Why Economists Messed Up

The biggest thing in economics today is Paul Krugman’s “How Did Economists Get It So Wrong?” in the New York Times Magazine. If you have any interest in macroeconomic policy, you should read it.

For one thing, the illustrations by Jason Lutes are quite entertaining:

More important, though, is Paul’s evaluation of how we economists missed the 800-pound gorilla in the room. He fingers three suspects:

• Mistaking beauty for truth. I.e., too much reliance on elegant, solvable, mathematical models in which economic players are rational and markets adjust to shocks easily. These models are a joy to play with — and provide important insights — but they miss messy truths about the actual economy.

• Excess confidence in financial markets. He argues that widespread acceptance of the efficient markets hypothesis (the idea that asset prices incorporate all information and thus get prices “right”) left us blind to the risks of asset bubbles.

• The limits of mainstream macroeconomics. This critique is harder to summarize, but in a nutshell he argues that (a) some economists have (incorrectly) embraced the classical view that the government can’t and shouldn’t try to moderate the business cycle and (b) the larger body of mainstream of economists have (correctly) embraced the Keynesian view that the government can try to moderate the business cycle but have (incorrectly) concluded that the Federal Reserve is the only appropriate tool to do so.

I think each of these charges has merit, with one caveat. Back in graduate school, I was indeed taught that monetary policy was the preferred tool for addressing economic weakness (e.g., because of policy lags and concerns about the political economy of what passes as fiscal stimulus from the Congress). In my years in Washington, however, I have met many economists, of the left, right, and center, who believe in fiscal policy as well. Indeed, in policy circles, the idea of fiscal stimulus was active in 2001, 2003, 2008, and 2009, each of which witnessed tax cuts (and, in the most recent case, spending increases) that were partly or wholly passed in the name of stimulus. One can debate the merits of those acts, but the concept of fiscal stimulus has been alive and kicking.

Paul’s recommendations for the way forward for economists:

First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

On his final point, I should note that one of the leading thinkers on the links between finance and macro is none other than Ben Bernanke, current (and, one hopes, future) chairman of the Federal Reserve. That’s one of the reasons he’s the right person for the job.

Related commentary: EconomistMom, Barry Ritholz, Paul Kedrosky, Brad DeLong, and Paul Krugman himself.

Comments

[Dave Wrixon:]

Well he should know. He has got it more wrong than most!

Sep 07 08:58 AM

[markfl:]

The single greatest problem facing economists is that of being out of touch with reality. Greenspan not only created one but lived in one. He remarked that one of his post-retirement accomplishments would be to learn how to use email.

I was well aware that a speculative housing bubble was in progress, and I didn't need him to tell me. The proliferation of "house flipping" into the culture with ubiquitous books and tv programs showed me all the classic characteristics of faddism--the same as with MySpace (clue here Murdoch) and possibly Twitter and Facebook as well. House flipping for the common man, like shoeshine boy stock tips in 1929 and CB radio in the 1970's was obvious evidence of a temporary fads or bubble . . . one that economists should have been able to sleuth out without a magnifier.

Sep 07 09:21 AM

[perceptions...:]

Depending on your perspectives, there are a few basic ways that the world’s Economic system is meant to function –
1) Hands off/Market based approach, more commonly known as Capitalism.
2) Planned or Hands on approach, more commonly known as Communism or Socialism
3) A Mixed economy, which is a mixed of both Market and a planned economy.

It is apparent that there are those who are “true believers” in these variations, come what may, there are those who take a pragmatic approach and there are those who say, we need to start again.

At the basis of these systems, are two competing assumptions –
1) Markets are efficient and governments ruin everything they touch.
2) Only governments can provide the planning needed, to avoid irrational markets.

The truth is that “Economics” does not stand alone, it's not like mathematics, where we know that 2+2, will =4.
Economics is not a science, where you routinely have the same inputs factors and the same outcomes.

The truth is that Economic is, in fact, a culmination of many factors, which are in a constant state of change!

Included in the economic mix, is the past history of what has happened, which people, by enlarge, rely on. However, included in the mix (amongst others) are the competing interests of Domestic Politics, international Geo-political power struggles, Elite Multi-National organisations and the apparent human desire for infinite (exponential) growth, in a finite environment.

The truth is that neither Markets nor Humans are rational or inherently efficient and that Economics is a fluid, moving, living thing, not a fixed target that may be easily hit by a “silver or single bullet solution”! It is also true that the vast majority of past Economists & Politicians, would never have imagined, in their wildest dreams, some of the Global factors, now in play.

In fact, most current Politicians & Economists still refuse to admit to the Public and even themselves that we are at and are approaching once in history tipping points, which may change Humanity, forever.

The current Global Financial slowdown includes examples of systematic failings, in that –
1) Many Politicians, Economists and Business failed to realise &/or consider that a number of once in history factors would impact on and change their basic assumption, that the usual “Boom/Bust” historic cycles, would simply continue to repeat. Those factors include Population Aging & Total Population Growth rate reduction and Peak Oil.
2) The Political & Business games are now too closely interwoven, with corruption a systemic player, not just an occasional interloper.
3) Humanity, including the establishment (the FED, Politicians, Business & others) refused to voluntarily consider that our system requires exponential (infinite) Growth, in a world full of finite limitations.

The truth is, irrespective of the “smoke & Mirrors” of Politicians and other self-interested party’s, we are now in the early stages of some vital once in history events, Exponential Growth is no longer an option. The Global Economic & Political situation is now under great stress and change must come to the whole system or that system will break!

Finally, I would say to those “truebelievers”, there must be room for flexibility. Markets can be effective, but they do need parameters & regulations that are enforced, to function properly, for the long term benefit of all. Governments are a necessity, to provide that which the Private sector is neither designed nor equipped for, such as Police, Armed Forces, the setting of realistic Business regulations and the provider of long term vision for the future. But, above all, Politicians (Globally), business & other self-interest players need to disconnect themselves from their self-interest, long enough to understand that these arrangements are not in anyone’s long term interest!

