Should we send all of America’s economists away for a few years?

In reading opinions regarding the U.S. and state economies from professional economists and in talking to these folks face-to-face I’ve never heard any of them say anything clear enough for a voter to act upon. For example, suppose that the U.S. owed 800 percent of GDP, like Greece (see this NY Times article (the U.S. figure is around 500 percent, though we’re not as centralized as European countries and there is almost surely a lot of state-to-state variation)). An accountant would say “You’re spending more than you earn. You have to stop or you will run out of money.” After hearing that, voters and politicians might be able to get together and agree on some spending cuts (not the trivial ones that they’ve managed so far). Perhaps even Californians would be able to agree that their cities could be run into bankruptcy just as competently by managers who earned no more than the President of the United States earns, that a qualified fire chief could be hired for only the same salary as the U.S. Secretary of Defense, and that a police lieutenant need not receive 3X as much as a U.S. Army infantry lieutenant in combat in Afghanistan.

Instead of accountants in public discourse, however, we have economists. So our problems are not recognized as arithmetic challenges, e.g., “How can a society with a median wage of about $16 per hour afford to pay local and state government workers $100-200 per hour (and then pay them for another 50 years after they retire)?” or “How can teenagers who score lower than their Chinese counterparts on every measure of educational attainment be relied upon to pay for 130 million poor and older Americans to receive unlimited medical services in the world’s most expensive health care system?” (see this chart for how Medicare will have 80 million beneficiaries in 2030 (I added in another 50 million for Medicaid (chart)).

The problems are instead categorized as amenable to complex solutions that only someone with a Ph.D. in economics can understand. Or perhaps they are cast as political problems, e.g., “If not for the presence of a handful of heretics amongst voters and in the legislature, we could pass new laws that would magically double our wealth” (I have some extra faith in Massachusetts because one party has controlled our legislature for decades and when we run out of cash there is less chance that they will waste time trying to pin the blame on the handful of Republicans who show up to the State House every now and then to collect a paycheck (but do nothing else)). But oftentimes economists are politically oriented and contribute to the relabeling of “not enough cash” to “too many people in Party X”.

So instead of the sober accountant showing up on TV or in a news article saying “You aren’t rich enough to do stuff like this” or “All of your wealth was siphoned off by the following cronies of the current rulers” we have Economist A saying “Really the U.S. is in great shape if only we printed more money here, had one government agency issue some bonds there, had another government agency buy those bonds, and changed some assumptions in making projections about the costs of Programs X, Y, and Z”. That would be confusing enough except that Economist B then comes on and says “No, the government shouldn’t be printing money and we need these other assumptions in our projections.” The contradictory and complex opinions result in paralysis and inaction where the accountant’s simple warning would have been heeded. Perhaps worse, people hear what they want to hear, in which case a complex macroeconomic argument will register as “We can all be wealthier even if we’re studying less in school and then working fewer hours and fewer years.”

So could we increase our society’s wealth if we sent all of our economists off on a three-year holiday?

40 Comments

  1. Unfavorable odds

    June 6, 2011 @ 9:57 am

    1

    Nailed it. Economics is a social science whose theories can never be proved or disproved because there are simply too many variables. It’s why there are so many theories and differing opinions. Whether it’s Krugman or Kudlow, neither can be proven right or wrong. And if they do ever get something right, chalk it up to being lucky, or being a stopped clock (which is right twice a day).

  2. J. Peterson

    June 6, 2011 @ 10:34 am

    2

    Perhaps. As the movie Inside Job indicated, academic economists are very much part of the crew actively involved in looting the country.

  3. Nick

    June 6, 2011 @ 11:31 am

    3

    Finally a call for common sense! Yes, let’s send the economists away and bring in the accountants. It would be nice if we had the money do to all these wonderfully intentioned programs and “investments” in our future, but we don’t. If we continue to spend money we don’t have, it won’t end well.

  4. Tiago

    June 6, 2011 @ 11:50 am

    4

    You fail to notice that “you’re spending more than you earn” is just wrong when applied to governments. Especially when those governments borrow in their own currency, as these debts can be restructured by monetary policies.

