Relevant and even prescient commentary on news, politics and the economy.

Why Much of the Population Thinks Economists are Charlatans

by Mike Kimel

Why Much of the Population Thinks Economists are Charlatans

Noah Smith asks why people think economists are charlatans. He concludes it has something to do with trade.

I submit the answer is much, much simpler, and I think it deals with the part of economics which has most visibility with the public: macroeconomics. Read this post from a few years ago about an economist who is reasonably prominent outside academia. But it wouldn’t be difficult to make a list of other economists, whether with a bit of prominence outside academia or inside it or both, for whom one could write essentially
the same post. Heck, if we wrote down a list of chairs of the President’s Council of Economic Advisors, budget directors, and Treasury Secretaries, how many of them couldn’t be the subject of that sort of post? And let’s be realistic, there is no cost to doing so. Consider the folks who retroactively predicted double digit growth rates in 2002. None of them suffered consequences, regardless of the damage they caused.
None.

What happens if you do the same thing in another field? What happens if to a guy who peddles Lysenkoism in Biology? Think they’ll make him Dean of a prominent Medical School? A physicist who makes her life
work debunking the Michelson Morley experiment ain’t gonna go far either. Obvious charlatans in biology or physics or chemistry get treated like charlatans by people who call themselves biologists, physicists and chemists, even those who work in different parts of the field. People who call themselves economists (whether macroeconomists or otherwise) sit on panels and attend conferences with the obvious charlatans. They shake hands with the obvious charlatans, they don’t spit on the floor and turn their back on the obvious charlatans, and most damning of all, they don’t refer to them as obvious charlatans. And meanwhile, the obvious charlatans do very well. Fudging and shading the data can pay very well, especially if one is well spoken and looks presentable.

The problem is, a career where it is easy and lucrative to be a charlatan, where being an obvious charlatan has no consequences or costs but plenty of benefits will attract more and more obvious charlatans. In fact, there are a couple old principles in economics, from back in the day when the field wasn’t as infested that can tell  you what happens next. We’re long past the point where the public has figured it out. The only thing that will save the profession is if economists figured it out too.

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Why Economists (On Average) are Terrible Forecasters

by Mike Kimel

Why Economists (On Average) are Terrible Forecasters

My colleague, Rebecca Wilder, had a post at her site entitled Economists are terrible forecasters – why trust them anyway?. The reason why economists as a general rule are lousy forecasters is obvious: there are no penalties to being wildly wrong.

Prominent examples abound. Dow 36,000 anyone? No housing bubble in 2005. I can go on forever, but these aren’t even as as it gets. At least these are bad forecasts of the future. There are plenty of bad forecasts of the past, or even the hypothetical past, too. My favorite example, in fact, of a bad forecast came in 2002, when a group of prominent policy economists, advisors to the then President, told the world that barring the 2001 recession, the US would have enjoyed double digit growth in fiscal 2002. And nobody said peep. It wasn’t front page in the newspapers. It wasn’t in the newspapers at all! Nobody involved paid any price for it, except the public who had to endure the policies “supported” by such an incredibly inane analysis. In fact, just about everyone involved went on to bigger and better things – Governor of Indiana, Dean of the Business School at Columbia, etc.

If there are no penalties to being wrong, there also usually aren’t any benefits to being right. Consider, well, me for example. Regular readers know I don’t make predictions often, but I like to be right when I do make ’em. I can’t think of anyone else who called both the start and end of the Great Recession, in both cases running against the grain, but you aren’t likely to see me on TV any time soon. (I will admit my forecasts weren’t perfect: I misunderestimated the stupidity of the policy responses of both Bush and Obama and thus didn’t expect it to be quite as bad as it turned out.) I can even think of two forecasts made for a then employer that I suspect together cost me a job, despite the fact that the forecasts turned out to be spectacularly right.

Its been said its better to be wrong in the same way as everyone else than to be right alone. That’s certainly true for economists. Unfortunately, that is a bad thing for anyone who listens to economists.

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Some @*$&s Write a Letter

by Mike Kimel

Deficit numbers for CEA chair signatories on the deficit letter Cross-posted at Presimetrics Title updated

I’m kind of late to this, but apparently ten ex-chairs of the President’s Council of Economic Advisors decided to share their opinion about the national debt with the rest of us. There’s been commentary here and there about how hypocritical some of the names on the list are – the CEA chair is the President’s chief economic advisor, and many of these people served under Presidents (and provided economic advice) that drove up the debt. I thought it would be an interesting exercise to put some numbers on the hypocrisy.

To do that, I pulled the dates for which each CEA chair served and quarterly figures for the total public debt. The debt series I obtained (from the Federal Reserve Economic database) goes back to 1966. The terms of each CEA chair served did not completely coincide with a yearly quarter, but I split them up as best I could. (Note – because sometimes it took a while for a CEA chair to be confirmed, but that person could well be offering the President advice before confirmation, I assumed that each CEA chair “took office” immediately after his/her predecessor left.)