As per the following NY Times article, “this seems like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”
NY Times article link -
www.nytimes.com/2009/0...

Politicians, Economists and Business, need to rethink their foundations, we need to help them in those endeavours and we should encourage them to get it substantially right, via easily understood means, the electoral vote & consumer spending.

Sep 07 09:53 AM

[Alphameister:]

The comment by "perceptions" is brilliant, much superior to the article that precipitated it. The basic problem that has led to this mess is the arrogant, elitist belief that economic sophistication has progressed to a point where super-enlightened leaders in Washington can eliminate the cycles that are inherent in all of human life. Markets are efficient only to the extent that they cycle around levels that tend toward rationality in the long run.

Jefferson said that "a government powerful enough to give you anything you want is a government powerful enough to take everything you have." Perhaps a corollary of that is "a government big enough (and meddlesome enough) to moderate economic cycles and seemingly reduce risk is a government big and meddlesome enough to give you an eventual cycle that will blow your mind away (and your wealth along with it)."

So let me add a third underlying assumption to those offered above by "perceptions": Markets are not always efficient, but they are far superior to meddlesome and incompetent governments for whom the long-term is defined by the next election.

Anyone who would look to Paul Krugman and that rag he works for to provide valuable economic insights is part of the problem rather than part of the solution to our problems.

Sep 07 11:49 AM

[JeffDB:]

It seems to me as if he is rather cavalierly dismissing the economists who *did* get it right and were jumping up and down warning about the crisis before it hit, and then saying the problem was exacerbated if not caused outright because not enough people were on board with the economists who were laughing at them for their warnings.

Sep 07 12:11 PM

[JohnL:]

So the majority of economists are Keynesians or neo-Keynesians, they did not see this coming, and they now think they can diagnose their own errors. Meanwhile, the Austrian economists, the ones who actually called this thing in advance and have a rational explanation for the causes, are ignored by the mainstream (including Mr. Marron). Why the world continues to pay any attention to the mainstream economists is beyond me.

Sep 07 12:40 PM

[johnmorrison9:]

Honest ecomomist warn us about governments debasement of currency, and its propensity to grab power at the expense of the people, and in the name of the people. What can protect us from politicians? Why are they above the law? Why do we finance thier political mechines? Will they ever be held accountible for Madoff, or the housing bubble?

Sep 07 12:57 PM

[Econ Base:]

Although the stock market is still the best indicator of future, the 1999 internet bubble, and the 2008 crash are two examples how the stock market also gets it so wrong. Governments by manipulating the currency and bond markets prop up the stock market. So market corrections are postponed. Sooner or later this "manipulation" will get factored in by the stock market.
portfolioforlife.blogs...

Sep 07 01:33 PM

[ebworthen:]

Economists are like lawyers; they fool themselves into believing they are doing something constructive for society.

Once they convince themselves they are doing good (whether they are or not) they proceed to make money prognosticating and equivocating about the morality of onerous taxation, lavish spending, corporate greed, and the need to fire people with 20 years service to a company or government.

Most third graders have the common sense needed to be an economist.

Here it is:

1. Debt = bad
2. Allowance for chores = good
3. Lending to the kid you don't know very well = bad
4. Principal busting the bully for shaking down other kids for lunch money = good
5. Principal ignoring bully because it is his Nephew = bad
6. Stealing money from Mom or Dad = bad
7. Government stealing money from Mom and Dad = good (or so the politicians say).

We have robbed the average citizen who invested in the nation (markets). We have turned around and robbed them and the next two generations to excuse the malfeasence of Wall Street. Our lawyer politicians are doing what lawyers do; equivocating and taking both sides to forestall reality until they can get elected again.

Sep 07 03:11 PM

[whidbey:]

Even if we take the three points you make at face value the criticism you offer adds little.

Math may oversimplify economic analysis, but your assertion of missing" messy truths", is a joke. Who says? Give us an example of messy truth generally acknowledged. Surely you can do better than that. Is it Just a cover for your preconceptions?

Excess confidence in the Financial markets is hard to judge. "Excess" is not exactly precise. And you failed to mention that had the markets been free of regulation, much of the distortion you now regret might not have happened. We call that humility. Try some. I could carry that much further, but your use of Excess must show that you do see some Confidence in market processes is justified. Which exactly? Don't join the dark side because you feel magnanimous towards the current attacks on market processes. The attacks are wrong for the most part.

The limits of Macroeconomics are all to obvious since aside from some national accounting framework, it mostly a religion with few strictures. I am always sure that my doctoral students who are power Hungary will gravitate in that direction since in macro opinion is everything and interest in rigor just insecurity, e.g. Krugman. Macro is still a science aborning and Ben B's interests ought to be of great concern since he is a banker for the most part, not a political economist, or is that questionable?

My experience in Washington as an economist was always a let down since consistency and adherence to rigorous analysis was never popular, and where compromise, wink and nod (the short run) was everything. Don't discard behavioral economics, but remember it was first called sociology, and still probably should be called sociology.

Sep 07 03:25 PM

[BRUCE E. W.:]

seekingalpha.com/artic...

seekingalpha.com/artic...

seekingalpha.com/artic...

In retrospect, the Economist did a great summary job on evaluating the threads of emergent disaster in our instrumental institutions (see: economist.com/disp...