  5. philg

    June 6, 2011 @ 12:39 pm

    5

    Tiago: The Greeks should be reassured by your message. They can be richer than the Germans and French and retire younger. They just need a fancier monetary policy. Perhaps if we send our economists on a holiday to Greece they can work out the details while there.

  6. Tiago

    June 6, 2011 @ 1:55 pm

    6

    Phil: the Greeks are not in control of their monetary policy, so effectively not borrowing in their own currency. This is the cause of all the criticism of the Euro, not allowing countries to devaluate their currency in times of crisis. In any case, even if Greece was not in the Euro it would still have problems — very unlikely that outside investors would grant much credit in dracmas.

    And, still in the greek case, the major problem was not government overspending (this has continuously taken place over the last few decades), but reduced revenue due to the financial crisis. But I guess it suits some political agendas to say that the problem is government overspending.

  7. philg

    June 6, 2011 @ 1:57 pm

    7

    Tiago: Greece’s problem is not too much spending but rather the completely unrelated problem of insufficient revenue? In particular they are short roughly 8 years of GDP and it just snuck up on them? That’s why they needed a $15,000 per person (man, woman, child) bailout last year? Because they had planned to collect $15,000 extra in tax last year from every 3-year-old Greek and the kids turned out not to be good for the money? And this month they need another $5,000 per Greek because the tax revenues have inexplicably proved smaller than if there were an oil well on every street corner?

    That sounds kind of like my household. In addition to my townhouse on Park Avenue, I have purchased a mansion in Newport, Rhode Island and a 200′ yacht plus staff to go with it. I bought a new Gulfstream G550 to take me back to my ranch in Jackson, Wyoming often enough that I won’t be subject to any state income tax in NY or RI. I can’t figure out where to put all of the Manet and Matisse paintings, so I’m just stacking them up in the basement. I’m not a big spender, exactly, but I’m feeling a little crimped right now due to a revenue shortfall. You see, I didn’t get the hedge fund manager job that I had planned to take.

  8. Econ Boi

    June 6, 2011 @ 1:58 pm

    8

    Current economists remind me of the one in Douglas Adam’s universe. He is a quote from one of them:

    “But since we decided to adopt the leaf as legal tender, we have all of course become immensely rich. But we have run into a small inflation problem owing to high leaf availability. That means the current rate is something like three major deciduous forests buy one ship’s peanut. In order to obviate this problem and revalue the leaf, we’ve decided on an extensive campaign of defoliation and burn down all the forests. I think that’s a sensible move, don’t you?”

  9. Roger Babson

    June 6, 2011 @ 2:01 pm

    9

    Economics as practiced at universities should be regarded as a failed discipline. Instead of tarot card readers and magnetic mesmerists, we employ bespectacled white dudes to spout off authoritative nonsense to make the status quo seem like it has an esthetic of officialdom surrounding it. In reality, the status quo is merely ushering in an age of neofeudalism and turning the United States into a debtors prison with 300M+ inmates.

  10. Russil Wvong

    June 6, 2011 @ 2:34 pm

    10

    “… we have Economist A saying ‘Really the U.S. is in great shape if only we printed more money here, had one government agency issue some bonds there, had another government agency buy those bonds, and changed some assumptions in making projections about the costs of Programs X, Y, and Z’.”

    I’m reminded of Keynes’ exasperated comment: “Economics is a difficult and technical subject, but nobody will believe it.” This kind of analysis isn’t just mumbo-jumbo. Cost projections, for example, make a huge difference in determining the size of the fiscal problems facing the US.

    Why does the US have the most expensive medical system in the world? How is it possible that Canada is spending 10% of GDP on health care, the US is spending 15%–the US still isn’t able to insure everyone?

  11. philg

    June 6, 2011 @ 4:00 pm

    11

    Russil: I think I must not have made my point very clearly. I wasn’t arguing that projecting costs for future stuff wasn’t relevant, only that when you have economists doing the projecting rather than accountants you end up with 15 different contradictory assumptions. Estimates by accountants would likely fall into a much narrower range.

