Robert J.Samuelson has just written a savage indictment of economists. You will find it in the February 16 2014 Washington Post. The following is an extract.
These are hard times for economists. Their reputations are tarnished; their favorite doctrines are damaged. Among their most prominent thinkers, there is no consensus as to how — or whether — governments in advanced countries can improve lackluster recoveries. All in all, the situation recalls a cruel joke:
How many economists does it take to change a light bulb? None. When the one they used in graduate school goes out, they sit in the dark.
Recently, economists at the Organization for Economic Cooperation and Development (OECD) published a retrospective study of its economic forecasts. This qualifies as an act of bureaucratic courage, because the record was predictably dismal. Not only did the OECD miss the 2008-09 financial crisis, but it routinely over-predicted the recovery’s strength. In May 2010, for example, the OECD forecast that the U.S. economy would grow 3.2 percent in 2011. Actual growth was 1.7 percent. This is a huge error, and there were larger misses for some European economies as well.
Well, he is certainly right about forecasting though I think he is wrong about several other points he makes—and, as it happens, I did forecast the 2008-9 Great Recession back in 2004. That said, I don’t think economics should focus on forecasting as much as it does. Economists get it wrong for a number of reasons:
- They rely too heavily on mathematical models. Such models can be useful but to expect accuracy to within a couple of percent is unrealistic. There are far too many variables.
- They only count what they can count—and there is a great deal in an economy you can’t count (like the Republican Party’s policy of blocking just about everything).
- The statistics they rely upon are far from accurate. Bluntly, the whole U.S. government statistical methodology needs to be overhauled drastically. Currently, we don’t know what we need to know as fast as we need to know it.
- They underestimate the speed at which an economy can collapse—and particularly the U.S. economy where the social controls that exist in, for instance, Germany, don’t exist.
- By and large, they don’t understand the full implications of financialization compounded by monopolization.
- They pay far too much attention to GDP and far too little to structure. GDP is a deeply flawed metric, yet it is the overarching number we use to measure the health of the economy. This is crazy—but we continue to do it.
- Forecasting is a mug’s game anyway. No one has a crystal ball and there are just too many variables.
Economists are much better at analyzing economic history, the status quo, and at spotting trends—in short, they help us understand the economy (an incredibly important task). Some—arguably not many—are also good at coming up with policies. However, whether politicians implement them effectively, or fully, is another matter.
In point of fact, there are some outstanding economists in the U.S.—Joseph Stiglitz and Paul Krugman being but two examples—and they have been remarkably accurate in their their diagnoses of our most serious economic problems. However, despite their track records, both seem to be too outspoken to appeal to the Obama administration—more is the pity.
As to Samuelson’s point about there being no consensus amongst economists re the appropriate policies which should be followed to rev up the economy, that is not quite true. There is broad agreement between those of similar political orientation.
Samuelson also takes a predictable swipe at Keynesianism.
When the economy suffers a massive drop in private spending, government should offset the loss by increasing its budget deficits. Europe’s budget cuts were too aggressive, they say, while U.S. “stimulus” policies were not aggressive enough.
Perhaps history will vindicate this appeal to Keynesianism. Or perhaps not. The fact is that the United States did respond aggressively under both George W. Bush and Barack Obama. It certainly didn’t embrace austerity. Federal budgets ran the massive deficits — $6.2 trillion worth from 2008 to 2013, averaging 6.4 percent of the economy (gross domestic product).Nothing like this had occurred since World War II. Yet, the economy limped along. Why wasn’t this enough?
Most people miss the fact that Keynes was a pragmatist—not an ideologue. He would work out a principle then refine the details—sometimes getting them wrong at first. But he was a quick study and normally ended up with a result that worked. He did not say things like “The private sector is inherently more efficient than government,” when the correct answer is: It depends.
As it happens, there is abundant evident that the stimulus did work—even though, in an effort to gain consensus—to win over some Republicans—it was both inadequate and flawed. The following are just some of the the reasons it did not work as well as we would have liked. But, it did work.
- Too much was in the form of tax cuts which primarily helped the rich—and also ensured that much was merely banked—whereas the object was to have it circulate.
- The total was spread over a period so the impact in any one years was much less than most people realize.
- The stimulus was heavily offset by cuts at state and local level. This is a crucial point.
- The stimulus was not supported by a range of other government initiatives which, all together, would have had a multiplier effect.
I’ll deal with the flaws in the Fed’s activities on another occasion. Suffice to say that although they appear to have restored the health of the banks and driven up stock prices, they have increase income inequality, and done little for the real economy. If the same amount of money had been used in a more enlightened way, the results could have been dramatic.
Ideology is the curse of the thinking classes. Here we have case histories in both the U.S. and Europe from which we can learn much—yet ideology blinds us.
If anything brings this Great Nation down, it won’t be terrorism—or the Chinese. It will be greed, ideology, and problems in our economic structure—which we are letting fester.