While economic historicism has been part and parcel to the history of economic ideas, it is also true that the best of economic ideas have derived from direct experience. We are in a "stres test" of sorts right now to determine the credibility of direct observation and experience over deductive conjecture from politicized schools of thought.
One must wonder why historic content and serious social, political, demographic, ecological and hard environmental/geopolit... factors are so easily left out of the interpretations from previous influences. Economics follows a business model which at times seems to selectively prefer class interests and narrow value judgements. The past 30 plus years have been dominated more by ideology than science. Quantification has been relativistic to floating standards, and have done more to advance profits by manipulation and fractional value distortions than to improve the foundation of sound or prudent judgement. Business cycles are seen as presuppositions for socially stratified time bomb economics that sets desparation and exploitation into a ticking normative clockwork of creative destruction.
Science is observe, measure, hypothesize and test through processing ground theories that can be reliably retested for real time consistency. When the process starts with theory and works itself backwards towards observations; then some kind of virtual reality has been perpertrated (and usually sold to the people with little or no information).
The purpose for doing this is more than obvious: perverted incentives, moral hazzard and false economies have become the new monetary standards of wealth takes all. All too often, however, monetary policy (AKA the supply sided Chicago School a la Friedman et. al.) have castagated their victims for not letting the system work hard enough or long enough to justify their own failures and perpetuate itself again and again.
The market should have been cleared of these failures. Economists need to get their house in order ( and are clearly doing so ...seekingalpha.com/artic... ); but theory is not as big a problem as the fact that bad theory continues to be FINANCED by the very people who have perpertraded this false economy in the first place. As long as massive amounts of money finance status and stature among Economists; the discipline will be subject to slanting and ranting among the "noisey traders."

Sep 07 03:30 PM

[Pat C:]

An item that should be considered is the all or nothing concept of capitalism. It is very, very good to foster innovation during start-up and early stage companies or organizations. It falls apart with large companies. I believe we should treat Companies or organizations that have grown to the point of being priviledged differently than young highly competitive Companies. Any organization that is big/and or priviledged should be subject to much higher social costs and not necessarily just income taxes.

Sep 07 04:22 PM

[TinyTim:]

Unfortunately, economists are suckers for elegance and simplicity. This works for "hard" science like physics and chemistry, but not for a social science, even one which relies on numbers and statistics.

Until macroeconomists recognize they're each looking at pieces of the same elephant, get away from the fresh and salt water class warfare distinctions, realize how many relevant pieces are still missing (such as credit flow) and pursue them, an integrated theory will only recede in the distance because this social science evolves as it's being observed.

Sep 07 08:11 PM

[Moon Kil Woong:]

Wow... where do i begin? Let's look at this first: "...some economists have (incorrectly) embraced the classical view that the government can’t and shouldn’t try to moderate the business cycle and (b) the larger body of mainstream of economists have (correctly) embraced the Keynesian view that the government can try to moderate the business cycle but have (incorrectly) concluded that the Federal Reserve is the only appropriate tool to do so."

The sad fact is that indeed the government has been meddling with the business cycle but have been meddling with it when the economy is up and when it's down. This in essence only exacerbates the business cycle. Government meddling is more the problem than not meddling since it's not done in a logical manner nor does it actually moderate anything. It is essentially flooring the gas peddle nonstop and then wondering why your engine overheats.

Regarding the Federal Reserve being the proper forum for moderation. Yes, it should be, but as we see with Bernake, Greenspan the Federal Reserve has also embraced flooring the economic accelerator even in good times and have contributed to more asset bubbles in their 100 year history than before they were created. If the Federal Reserve was actually run by competent economists rather than being a bank lobby influencing rates for their own self interest then perhaps we could start some productive business cycle moderation tecniques.

The author is right that Keynsian economics works but only when applied correctly. Keynes embraced stimulus to get us out of an economic rut when the economy becomes stuck in the proverbial 1st gear. He never did and never would endorse supporting the economy on an economic slide down because it doesn't work, prolongs the agony, and wastes needed money that you need for real stimulus later.

Those championing Keynsian economics today as a reason to support the measures in the last year and a half are 100% wrong! They are not championing Keynsian economics. They are clinging to the same failed stimulus programs they used in the depression which prolonged the collapse just long enough to break the banking sector "both good and bad", loose the publics support, wreck the goverments finances and legitimacy, and destroys the confidence and legitimacy neccesary to support a real economy with real wages and real jobs.

Bernake is the epitome of shady practices that undermine the foundation of capitalism. QE delegitimizes US Treasury auctions, buying bank assets at unknown values and refusing to disclose from who and what they buy deligitimizes the Federal Reserve, Trillions in unknown backstops calls into question the solvency of the government should 10 or 20% of them become worthless. Although his actions make things seem more sound, they are just shifting the risk to taxpayers and the liability to some other later date. This is no solution, it is an illusion which help the politicians of today at the cost of the constituents of the future.

Sep 07 10:35 PM

[Hmm?!:]

The economists miseed the 800 pound gorilla?........NOT!

Peter Schiff and every economist I heard on Fox Business new what was happening.

Economists that worked for the NAR, Wall Street firms with retail brokers, government economists and every biased source possible may need your cover story.

But lets not try to tar every economist with the same brush! You may have missed it, but not them.

In addition 300 economics professors signed a full page ad in the Wall Street journal stating that the Stimulus package was a very bad idea. Even though the bill contained large sums for education.

To my knowledge the pro-stimulus

Sep 07 10:40 PM

[Hmm?!:]

crowd has only their own supporting the plan as economically sound.

Sep 07 10:41 PM

[derryl:]

You can call it sociology or behavioral economics but from Adam Smith's time until recently it was called "political" economy for the very good reason that economies do not exist in a mathematical wonderland but in the real messy world of human life. It was a mistake to think economics could be understood in isolation from the psychological, sociological and political maelstrom in which economies function.

Mathematical elegance is a beautiful piece of art but it has little to do with how humans and our economies actually behave. Mathematical precision cannot predict the future any better than can augurs reading goat entrails. At best we learn to read the signs and make educated guesses. Some people are pretty good at this, until they make a wrong guess. Nobody's perfect at predicting the future and we should hedge our bets accordingly.