    Your final question regarding how the U.S. can spend 15% of GDP on health care is easily answered: We don’t spend 15% of GDP on health care. http://www.altarum.org/node/583 says that we were spending 17.7% in January 2011.

  12. Ryan

    June 6, 2011 @ 6:47 pm

    12

    So what do you tell the “sober accountant” when he says you cannot afford to defeat Germany and Japan in World War II, because it will produce debt even higher than what we have today (“you’re not rich enough to do stuff like this”)? http://en.wikipedia.org/wiki/File:USDebt.png

    Personally, I’d tell him to stuff it, because I know that not only can I vanquish some terrible empires but end up spending my way out of a depression.

    I am glad we have people like economists who at least attempt to grapple with complex questions instead of delivering pat answers. Of course, there will always be politicians who go looking for the dodgiest of the bunch to suit their needs. E.g. Ronald “Supply Side” Reagan and George “Let’s Spend the Surplus!” W Bush.

    (Oh, I guess technically I’ve Godwined this thread. It was worth it!)

  13. philg

    June 6, 2011 @ 7:16 pm

    13

    Ryan: I hope by showing off that link to federal debt that you aren’t suggesting that a competent accountant would look at debt without also looking at liabilities. The U.S. had a lot of bonds out there at the end of World War II, but it had very few other liabilities. Medicare and Medicaid did not exist. Public employee pensions were tiny. Social Security obligations were much smaller (due to shorter life expectancy at retirement and a larger ratio of young people to old people).

    A good accountant would tell you that the fact that you had high debt temporarily to deal with a world war at a time when you had no other significant liabilities doesn’t mean that you can handle the same high debt when you also owe 400% of GDP for public employee pensions, Medicare, Social Security, etc. A great accountant might also tell you not to use up all of your credit dealing with a small problem (business would rather invest in India, Brazil, and China than in the U.S.) because you never know when a big problem will arise. (See Japan, which went into the tsunami with a very big debt.)

  14. Brian Watkins

    June 6, 2011 @ 7:21 pm

    14

    “Bits and pieces of talk around the way about “is economics a science and if so why to economists disagree so much and so loudly?”.

    This confusion disappears if you make sure to remember that the “ist” at the end of the word “economist” should be taken not as analogous to “scientist”, but rather to “Trotskyist”. Robert Conquest was an expert on socialism, but not a socialist…”

    -Daniel Davies, http://d-squareddigest.blogspot.com/2011/03/ist-of-science-and-ist-of-ideology-bits.html

  15. Curt Doolittle

    June 7, 2011 @ 12:39 am

    15

    WHICH ECONOMISTS?

    I wrote about the crash as early as 2004, and was commenting daily by 2006 that it would occur in the fall of 07, and would last through at least 2014. I was called every name in the book. Roubini beat a drum almost daily and earned the name “Dr Doom”. The entire Austrian group chanted daily that a crash was deterministic, even if they couldn’t tell when. The crew in Iceland was publishing regularly that consumption was out of sync with increases in productivity, so that current prices and consumption were unsustainable.

    So be selective about which economists you’re sending away.

  16. philg

    June 7, 2011 @ 8:56 am

    16

    Curt: Selling all of one’s U.S. stocks in 2004 and buying foreign assets or gold would have been a pretty good idea, admittedly; the S&P was at about 1200 at the end of 2004 and is 1287 today (i.e., lower than 1200 when adjusted for inflation; $1200 in 2004 has the same buying power as $1428 today).

    However, just as we apparently aren’t able to agree on which economists to listen to we also probably wouldn’t be able to agree on which ones to export. So maybe it would be safest to export all. Or maybe we could retain the microeconomists, who seem to have done pretty reliable work.

  17. Peter

    June 7, 2011 @ 12:29 pm

    17

    Phil,

    Thank you so much for touching on this subject. I’m just a humble software engineer but I can definitely say that a huge number of economists (worldwide, I might add) have been proven to show a truly lousy understanding of the economy. In my opinion the root cause is that many economists actually believe in central planning ideas, which, as history has repeatedly shown, are terrible in the long run.