The debt was adjusted by quarterly CPI, and population, resulting in the real national debt per capita. The following figure shows the change in the national debt per person on a quarterly basis, over the length of each CEA chair’s term. The gray bars represent those who signed the letter.

Figure 1.

A few comments.

1. Most of the signatories to the letter increased the national debt per person.

2. A number of the CEA chairs are or have been with the Fed – none of them (Greenspan, Yellen, Bernanke) have signed the letter.

3. Harvey Rosen may look responsible… but that’s a function of the timing of the brief term (about a quarter) he served, encompassing the period when individual tax returns were due. He served under GW Bush, after all, and nothing GW, and despite what many supposed conservatives were saying through 2004, at no point did GW ever do anything that resembled being fiscally responsible.

4. About the only signatories who on the face of it have a leg to stand on signing this letter are Schultze (Carter’s CEA) and Bailey (Clinton’s last CEA chair).

5. I think its fair to stretch the leg to stand on thing to include Laura Tyson, Clinton’s first CEA chair. Yes, the debt increased while she was in office, but at a rapidly decreasing rate, and her advice provided some of the ground for the surpluses that came at the end of the Clinton term.

6. I’m sympathetic to Keynes’ view that a responsible government runs up the debt when times are bad, and pays off the debt at other times. By that standard, a lot of these signatories have no excuse whatsoever. I believe it speaks very poorly of economics as a profession that anyone takes Martin Feldstein, Glenn Hubbard, Greg Mankiw, or Edward Lazear seriously, and I believe it is a sign that they have no honor that they would have the temerity to put their names on a letter like this. These are not, after all, low level drones whose livelihood depends on not making waves, but rather financially secure architects of the policies that cratered this country’s finances. As I see it, they were in the position to do good, and instead they enabled bad.

7. That Obama inherited an economic mess does not excuse his economic policies, or those who provided him with advice (Romer & Goolsbee). Nationalizing debt incurred by companies (and there is no other way to describe the process by which nonperforming financial assets were taken off the ledgers of many companies) without also nationalizing the assets of those companies is a surefire way to ensure something like the Great Recession will happen again. And even a mediocre economist should have had the skills to convince even the densest of White House residents what happens when you don’t even try to incarcerate any of the bad actors.

8. I hesitate to disagree with Brad DeLong who is usually right, but I think there is yet another reason to avoid excusing his colleague Christina Romer. When a person’s most famous paper reaches a conclusion that gives ammunition to those who are wrong about economic policy, and that paper is itself a textbook application of Maier’s Law, that person’s advice can only produce poor results.

9. If I had to award a “Supreme Chutzpah” award to any of the signers, I guess it would be Glenn Hubbard. Not only did he turn a surplus into a deficit and lay the groundwork for bigger and better deficits to come, his defense of that deficit he created was fairly unique, involving an implicit assumption of double digit GDP growth!!!. (Yes, this man is now Dean of the Business School at Columbia.) I believe Hubbard was last seen co-authoring a paper explaining the desirability of “a 4.5 percent mortgage for homebuyers for a period of time. This bold idea, akin to our proposal on this page on October 2, would help arrest the decline in house prices and absorb excess inventory of housing.” I’m not sure what “a period of time” is to Hubbard, but we had rates in that neighborhood for about six months last year. The rates got there shortly after the Case Schiller Home Price Index had bottomed out and started rising, and right about the time the index started tanking again. The index is now rising to new post-crash depths.

10. On the other hand, I suspect Brad DeLong might nominate Greg Mankiw for some sort of award among the signatories of the letter and its hard to disagree with him. FYI – my views on debt haven’t changed since this.

Which leads to another look at the figure I put up earlier, this time color coded by the party of the President in office. Figure 2

And one more thing… as Michael Kanell and I wrote in Presimetrics, sooner or later “Democrats who make it to the Oval Office [will] realize that they are going to be tarred as fiscally irresponsible no matter what, so why make the tough decisions that Republican presidents have refused to make in recent decades?” I guess after Ford, Reagan and the two Bushes, an Obama has come home to roost.

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Crisis? What Crisis?

As I should have noted yesterday, and as Arnold Kling discusses today, sometimes the questions are as revealing as the responses. And sometimes, the answers are suspiciously inconsistent.

Below is the graphic from my question for the Q2 Kauffman Economic Outlook: A Quarterly Survey of Leading Economics Bloggers. Link to the survey press release here, graphic results for the questions from Bloggers here, and the general Kauffman Institute blog site, Growthology, here.

I’m failing miserably at developing a Macro model that supports the majority answer for all the questions.

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Three to Read for the Solvency Crisis

Simon Johnson on the possible consequences of Goldman Going Greek.

Economics of Contempt explains why economist John Cochrane should not be allowed to talk about finance. (Bonus coverage: EofC’s previous piece on John Taylor)

Alea’s jck on how all the talk about risk management became mainstreamed.

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