Sep 07 11:50 PM

[rawhamburger:]

Yes the run of the mill economist did get wrong or they just didn't get it period. They are still the ones planning our way out of (or deeper into) this morass.
However, some of our more intelligent free thinkers did and are getting it right. To name a few Nouriel Roubini, Robert Prechter, James Quinn; all three of these men predicted exactly what is happening in the economy today. Perhaps there should be a paradigm shift to follow these top thinkers instead of continuing down into this abyss.

Sep 08 12:02 AM

[William M. ...:]

Your last statement "one of the leading thinkers on the links between finance and macro is none other than Ben Bernanke" ???

I must respectfully disagree on your closing point.

Ben's a nice guy but please the man should have been taking a finance and economics class in how to prevent realestate bubbles from Paul Volker instead of attending Woodstock in 1969.

Sep 08 12:17 AM

[The Retired...:]

Come on guys everyone has forgot to ask themselves. I didn't see the bubble coming why should the economic advisors have seen it then and now.
Is w/s just a money pit to suck in novice investors to get free money to use to float businesses during times of distress.
They Don't Provide Jobs For American workers.
So how are real people going to drive the market. The savers have been people that saved for retirement, now mostly older people have earned money that they place for living on deposit.
Where can you go there isn't any place to invest in a income portfolio .
We need jobs or the turnaround will stall like a pig that tries to fly.

Sep 08 03:40 AM

[User 377523:]

I'm not sure Ben is the the right man for the job, unless you have shares, interests in Goldman Sachs.

Sep 08 08:43 AM

[Mike from NYC:]

Krugman was in the same camp and started warning and screaming about what was going to happen but no one listened as it would be an Inconvenient Truth. I remember telling my Mom's Financial Adviser in Summer 2005 what was going to happen and he looked at me like I was an Alien with 3 heads. Thankfully, my Mom listened to me and I put her money in the Money Market in late 2006 and mine as well so we both came out OK.


On Sep 08 12:02 AM rawhamburger wrote:

> To name a few Nouriel Roubini, Robert Prechter, James
> Quinn; all three of these men predicted exactly what is happening
> in the economy today. Perhaps there should be a paradigm shift
> to follow these top thinkers instead of continuing down into this
> abyss.

Sep 08 08:48 AM

[lostark98:]

On Sep 07 09:53 AM perceptions_now wrote:

Amen.

> 3) Humanity, including the establishment (the FED, Politicians, Business
> & others) refused to voluntarily consider that our system requires
> exponential (infinite) Growth, in a world full of finite limitations.

Sep 08 08:52 AM

[george archers:]

"Ben Bernanke, current (and, one hopes, future) chairman of the Federal Reserve. That’s one of the reasons he’s the right person for the job."
Go back to school old man Marron--learn cooking instead--like in economic books.
No wonder America is a mess.
Fed reserve,did the mess in the 80s to oust Carter--21% for home mortgages and worse the 1928 depression.By the way old man,can you explain,what happened and who acquired , all the gold USA once had in reserves .
Most Americans,when asked--Who owns the Fed reserve--most answer Government. Stupid Americans :^/

Sep 08 09:08 AM

[Mike from NYC:]

The problem I see with almost all economic and political theories is that they all assume that people will NOT act against their own interests and that common sense will prevail - that people are rational, not motivated by greed alone and that they will treat thy neighbor as thyself.

However, that's not the way people, especially politicians and financiers operate, especially in today's world. Because of the unpredictability of human behavior NO theories can be taken as a model for what should or should not be done, or what will or will not happen.

So take all those fancy charts and reams of data and throw them out as they are useless. I didn't need any reams of data to tell me that there was a real estate bubble, all I needed to look at was that the price of housing was rising far faster than wages and that most of the people who purchased homes could not afford them.

Over-optimism is what gets us in trouble when we overlook reality and truth and that is exactly what happened in the Dot Com and real estate bubbles - that and the snake oil salesmanship of Wall Street.

Sep 08 09:11 AM

[Geezer Bela...:]

I would like to address two topics: 1. the government's ability to deal with the economy and 2. the housing bubble.

The government has several drawbacks when it comes to making economic decisions: 1. it is slow; 2. it is open to political pressure counterproductive of economic good sense; 3. the govt needs to treat the world of business according to rules, which assumes that all businesses behave more or less the same; 4. when the govt tries to accomodate differences, the rules constructed become so cumbersome as to be almost incomprehensible and very difficult to administer; 5. they who have the power become targets to corrupt.

Lessez faire Capitalism does not mean that anything goes. Fraud, cheating, etc are prohibited and can be fought in the courts. These are also punishable by customers turning away from a business that is dishonest. Only things where efficiency and cost do not matter should be turned over to the government, such as the armed forces and fighting wars.

As for the housing bubble, this was seen and attempts were made to stop it. Bill Clinton turned Fanni May and Freddie Mac into cash cows for his Party. When the Bush Administration complained in 2003 about fraud, black Democrat Congressmen labeled the complaints a "lynching." (The head of Fannie May at that time was a black man). Sen McCain co-sponsored a bill to straighten out the sub par loan business, but again, Democrats filibustered the bill to death. Liberals saw what was coming. In Rahm Emanuel's words they did not let a crisis go to waste. They nationalized the car industry and a good part of the banking business.

We have a name for the "U-shaped recovery." It's called a toilet bowl formation.

Sep 08 09:14 AM

[Dubious Bro...:]

Unequal enforcement of rules and laws is corruption. The SEC is corrupt when they don't enforce their rules the same for everyone and they allow law firms to manipulate the SEC on behalf of their clients. Congress is corrupt in the way they pass laws to favor certain constituents who happen to be large campaign fund donors. Wall Street firms are corrupt by influencing Congress to their benefit and using large "major" law firms to run interference for them. The large law firms are corrupt by covering up their clients actions and swamping the "opposition" with meaningless details to avoid the real issues and are not held responsible for the wrong doing because "they were only representing their client." Economists have been unable to factor corruption into their evaluations / predictions. Until the press and the US citizens are able to call corruption what it is and address it, we will continue to have distorted out of proportion problems. A little corruption goes a long way and the ones that get hurt the most are the innocent bystanders.