    Thank you for a breath of fresh air.

  18. philg

    June 7, 2011 @ 12:47 pm

    18

    Peter: If all economists believed in central planning that might actually be better than the situation now where only half of the economists believe in it and the other half are out there contradicting them, leading to paralysis in decision-making.

    [Separately, a centrally planned economy might do better in some ways than the U.S. crony capitalist system. Central planners in the Soviet Union did not borrow heavily with bonds. Nor did they give lavish pensions to young retirees (why would they need to? They didn't have to curry favor with a public employee union in order to get reelected). Nor did they set up a health care system in which the only limit to spending would be the imagination of health care vendors.]

  19. jay c

    June 7, 2011 @ 2:41 pm

    19

    maybe we shouldn’t send them off on a three-year holiday, because we’d probably have to pay them 99 weeks of unemployment. And, as Ezra Solomon said, “The only function of economic forecasting is to make astrology look respectable,” so at least economist jobs have a purpose – it’s a make-work program. The problem is that we listen to them.

  20. Peter

    June 7, 2011 @ 2:57 pm

    20

    There was an old joke about how the US capitalism (crony or not) was on the edge of the abyss. What was it doing there? It was staring at the centrally-planned economies.

    Having a rather libertarian view of how things should go in the economy, I for one would be happy if there was a true paralysis due to lack of consensus, so the free market could sort itself out. Yes, even if that included painful bankruptcies for certain car makers, people who have mortgages, banks, insurance companies, cities and states. Unfortunately though, the central planners have been extremely effective in the past three years, and have done everything in their power to prevent things from following their normal course.

    As for the idea that an accountant’s voice would have been listened to, let’s not forget two things. First, that accounting can also be a very fluid thing: see how the US government has perversely changed the accounting laws to allow banks to mark assets to imagination rather than to market, see how the Greek government has used accounting to hide their true costs, see Enron and so on. Second, that it’s not at all safe to assume that a well informed voter would choose differently (read austerity), for the good of the city or state or country where the voter is located. Not when a significant number of these voters actually like and depend on the status quo.

    Phil, I’m convinced that the changes required to correct these excesses you mentioned in your blog post will happen eventually, just as they have in Greece, Ireland or other countries. And yes, they will affect our beloved public sector and union employees too, the healthcare system, the higher education institutions and so on. But only when there will be no other option left.

  21. Ryan

    June 7, 2011 @ 5:27 pm

    21

    Philip: No, an accountant in the 1930s and 1940s would not have concluded, as you suggest, that the U.S. “had very few other liabilities.” In fact, the U.S. had in 1935 embarked on an unprecedented expansion of the federal government and of social welfare benefits known as social security.

    This pernicious program threatened to plunge the U.S. into communism, assuming it could escape insolvency first.

    “In October of 1936, the Los Angeles Times described the California campaign visit of Roosevelt’s opponent Alf Landon as ‘highly encouraging to the Republicans and the real Democrats of this State,’ which State, they went on to say, ‘must pay for New Deal prodigality and folly.’”

    http://www.theawl.com/2010/11/the-mainstream-media-and-the-fight-against-communist-and-social-security-1936-edition

    Remember, back before the federal government provided the interstates that fueled many a travel memoir, and before it kindled the internet that fueled many a consulting business and many a fortune, the notion of what constituted a “significant liability” was very different.

    An accountant can tell you all about the numbers. An economist helps you think about where the numbers are going.

  22. philg

    June 7, 2011 @ 5:59 pm

    22

    Ryan: I somehow doubt that prior to embarking upon World War II the trustees of Social Security were saying that the program wasn’t sustainable. Whereas in 2011 http://www.ssa.gov/oact/trsum/index.html notes “Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing”. Nor do I think that prior to World War II were there top government officials saying that really they couldn’t even estimate with certainty the costs of the government’s future obligations, as in http://www.ssa.gov/oact/trsum/index.html where it says “Cost projections for Medicare are much less certain than for Social Security over both the short and long term … Over the longer run, assumptions regarding the growth of health care costs are central to projections of Medicare’s long-term financial outlook. These assumptions are inevitably highly uncertain. … Also unknown is how effective the significant federal health legislation enacted in 2010 will be at moderating cost growth for Medicare. If the legislation’s cost-reducing innovations in the delivery of and payment for health services were not successful, or if health care providers could not accommodate the slower growth in Medicare payment rates mandated by the new law, Medicare costs would be significantly higher than shown in the Trustees Report.”

