to stop this falling knife would need to be so massive, that our government can't produce something to buffer or stop the object. The knife will be slowed, but it will do both damage to the object in its path and still fall to the floor.
If we were a country built on savings and had a government surplus of a few $trillion, we might be able to pull it off. Of course, if that were true, we wouldn't be here in the first place.
Finally, the problem for the last 10-20 years has been due to too much purchasing power through the abuse of credit. For the past decade or two everyone could have their cake and eat it too without a second thought. Credit has a good side, and a dark side.
regard that there are certain laws or
principles that govern it. The key
distinction I made is that in contrast to
phyics economists mostly don't have the
luxury to back their theories and models up
by an experiment. What they have is
empirical data which itself is subject to
interpretation. Over that indirect route it
is possible to gain evidence and operate
from a stronger foothold, however there is
still a huge bias to it as the empirical way
opens the methodology up to all ways of
personal bias like acknowledging certain
facts and others not.
In contrast to the majority of people I
don't believe in a stimulus package, a
stimulus package can only work if there is
artificially low amount of demand and thus
production capacity is under-utilized. What
is the case however, is that demand had been
artificially HIGH (debt, house-atms etc)
which is why that correction needs to
happen. It may not please everyone but
rather than following along this route which leads to trillion dollar deficits for several years and doesn't even address the CA deficit people should wake up to the facts that they themselves need to 'downsize'.
There is only one way to wealth and that is wealth creation, I'm sorry but fixing bumpy roads and putting pupils that score lowly in international studies into energy-efficient classrooms does not help wealth creation. America already spends about 460 billion on interest, that's about the size of the German governments budget.
Agree about the comment on purchasing power through credit.
I hear you about wealth creation. If you want to check something out from the Federal Reserve turn to page 113
www.federalreserve.gov...
From Q4 2007 to Q3 2008 we lost almost $8 trillion in wealth in ONLY the asset classes listed and this EXCLUDES the worst quarter, Q4 2008.
Not too neat statistics when Bush and Obama have been using under $2trillion and something that may be a $15-20 trillion problem all assets included. It's a black hole sucking the world as we knew it away...
But no, the stimulus will not work. I think about 1/3 is going to help employment in retail sales, 1/3 for construction, and 1/3 for manufacturing --job creation stuff. Of course, a big problem with our economy now is too much retail/selling sector and too much construction to build homes to sell to each other. The local malls and box stores will be the latest eyesores in a community near you in another year or so.
Well, they have a pint of blood and the economy is bleeding two pints a month -- might keep it in a Paulson-induced coma for another month or so.
They are doing some game theory things in economics, to see how things will play out in the end.
My undergraduate degree was in this field, but went on to other things long ago when it came to graduate studies. Lucky me the way things turned out a few decades later. Can't blame me!
The mis-representation leads to a perception about manipulation by money men, and few economists are on Wall Street or flacks for the financial sector (notwithstanding NAR economist Yun & a few others like him). Most economists are academics, and there work varies in quality in the extreme. The remaining, usually from academia, are policy wonks as well--Shiller, Bernanke, and the like.
NTL, I think Yves' contention that economists are moving on without a meaningful self-critique of their recent performance is disturbing. If you don't know what you did wrong, you're almost certain to repeat the mistake.
Since I'm not buying or selling, however, it is more just curious--and a little depressing.
On Jan 12 06:54 PM Dans Deep Creek Blog wrote:
> Could be worse, we could still be listening to real estate agents.
> Check out this whopper I found today:
>
> dansdeepcreekblog.blog...
>
>
> January 21, 2008: "This is a great time to buy a second home at Deep
> Creek Lake!"
>
> "local developers realize that Deep Creek has always been in high
> demand and that prices will go back up this summer"
>
> That's summer 2008 mind you!
Thank you for calling my attention to a typo. You are absolutely right that Yves Smith was writing about economists and that is the word I meant to use. My fingers moved faster than my brain and I didn't proof read as well as I should. Nevertheless, I think the point of the post is clear.
with the net result that skeptical economists are not getting the media call ups. That plus the 'groupthink' effect of a panicked elite, with breathless nonsense about Great Depression, etc. (we are barely 2 quarters into a minor reduction in GDP and employment that shockingly has fallen to the rather high levels of mid2006, and an oil shock and credit shock sent us there, but now oil is down and fed rates are zero. QUIT PANICKING ALREADY FOLKS.)
The dirty little secret of the Obama 'stimulus' plan is that even THEY KNOW it won't create jobs. This plan is all about paying off political friends (Democrat Govs in the hole, unions, pay-to-play contributors) and *appear* to do something useful, as the economy, in its natural way, resets back to growth, responding to the Fed signals, etc.
How do we know the Obama economists know it wont create jobs? There own estimates say as much - employment in Q4 2010 *with* the stimulus is 137m, same as levels in Q32008. hmmmm. They are sadbagging the numbers.
See:
travismonitor.blogspot...
Ideology isn't the only problem. Business economists employed by the major wirehouses and mutual fund families need to stay upbeat to help their sales forces. Academic economists can't afford to stray too far from consensus wisdom or they lose access to government grants and Federal Reserve conferences. "Publish or perish."
The proposed policies come first. Economists that will support those policies are found later.
On Jan 13 02:50 AM Anthony Alfidi wrote:
> Economists got it wrong because they are predominantly (starting
> with the largest group) Keynesian, monetarist, or Marxist in their
> ideologies. Very few are Austrians; those that are stay confined
> to private investment shops (Peter Schiff) or the gold community.
> Ideology is akin to the "Orientation"... factor in Col. John Boyd's
> OODA Loop theory of strategic decisionmaking by combat leaders.
> Get the orientation wrong, and you're toast. See www.d-n-i.net
> for good OODA discussions.
>
> Ideology isn't the only problem. Business economists employed by
> the major wirehouses and mutual fund families need to stay upbeat
> to help their sales forces. Academic economists can't afford to
> stray too far from consensus wisdom or they lose access to government
> grants and Federal Reserve conferences. "Publish or perish."
I'll take my chances here.
On Jan 13 06:47 PM CJJ wrote:
> I have nothing against your opinions but at this point that's all
> they are. Why don't some of you back up your words. If the US is
> doomed, move out of the US. Maybe if everyone "who knows whats going
> on" moves away we'll have no choice but to meet our maker. Also,
> you can live within your means there(where ever you go).
> I'll take my chances here.