Sep 08 09:14 AM

[charlesrkiss:]

Plenty of economists had it right; but people mostly wanted to believe that the worst could never happen. Thankfully, it didn't. Yet.

Sep 08 09:20 AM

[Ferdinand E...:]

I'm a great economics teacher, better than anyone mentioned above, and I 'thought' that this meltdown was coming. After all, everytime - except perhaps once - that there has been an oil price spike, there has been macroeconomic trouble. This time the sustained oil price escalation was the straw that broke the camel's back.

But you see, I don't give a bag of beans . Krugman is a smart guy, but not so smart that I would listen to anything he saws, because mixed in with his smartness is a load of stupidity. Exactly who in their right mind could possibly be interested in those crazy 3 points mentioned at the beginning of this article.

And incidentally you-all, I have taught mathematical economics in at least a half dozen countries, and I don't remember many important insights that I gained from the subject. The Hotelling model of exhaustible resources is the biggest crock of the last century, but it provided dozens of well payed careers.

Sep 08 09:55 AM

[sapereaude:]

Two years of physical labor on a farm, ranch, woodlot, quarry, mine, fishing boat or oil rig, followed by a few hours of watching siblings play Monopoly, should be a prerequisite for admission to B-school.
Computers have lobotomized America's nominal intelligentsia. Turn the damned thing off and look around at what's actually happening outside the cubicle.

Sep 08 10:01 AM

[IT'$ OVER!:]

Article Snippet I found:

Equity Analysts vs Economists: Never before have Wall Street stock analysts diverged more with economists at their own firms over the outlook for earnings in the Standard & Poor’s 500 Index. Profits for companies in the S&P 500 will rise 25 percent next year, according to the average estimate of more than 1,500 equity analysts tracked by Bloomberg. That’s 10.9 times faster than the expansion in gross domestic product foreseen by 53 economists surveyed last month. The ratio of income to GDP growth is the highest on record and compares with an average of 6.1, based on data compiled by Bloomberg going back 60 years. Bloomberg.com

Sep 08 10:25 AM

[MikeW:]

I suspect that economists didn't get it as wrong as it seems. Most likely, there were lots of them who know full well what was in store, like the knowledgable folks who began grooming the great Depressionologist Ben Bernanke to head the Fed years ahead of the inevitable. The trouble is that 95% of economists work for organizations with products, services, or ideologies to sell, and the selling of those is in conflict with the telling of economic truth, even if they're clever enough to know it.

Sep 08 10:29 AM

[bottoms-up:]

You missed some of the major factors related to this issue...

Economist, like everybody else, are subject to psychological and social pressures...

Imagine a company economist sitting in the board room of a major investment firm in 2007 telling everybody... We are at the edge of the cliff! Well, if he has a wife and family to support, it just won't happen.

Take the "Nobel Prize" winning economist, who's university is flush with donations from private corporate industry and U.S. government grants... Is he going to come out and tell us the end of the economic world as we know it is coming?

You can look at such factors as "group think," etc., etc. and I think you'll get my point. Economist, by and large, are no different than you or I in that we all respond to the same psychological and social pressures as everyone else.

Unless economists are in a real position to "speak freely," nothing will change and there will be no warning of the next iceberg of the starboard bow.

Sep 08 10:30 AM

[bottoms-up:]

Krugman? Try to post a comment on Krugman's blog that is even mildly critical of his point of view. Since it is "moderated" you'll never see your post... Try it sometime -- it's truly socialist..

Krugman is now nothing more than a U.S. government cheerleader for the recovery a la CNN Money, CNBC, etc.

Krugman's Nobel Prize is in a totally unrelated area of economics, vis-a-vis the current crisis. António Egas Moniz got a Nobel Prize in medicine for his work with a "frontal lobotomy" and the Nobel Prize Committee, never making a mistake (sounds a bit like the U.S. government), justifies that prize to this day.

Well, if you think about it, maybe it won't be so bad... CNN Money, CNBC, Bloomberg, New York Times, etc. will give us all a frontal lobotomy through the garbage they spew in the media.


On Sep 08 08:48 AM Mike from NYC wrote:

> Krugman was in the same camp and started warning and screaming about
> what was going to happen but no one listened as it would be an Inconvenient
> Truth. I remember telling my Mom's Financial Adviser in Summer 2005
> what was going to happen and he looked at me like I was an Alien
> with 3 heads. Thankfully, my Mom listened to me and I put her money
> in the Money Market in late 2006 and mine as well so we both came
> out OK.

Sep 08 10:43 AM

[mloren:]

good clean summary. However it doesn't really answer how we missed the gorilla. Derivatives were recognized as dangerous well before the crash. The bad mortgages were also recognized as out there. I think the excess profits and partying blinded us.

Sep 08 10:47 AM

[bottoms-up:]

Actually, some of the economist I admire most, including Joseph Stiglitz, came from very humble, if not destitute beginnings. Many economist entered the field after seeing or experiencing abject poverty...


On Sep 08 10:01 AM sapereaude wrote:

> Two years of physical labor on a farm, ranch, woodlot, quarry, mine,
> fishing boat or oil rig, followed by a few hours of watching siblings
> play Monopoly, should be a prerequisite for admission to B-school.
>
> Computers have lobotomized America's nominal intelligentsia. Turn
> the damned thing off and look around at what's actually happening
> outside the cubicle.