    Finally as shown in http://www.usgovernmentspending.com/us_20th_century_chart.html , federal, state, and local government spending was about 20 percent of GDP prior to World War II and therefore there was a lot of room for additional taxes. Businesses weren’t very mobile and would have had little choice but to stick around and pay whatever new taxes were assessed. Today, however, the government is already at 40 percent, so there is less headroom, and a lot of enterprises as well as some individuals can flee. Those are the kinds of things that an accountant knows better than an economist. The accountants are the ones who tell a U.S. company when it is time to reincorporate in Bermuda or Dubai.

  23. jseliger

    June 7, 2011 @ 9:25 pm

    23

    It may also be possible that economics and the economy are complex and can’t be easily summarized in soundbites.

    Economics is the study of incentives, not a crystal ball.

  24. Seth

    June 7, 2011 @ 10:28 pm

    24

    philg:

    I’m surprised by your confidence in the integrity of the accounting profession. Loads of accountants were involved in Enron’s scams and most of the shadow banking system is based on a variety of “Special Purpose Vehicles”. They’re ‘special’ in the same way the shells in a shell-game are ‘special’. Quick! Hide the inconveniently large liabilities!

  25. philg

    June 8, 2011 @ 8:36 am

    25

    Seth: That’s an excellent point. In the case of Enron, though, the accountants were corrupted, presumably, by the large consulting fees that they were getting from the company. Also, despite the corruption, the books that they produced were transparent enough for some sophisticated investors (who went short) and journalists to see through the smoke and mirrors.

    For government finances, the accountants are often on the payroll and issuing reports, but their voices are drowned out by economists. Look at http://www.mass.gov/perac/teachers/2010teachersval.pdf for example. Right on page 2 the accountants (actuaries) say that the teacher’s pension fund in Massachusetts has $33.3B in liabilities and $21.2B in assets, leaving the taxpayers on the hook for at least $12.5 billion ($5,000 per household). Page 4 shows the growing expense to taxpayers of teachers (average salary up 3.5% from $60,029 to $62,135 per year during 2009, a period of retrenchment for most taxpayers). Page 17 shows that they are budgeting to get an 8.25% annual investment return (beating every other money manager on the planet!). The one thing that is missing is what the taxpayer liability would be if instead the fund earns the 3% return on investment that is obtainable from real-world bonds that can be purchased today. But an ordinary voter should be able to infer from this assumption that the average Massachusetts family will need to cough up more than $5,000 (that’s just for this one pension fund for teachers; unclear how many other unfunded liabilities there are).

    So… not a perfectly clear report (I picked it at random from the ones I could find relating to my home state), but a lot more clear than anything I’ve seen from an economist and certainly more actionable than what one hears from politicians (“our country is the greatest”; “we can do whatever we want”; “we’re making this world a better place for our kids”, etc.).

  26. Federico

    June 8, 2011 @ 9:42 am

    26

    Am I missing something here? don’t accountants get a degree in economics like economist? why should they be more realistic/grounded/down to earth/whatever? the education is the same.

    Aren’t accountants people who failed to make it to economist, and are doing the drudgery work instead? does doing a dull work make them more likely to come up with inconvenient truths? And finally, I was under the assumption that accountants were paid to make sure that one pays the least amount of taxes, not to deliver cold hard facts.

  27. philg

    June 8, 2011 @ 10:10 am

    27

    Federico: Are Google and Wikipedia not available in the UK (I think that’s where you’ve said that you live)? http://en.wikipedia.org/wiki/Certified_Public_Accountant explains the qualifications to become an accountant. Note that a degree in Economics is not one of them (more typical would be a degree in Accounting).

    Is an accountant’s job primarily tax-avoidance? You could probably verify that by visiting one of the world’s many countries that do not collect corporate income tax and seeing if there are any accountants around. Alternatively, you could ask yourself if you were the manager or owner of a business in a tax-free environment, would you care whether or not you were making or losing money. If so, you would probably wish to hire an accountant.

    http://en.wikipedia.org/wiki/Accountancy gives a good introduction.

    [Separately, the major work of tax-avoidance is done, in the U.S., by lawyers specializing in tax, not by accountants.]

  28. Bob Towery

    June 8, 2011 @ 12:10 pm

    28

    Phil, perhaps this is a rhetorical question, but “why is it so?” Are there no politicians that will cast aside the obfuscation and say “this is where we are, this is where we need to go, and here is how we can do it.” Kind of like Ross Perot did with his funny little charts.

    Are all politicians such whores that all they care about is their own job for the next 4 years? By the time they get into a position to do something they are owned by special interests? There isn’t anyone left with a long term view?

    The situation is obvious to you, me, and lots of other people. It’s like the politicians live in a separate world where reality is irrelevant?

    Why is it so?

  29. philg

    June 8, 2011 @ 2:00 pm

    29

    Bob: Why would a politician even bother to calculate the cost of whatever pensions they hand out to grateful workers (who happens also to be voters)? The pensions will be paid for by future taxpayers and what future taxpayer ever traveled back in time to vote against a politician today? In any case, most politicians lack the skills to read a financial statement, much less produce one. The typical politician today has never had a managerial job except working for the government (example: Barack Obama). So why would such a person ever even have seen a financial statement?

    [Not that experience with finance seems to help. Mayor Bloomberg has been cheerfully impoverishing the future taxpayers of New York City with handouts to unionized public workers.]

  30. Russil Wvong

    June 8, 2011 @ 4:56 pm

    30

    Bob: slaying a budget deficit requires a peculiar combination of economic caution and political risk-taking. Raising taxes and cutting spending requires imposing a lot of pain on people, and they get very angry.

    So a cautious person (like Obama), while recognizing the problem, may be unwilling to take big political risks to tackle it. Conversely, a more reckless person (like Bush II) is unlikely to regard the deficit as a problem in the first place.

    Conclusion: avoid cutting taxes and increasing spending the first place. It’s like rolling a giant boulder up a hill: it’s much, much more difficult to move uphill than downhill.

    Traditionally the Republican Party was the party of fiscal conservatism and balanced budgets, but these days they’ve become the party of tax cuts, no matter what the fiscal consequences. See Jonathan Chait, “The Triumph of Taxophobia.”

    Canada was able to balance its budget and run surpluses back in the 1990s, but the Canadian political system is quite different from the US political system: the party in power has a lot more leeway to make painful decisions. For the detailed story, see John Richards, “Retooling the Welfare State.”

  31. Jesse

    June 10, 2011 @ 12:36 pm

    31

    On a related note not all schools of economic thought are incorrect and not all economists actually advocate government policy intervention or participation in the marketplace. For more information you can look up “Austrian Economics”. The downside to it is that it doesn’t really offer any solutions, the upside is that it explains why mainstream neo-classical economics is a fallacy. A quote that I like from FA Hayek(one of the fathers of Austrian Economics) is I think “One of the curious taks of economics is to demonstrate to men, how little they know, about what they imagine they can design.” That pretty much sums up socialism in a nutshell as well as what economics should be. Here is a fun link to a rap song, spoofed to be a debate between Keynes(father of socialism/stimulus spending theory) and Hayek.
    http://www.youtube.com/watch?v=d0nERTFo-Sk

  32. philg

    June 10, 2011 @ 1:23 pm

    32

    Jesse: “not all schools of economic thought are incorrect”? Isn’t that tautological? If there are enough schools of economic thought, some of them will have more predictive power than others. A voter watching http://www.youtube.com/watch?v=d0nERTFo-Sk and http://www.youtube.com/watch?v=GTQnarzmTOc is not necessarily going to be convinced that Hayek is right and Keynes is wrong. He or she might simply conclude that “economists can’t agree and therefore no course of action is safe”. Accountants may differ in details, e.g., whether a particular item should be considered a capital expense, but they are not nearly as far apart as economists.