Sep 08 10:48 AM

[Drew Horn:]

As long as economists fail to recognize the significance of fundamental elements of the economy, they will continue to have faulty vision. They could easily have seen that savings were negative, house prices were increasing much faster than income, the jobs that provided the income to support the economy were being exported, infrastructure was not being maintained, etc., etc.,etc.

I sometimes think that it is a mistake to train economists in universities. Academics constantly try to impress each other with a newer and more complex mathematical model or a combination of irrelevant data they claim has great importance. Their primary motivation is to publish enough to get tenure. Their jobs are not dependent on teaching students how to truly understand the world around them. Students are not taught to make a reality check by getting out of the office, actually seeing exactly what is happening on our streets. The are not taught to question data, only to massage it.

Frankly, we should take what economists say, put it through the sieve of common sense, and ignore all that does not pass that test.

Sep 08 11:06 AM

[DRBRUCE:]

INTERESTING ARTICLE AND COMMENTS, MOST TEND TOWARD SELF INTEREST OF ECONOMISTS AND BANKS, READ WALL STREET, WE HAVE MORE THAN ENOUGH RULES AND REGULATIONS IN WASHINGTON TO CONTROL AND MONITOR OUR FINANCIAL SYSTEM, THE MAJOR PROBLEM IS OUR POLITICIANS HAVE A MUCH LARGER SELF INTEREST!! THEY WILL NOT REGULATE THAT WHICH GIVES THEM MONEY, POWER, CONTROL. THE SAME PEOPLE WHO OVERSAW THE DEVELOPMENT OF OUR FINANCIAL CRISES, AND MISSED IT, ARE NOW GOING TO SOLVE THE PROBLEM?? THEY WILL NOT AND CANNOT, THEIR SELF INTEREST KEEPS GETTING IN THE WAY!

Sep 08 11:09 AM

[BRUCE E. W.:]

HERE! HERE! WELL STATED and "economical" too! It is what I regretted leaving out of my own comment.
The other Bruce


On Sep 08 11:09 AM DRBRUCE wrote:

> INTERESTING ARTICLE AND COMMENTS, MOST TEND TOWARD SELF INTEREST
> OF ECONOMISTS AND BANKS, READ WALL STREET, WE HAVE MORE THAN ENOUGH
> RULES AND REGULATIONS IN WASHINGTON TO CONTROL AND MONITOR OUR FINANCIAL
> SYSTEM, THE MAJOR PROBLEM IS OUR POLITICIANS HAVE A MUCH LARGER SELF
> INTEREST!! THEY WILL NOT REGULATE THAT WHICH GIVES THEM MONEY, POWER,
> CONTROL. THE SAME PEOPLE WHO OVERSAW THE DEVELOPMENT OF OUR FINANCIAL
> CRISES, AND MISSED IT, ARE NOW GOING TO SOLVE THE PROBLEM?? THEY
> WILL NOT AND CANNOT, THEIR SELF INTEREST KEEPS GETTING IN THE WAY!

Sep 08 11:26 AM

[TeresaE:]

The economic geniuses are rife with ignorance.

Like their nearly universal backing of the stripping of American wealth building (manufacturing) for cheap labor and temporarily large profits (now gone).

The minute anyone spouts, "globalization is good" for America, I want to puke.

Keynes is just an excuse to grow the political elite and their academic cronies.

The outcome of this massive government power & wealth grab is obvious to any small business owner.

And the economists are missing this gorilla too.

Sep 08 11:30 AM

[dragonpaw:]

All politicians' jobs are to "buy votes." They accomplish this by selling a bag of future goods (read promises, entitlements) to win-over that 50+ % of their electorate that places them in office. Present and future generations are left to pay for these bribes.These systemic cancers have been so ingrained in the electorate, that those receiving
redistributed wealth for thirty or more years (eg. social security, medicare,really all 'entitlement' scams) actually believe that they have "earned" these funds. With the Ponzi-like nature of these programs, nothing could be further from the truth.
The ever increasing intrusion of gov't into our private and financial lives have an apathetic electorate clamoring for gov't solutions for all ills; public, private, and global. After all, this is what the talking heads are best at. The bobble-headed public (or at least50%) wag in approval and then the snooze media gush a 50%+ acceptance and proclaim that "all is well." This will undoubtedly occur tomorrow evening.
But in a nutshell, doing the same old things the same old way( you know in good old Keynesian fashion) has brought our country to the brink of bankruptcy. Spending your way out of debt is a lot like "f--king you way to virginity. Either way, someone on the receiving end will have been badly screwed. We certainly can thank the Federal Reserve, the Treasury, and the many conspiratorial functionariesa(helicopter Ben foremost among them), for burdening us with $10+ trillion in new debt.
As the US goes bankrupt (as part of the Obama plan to bring us to our rightful place in the world) we will still be hearing the echoes of the Bush's ghosts being parroted by the Demo-gogues as the cause of the downfall. And the stunned sheeple will be more than obliging to have the neo-progressive (read "neo-facist') party pick up the pieces of country and reform us as obliging pawns in the "new-world-order"; which no doubt will be full of new order and orderers (reread Orwell's "Animal Farm").

Sep 08 11:55 AM

[milkchaser:]

"We're all Keynesians now." Where have I heard that before. Just after Nixon took US off the gold standard.

Laissez faire has not been tried since the 1920s. Not everybody agrees that Keynesian approach is best.
www.telegraph.co.uk/fi...

I doubt Lord Keynes would recommend borrowing so much when you're already so far in debt. He recommended gov't spending from a low baseline. That's not what we have had in a long time.

Sep 08 12:00 PM

[GadflyOnThe...:]

I agree with Alphameister that Perceptions' comments was brilliant. Reminds me of my economics class in college when I asked the professor why we could not have an inflationary recession. I am dating myself because this was right before the oil crisis, which was, of course, an inflationary recession. The professor, sticking to his economic theory, tried to humiliate me in front of the class, saying that my question was a stupid question, that you could never have an inflationary recession. The fact that we did have an inflationary recession forever formed the basis of my economic thinking; that yes, the world of economics is indeed fluid.