  33. Jesse

    June 10, 2011 @ 2:21 pm

    33

    Phil, I see you caught round 2 :)

    I wasn’t countering your point. In fact, I agree with it. However, shipping Austrian Economists off to a desert island is unecessary because in it’s purest form they do not make recomendations to government for policy decisions. They function a whole lot more like accountants as they do not try and introduce all the faulty assumptions that neo-classical economists do. You can ship all economists off and leave the Austrians and have the same effect.

    In a broad sense. You could almost think of Austrian economics as much economics as it is disproving economics as a science.

    http://www.youtube.com/watch?v=hkDYsRDah3I starting at 32:00 minutes.

  34. Jose C Silva

    June 11, 2011 @ 7:46 pm

    34

    If I may interject a short anecdote on the thinking of economists:

    Several years ago a colleague who is an economist, but teaches at a business school, and I were discussing the rise of fiery explosions in action movies. I argued that there were two reasons: CGI lowered the cost of explosions and audiences wanted more and more spectacular explosions because they were ratcheting up their expectations.

    The economist agreed with the cost argument, but said that the second reason was invalid — and I quote — “because you can’t have a model where utilities change.”

    The reason why economists don’t like models where customers’ preferences change is that they can’t make regulatory recommendations from such models (the model can predict anything depending on how you model the preferences; for business this is not a problem as the preference model can be empirically estimated with market research, but regulators don’t soil their august hands with market research). But this is not what we were debating; we were talking about actual people watching actual movies. He wanted the world to fit his model and that model was constrained not by reality and empirical analysis but by the publication standards of the profession driven by its target market of regulatory agencies.

    I’d like to be able to say that interactions with other economists have in general dispelled the impression caused by this anecdote. But I can’t.

  35. Ryan

    June 11, 2011 @ 8:22 pm

    35

    Philip, I’d like economists around precisely to help us answer complex questions like “Should we slash government spending simply because it has exceeded 40 percent of GDP during a time of catastrophic recession and the midst of two simultaneous land wars? Is it possible that slashing government spending during a deep recession and joblessness will make the problem worse?”

    The magical qualities of the number 40 may be readily apparent to you and your preferred accountants, but I do not thing they are obvious, nor should they be taken for granted.

    Your indictment of economists seems to boil down to, “Economists’ pronouncements are complex, confusing, sometimes politically biased and ultimately paralyzing.” What you have not explained is how this sets them apart from any other class of PhD holders!

    The solution of “let’s listen to the comforting certitudes and random statistics from simple occupational class X” does not seem like a promising solution to dealing with pesky PhDs, although I can think of at least one prospective presidential nominee who would probably embrace it readily.

  36. philg

    June 11, 2011 @ 8:53 pm

    36

    Ryan: Other PhD holders are equally likely to contradict each other as economists? That’s certainly not my experience. I wouldn’t expect two aeronautical engineers to be unable to agree on whether a wing spar design was likely to support the weight of an aircraft, two civil engineers to disagree on whether a bridge was likely to remain standing, or two physicists to differ on whether gravity will tend to pull objects down towards the earth or lift them up towards the sky.

    [Separately, I'm not sure why you say that we're in a "deep recession". The NBER says that the U.S. recession ended in June 2009 (two years ago). Nor do we have an extraordinary amount of "joblessness" as you put it. Plenty of European countries had decades of similar unemployment rates to our current one (see http://www.politiquessociales.net/IMG/pdf/US-EU-UR-2009-05.pdf for how the US and EU rates of unemployment have converged; the U.S. was a temporary outlier for reasons not fully understood, but it is no longer an outlier). Finally, on the subject of wars, as we don't seem to be able to resist starting them (cf. Libya), there is no reason to believe that the future of the U.S. will entail fewer wars. People like to believe that they live in times that are somehow exceptional, and politicians certainly love to say that they're tackling a crisis, but the safest prediction about the future is probably that it will be more or less like the present.]

  37. Jose C Silva

    June 13, 2011 @ 9:15 pm

    37

    Phil:

    Though I’m not that keen on defending economists, your analogy isn’t exactly where the problem is: the disagreements are mostly about effect sizes and objective functions, not the fundamentals. (There are disagreements over fundamentals, but those are less visible that the ones over policy.)

    To pick an example, most economists agree that there’s a theoretical dead-weight loss from having a minimum wage. Even a marxist economist will be able to derive its mathematics (assuming that s/he has passed an intro econ course). But economists argue about:

    1. The magnitude of the effect (similar to engineers who are given wood to make wings for a plane but not the wood’s mechanical properties: one assumes it’s balsa, the other assumes it’s mahogany, and they have bad measurement instruments).

    2. The actual objective to achieve (similar to engineers who have different perceptions of the size of the plane, or who optimize the wings for different things, like short take-off versus maximum speed). Many policy disagreements fall into this second argument, which is equivalent to engineers designing products for different uses except that there’s only one policy that can be in effect at any time in a given place.

    There are other, more fundamental disagreements, but those are more in line with the type of argument you see in superstring theory and the nature of black energy and black matter than the engineering-like arguments.

    It’s also important to keep in mind that people with the title “economist” or even “Nobel Laureate in Economics” are not necessarily being economists when they make policy pronouncements, just like when a physicist officiates a religious ceremony (and some do) this is not evidence that Physics proves religion…

    Cheers,
    JCS

  38. Jesse

    June 14, 2011 @ 8:47 am

    38

    JCS

    I can’t agree with your arguement. You sit 4 economists in a room and ask them what is causing the current unemployment and you will get 4 different answers. You ask them how to solve it and you will get 4 different answers. They assess the problem differently, they also derive 4 different solutions. If you ask 4 engineers to assess a problem, they will generally all assess it the same, yet they might offer 4 different solutions. But then if they talked it out and discussed and compared data for awhile, they would likely eventually settle on 2, or at bare minimum there could be 4 solutions that all offered various cost/benefits. This is the difference between engineering and economics. Engineering by is solutions based on science. Economics isn’t a science….it’s a mix between sociology, philosophy, statistics and psychology….at best it is a soft science.

  39. Russil Wvong

    June 14, 2011 @ 4:43 pm

    39

    Philip, I’m curious what you think of Lawrence Summers’ analysis and recommendations.
    http://business.financialpost.com/2011/06/13/the-jobs-crisis-lawrence-summers/

    Jesse, would it be possible for you to supply a couple examples of economists whose analysis is completely different? I looked around and found this recent talk by Robert Lucas. His conclusions differ, but his analysis isn’t actually that different. See pages 21 and 22 in particular.
    http://www.econ.washington.edu/news/millimansl.pdf
    http://blogs.ft.com/gavyndavies/2011/05/31/the-classical-view-of-the-global-recession/

  40. philg

    June 14, 2011 @ 9:29 pm

    40

    Russil: Thanks for the Larry Summers article. I guess he is a smart guy, but it looks as though he is prejudiced by American history and his status as an American: “the most fundamental strength of the United States is its resilience” (i.e., because the U.S. economy has mostly experienced robust growth, it will always bounce back to robust growth; folks in Argentina felt the same way at one time). This parochial view prevents Summers (and most American economists and politicians) from considering the humble business owner who needs to make decisions on whether to risk additional capital here or hire an additional worker (taking on the expenses of government-mandated medical benefits and the risk of a wrongful termination or equal pay lawsuit).

    I think a temporary payroll tax cut is a gimmick. I wouldn’t want to hire someone based on a temporary tax cut and then have to figure out a way to pay higher taxes later or get rid of the added employee. It is the kind of idea that makes sense to an economist, who doesn’t experience the friction in the labor market. Summers doesn’t have to read through 800 resumes, most of which are replete with grammar and spelling errors, in order to fill one position.

Log in