Sep 08 12:05 PM

[springtorrent:]

krugman's a politician, not an economist, his argument is flawed. first, he ignores the politically correct, yet economically destructive, notion that "every" american has the right to own a home and the economic distortion caused by politically popular ideas like the ability to deduct mortgage interest and non-recourse mortgage loans. these, not economic theory, encouraged people to borrow recklessly and produced tremendous distortions in the housing market. second, he incorrectly implies you can't have economic prosperity without inflation, which is wrong. prices declined in the late 1800s with the rail boom, which brought huge improvements in productivity and prosperity for everyone. the same occurred in the '20s, with the arrival of the motor car. today, the internet will do the same thing for the us economy, if the clowns in washington can keep their nose out of it. krugman should stick to beauty pageants and avoid the field of economics, a subject he seems to know little about.

Sep 08 12:19 PM

[bobbybutte:]

No one carepredict with certaintity WHEn something will happen We all knew the market was overvalued in 1996 however it took almost 4 years for the bubble to burst.and billions were gained and lost in that time

Sep 08 12:23 PM

[Chickenpookie:]

I sold my real estate as quickly as I could once I heard Bernanke say there was no housing bubble. I bought when nobody else could, just after the dot-gone bubble burst.

Now I'm looking for the next big bubble, maybe defense contractors? I figure this is about the only manufacturing industry remaining in the US, NAFTA and the "free" trade agreement with China have decimated nearly everything else. And I would've thought toys made for children by children to be safe... Go figure!

Sep 08 12:26 PM

[Boxed Merlot:]

On Sep 07 09:53 AM perceptions_now wrote:
> Politicians, Economists and Business, need to rethink their foundations,
> we need to help them in those endeavours and we should encourage
> them to get it substantially right, via easily understood means…

How about a brief lesson in construction /deconstruction terminology?

Constructive terms:
1. Power
2. Wealth
3. Wisdom
4. Strength
5. Glory
6. Honor
7. Blessing

Deconstructive terms:
1. luxuria (extravagance)
2. gula (gluttony)
3. avaritia (avarice/greed)
4. acedia (acedia/discouragement)
5. ira (wrath)
6. invidia (envy)
7. superbia (pride)

The first terms are a list of attributes roughly correlating to the flames represented by the golden candlestick illuminating the veil before the throne of the general contractor and presented to his foreman after completing his carpenter’s task of constructing his father’s dwelling. The second list of attributes describes human attempts to gain residency in the structure.

Maybe the struggle we’re in is beyond “global”.

Sep 08 02:19 PM

[dracula99:]

I wonder what conservatives thought of slavery when a few Socialist / Radicals thought about abolishing it. You don't have to believe in God to know that tying up a unfortunate black soul, and beating him to a pulp because he didn't pick enough cotton, MUST BE a bad thing. Likewise, when a bunch a bankers and oilmen are able to cause so much misery to their country, this too must be a bad thing. Thus, my position on this so called free-market, is that it must be regulated a hundred times-fold more than it is now. I trust government more than I trust human beings individually, because at least with governement you know who to go after, if things go bad. Who can I go after now? Exxon? Goldman-Sachs? Blackwater? Halliburton? Bechtel? I will surely disappear in a timely manner. At least revolutions do stand a chance. Spare me your faith in free-markets, it has caused the demise of this nation.

Sep 08 04:48 PM

[Gem Hudson:]

But when free in your enterprise, going from your rags to your riches is you working out the business until the business work for you.

The business cycle boom are in the people producing and selling what they produced. Prospering in your own business are the people in their private enterprise and property but government enterprise are to sell green cars. If your green jobs are selling more discounted trade in for your so call clunker, the cash incentive sell any other car but their union cars. You pay additional expense for their hostile take over.

Sep 08 06:26 PM

[pater_teneb...:]

with all due respect, Paul Krugman is primarily a political hack, not an economist, in my opinion (Nobel prize notwithstanding).
i still recall how he disparaged Austrian Economics back in 1998 (proving, in his so-called 'critique' that he did not even remotely understand its concepts, and has therefore probably not read a single work by an Austrian school economist, or if he has, he didn't understand it).
He and his fellow Keynesians have practically begged Greenspan to 'create a housing bubble to rescue the economy' in 2000-2002 (see Paul McCulley's writings, the Über-Keynesian whose prescriptions remain the same today: more fiscal spending and more money printing please! some new bubble will surely arise and 'save us').
Keynesian economists have no proper theory of capital - they think it's just an aggregate 'K' in a circular flow model of the economy ('one man's spending', they contend, 'is another man's income', and thus consumer spending must be pushed at all costs. well, we see now where that has landed us).
Their lack of understanding of capital theory in turn is at the root of their misconceptions about what causes bubbles and busts. Since they do not understand these things, they can not accurately predict them, and can also not be relied upon to deliver the proper 'cures' or policy ideas for the busts that are ultimately caused by the very policies they advocate.
One thing is correct - most economists are worthless charlatans nowadays, whose forecasting ability ranges far below that of janitors or housewives (this is not idle chit-chat, a study by the magazine 'The Economist' showed that housewives were better economic forecasters than professional economists for every time frame from 1 to 10 years!) - but then, most of them are Keynesians, so there's no big surprise there.
Krugman must be denounced at every available opportunity, the man is imo dangerous, because through his platform at the NYT he provides a 'scientific' fig leaf for the statist interventionist economic policies that continue to be our ruin.

Sep 08 07:00 PM

[Bad Dog:]

Damn but that's crap! Flunking history = bad. The greatest period of economic expansion in the 20th Century occurred during a period of very high taxation. But out of that taxation, we got an Interstate highway system, a fantastic education system with a correspondingly educated workforce and powerful economy, and very low deficits, along with many other advantages. What did our huge tax reductions get us? I think we know the answer to that. Taxes are a form of forced saving. Lack of saving = bad. Time to relearn your lessons, Junior.


On Sep 07 03:11 PM ebworthen wrote:

> Economists are like lawyers; they fool themselves into believing
> they are doing something constructive for society.
>
> Once they convince themselves they are doing good (whether they are
> or not) they proceed to make money prognosticating and equivocating
> about the morality of onerous taxation, lavish spending, corporate
> greed, and the need to fire people with 20 years service to a company
> or government.
>
> Most third graders have the common sense needed to be an economist.
>
>
> Here it is:
>
> 1. Debt = bad
> 2. Allowance for chores = good
> 3. Lending to the kid you don't know very well = bad
> 4. Principal busting the bully for shaking down other kids for lunch
> money = good
> 5. Principal ignoring bully because it is his Nephew = bad
> 6. Stealing money from Mom or Dad = bad
> 7. Government stealing money from Mom and Dad = good (or so the
> politicians say).
>
> We have robbed the average citizen who invested in the nation (markets).
> We have turned around and robbed them and the next two generations
> to excuse the malfeasence of Wall Street. Our lawyer politicians
> are doing what lawyers do; equivocating and taking both sides to
> forestall reality until they can get elected again.

Sep 08 07:47 PM

[ngwun:]

"Who knows what evil lurks in the hearts of men? The Shadow knows!"
Doesn't matter how good the mathematics, how researched the hypothesis, nor what "laws" are enacted. Those who are @ Uni. studying to develope society, & allow the species to progress, are sharing facilities with those who are to take their system apart: not only to rape & pillage it, but to do so to the approbation of the masses. So many who accuse would be in the game if dealt a hand.

"The weed of crime bears bitter fruit. Crime does not pay.... The Shadow knows.
So the deed must be redefined as eccentric rather than egregious.

Sep 08 09:11 PM

[JohnL:]

Bad Dog says, "Taxes are a form of forced saving."

Not to the person who have the money ripped out of their pockets. Nor to the individuals favored by the politicians who then get to spend it. Man! Whatever progressive-liberal weed you're smoking, I want some.

Sep 08 10:46 PM

[Econ 101:]

the first thing the economists got wrong is that the US is a "Free Market economy". It hasnt been since I dont know when. Everything and every economic step is controled by the federal government. The EPA, OSHA, and who knows how many other agencies and Czars so restict choices that it is no wonder the ivory towers that economists live in fell down.

It is part of the Bread and Circuses the sheeple are being fed to keep them quiet. The top 1% receives 20% of the income. The new taxes on the "rich" are meant for the middle class to insure they dont get upppity.

Before the 16th amendment fortunes were made and lost by many people. Since then the process has evened out and there isnt as much competition at the top. Just the way the top likes it.

Sep 09 03:58 AM

[MSimon:]

Real long term stimulus is research. Geese farming in the hopes of getting a few that will lay silver or gold eggs.

A few areas that are being short changed relative to potential:

1. Small Fusion - devices with experimental costs in the rage of $2 to $20 million a year.

2. Carbon nanotubes to replace copper and aluminum conductors.

3. Carbon transistors of various flavors including diamond, graphene, and carbon nanotubes.

There are probably a lot more places that need effort.

Sep 09 12:35 PM

[MSimon:]

" I wonder what conservatives thought of slavery when a few Socialist / Radicals thought about abolishing it."

Let me see. That would have been the anti-slavery Republicans vs the pro-slavery Democrats and the Democrat's domestic terror wing the KKK.

Sep 09 12:42 PM

[unclej0:]

"Perceptions" seems to have a good grasp of reality but not any really new insights. He is preaching to the choir.

The main feature of economics that makes it so complicated is that it is a portion of a rapidly evolving socio-economic order. Thus, we can get useful insights from many sources but not a fully usable model. Why is it rapidly evolving? Well, at least three good reasons.

1) We have not yet found any system that works, long term.
2) The facts around us, technology, population, military, political, and the availability of natural resources are changing rapidly.
3) We are a knuckle dragging, stupid, primitive species and many of us are gaming the system in our own stupid ways. Our best hope is that the leadership can hold things together long enough for science to drag us out of the current darkness. After that, perhaps we can create a smarter, better organized species and quietly shuffle off to a well earned rest.

Insulting the NY Times adds nothing to your argument.


On Sep 07 11:49 AM Alphameister wrote:

> The comment by "perceptions" is brilliant, much superior to the article
> that precipitated it. The basic problem that has led to this mess
> is the arrogant, elitist belief that economic sophistication has
> progressed to a point where super-enlightened leaders in Washington
> can eliminate the cycles that are inherent in all of human life.
> Markets are efficient only to the extent that they cycle around levels
> that tend toward rationality in the long run.
>
> Jefferson said that "a government powerful enough to give you anything
> you want is a government powerful enough to take everything you have."
> Perhaps a corollary of that is "a government big enough (and meddlesome
> enough) to moderate economic cycles and seemingly reduce risk is
> a government big and meddlesome enough to give you an eventual cycle
> that will blow your mind away (and your wealth along with it)."
>
>
> So let me add a third underlying assumption to those offered above
> by "perceptions": Markets are not always efficient, but they are
> far superior to meddlesome and incompetent governments for whom the
> long-term is defined by the next election.
>
> Anyone who would look to Paul Krugman and that rag he works for to
> provide valuable economic insights is part of the problem rather
> than part of the solution to our problems.

Sep 09 04:12 PM

[dracula99:]

Are you kidding me? I am using the Conservative v. liberal mentality, not the definition of Republican/Democrat of today' society. Surely you can't be that ignorant. Wait...you are a Republican.

Sep 10 08:21 PM