Advice Offered As Is, No Warranties

A reader called my attention to a wonderful essay by Dean Baker titled, “How about a Little Accountability for Economists When They Mess Up?” Indeed.

Keynes famously quipped, “You could lay all the economists of the world end to end, and they would never reach a conclusion.” Given that, it is amazing that they are given so much credence.

But why so much variation in viewpoints? I think Baker’s explanation,

The problem is not that modern economics lacks the tools needed to understand the economy. Just as with firefighting, the basics have been well known for a long time. The problem is with the behavior and the incentive structure of the practitioners. There is overwhelming pressure to produce work that supports the status quo (for example, redistributing to the rich), that doesn’t question authority, and that is needlessly complex…

misses some key points.

First, there is the problem of insufficiently detailed data. Though we live in the age of Big Data, the information needed to analyze the present and past (let alone the future) often lacks key quantities for a given problem.

Second, there is the related problem of Ptolemy’s Epicycles, in which ancient astronomers, lacking basic understanding of the fact that the planets orbit around the sun, developed elaborate but completely false models of the orbits. As I have mentioned many times, too many economists think that they can number-crunch their way out of any problem, without actually understanding the numbers they are crunching.

But the most severe problem is just plain bias. I’ve pointed out before, for instance, that most economists writing on the pro- side of the H-1B work visa controversy, do have funding from the industry and its allies. And many economists writing about controversial issues are driven by personal ideology, and for the academic ones, there may be career gains to be made simply by getting one’s name in the newspapers often enough.

And it MATTERS. It’s interesting that Baker mentions the failings of the Congressional Budget Office (CBO). In the recent commotion on the Hill concerning health care reform, the CBO’s scoring of the number of people who would not have health care coverage was cited as scientific fact, with little or no questioning by Congress or the press. (On top of that, neither Congress nor the press actually read the CBO report, and widely misquoted the 23 million figure on “losing” coverage.)

Baker writes,

Back at the time of the debate over President George W Bush’s social security privatization plan, I pointed out that his administration’s assumed rates of return in the stock market were impossible given the current price-to-earnings (P/E) ratios in the market and the economic growth rates assumed by the social security trustees. This was an argument based on simple algebra.

Brad DeLong wanted to make this into a Brookings paper and enlisted Paul Krugman in the effort. Together they produced a paper (generously leaving me as lead author) that had an intertemporal optimization model with declining labor force growth as its key feature…

This model had nothing to do with the underlying point (the stock market would yield the assumed returns if its price-to-earnings ratio was near its historic average of 15, rather than the P/E level near 25 that we were seeing at the time), but it was necessary to have something more complex than simple algebra to be taken seriously at Brookings.

Right, making an argument based on common sense won’t score any points with intellectual bigots like those at Brookings. But MONEY scores a ton of points there, leading back to my point above. And if I don’t mention here that DeLong and Krugman have their own biases, my readers will, so consider it mentioned.

Anyway, thank you Mr. Baker, for saying something that has been needed pointing out for a long, long time.


21 thoughts on “Advice Offered As Is, No Warranties

  1. To your critique, “As I have mentioned many times, too many economists think that they can number-crunch their way out of any problem, without actually understanding the numbers they are crunching,” I would extend this to say, “and without understanding the underlying requirements or limitations of their statistical procedures.”

    Admittedly this is also a problem with almost any social scientists and many physical scientists as well, making anyone with an advanced degree and a statistical computing package into an instant statistical scientist. At least a good statistician is aware of the required assumptions and after understanding the “numbers they are crunching,” can make reasonable decisions about which requirements can be relaxed with impunity.


      • Sadly I must agree. But I also recognize that to be a good statistician even in a fairly specialized application area, one must understand and thoroughly master not only the mathematics and statistical basis for the analysis, but also anticipate the likely limitations and problems of the data collection, experimental design and implementation, and the limitations on possible inferences.


    • Off hand, I have been looking for an economic text that describes the US and world economy since the world went off the gold standard 50 years ago. The Republicans cite Mises and “Chicago” economists that live in the 19th economic century. Democrats are only interested in income distribution.

      No one admits that the world has an electronic transfer fiat exchange system. (Not even) The Wall Street Journal recognizes that two parallel economies exist, for employers, producers, investors and one for the working class. The national press universally writes as if the worker economy parallels the investor economy and the income distribution curve is a bell curve. Claimed “experts” don’t seem to understand the difference between modal, median, and mean income.


      • Excellent points.

        I must confess, by the way, that in spite of being an econ minor in college and always having had a keen interest in the subject, I never truly understood the issue of fiat money until many, many years later. Yes, I understood how reserve requirements and so on affected the money supply, but didn’t fully grasp the practical implications. I am NOT an advocate of the gold standard, mind you, but I think it is crucial that everyone in the worker parallel universe that you cite understand these things. I think many would be absolutely shocked senseless if they knew,


  2. As you point out, Norm, it’s curious that mainstream economists are able to get away with their various claims. Many people, including other economists, question their role and agenda and there’s a substantial literature on the subject.

    There’s no question they have been used by big tech firms to provide cover. This 2015 Salon piece describes the background to an anti-trust conference presented by George Mason University’s Law and Economics Center. Quite disturbing.


  3. There are several issues with economists’ evaluations, macro evaluations, ignoring collective micro, nationally and internationally. However, when they all deliberately started citing U2 employment rates, to bury U6 employment rates, they lost all credibility from their deceit.


  4. They make their living off of their opinion. They aren’t going to admit they were wrong, until relocated in another secure position, with some time distance from the incidence. Larry Summers, for instance.


  5. Weathermen are probably correct only about 30% of the time, but we all tend to forgive and/or forget about that. Considering the high-powered computer modeling and numerous observations stations, plus decades of detailed records, it’s a wonder “we” (the public, or perhaps the businesses that rely heavily on such forecasts) do not even consider holding weather forecasters accountable for their erroneous predictions.

    And if we don’t do that for something as unemotional as weather science, how can we do so for economists and their forecasts, which necessarily involve what decisions will be driven by the emotions and the whims of millions of people?


    • I believe that the accuracy of weather forecasts (suitably defined) is much higher than 30%. I agree that the weather forecasters have much better data and models to work with, and I would forgive the economists if only they were less ideological.


    • The big difference between weathermen and economists is that weathermen don’t wander into other disciplines and claim to be experts.

      And when weathermen make predictions in their field, they are careful to accurately define the confidence level. By contrast, economists pretend they have the complete answers. If challenged, they frame the problem as just one of statistical analysis and engage in statistical warfare. It’s a discipline problem.

      Also, weathermen are actually pretty good, especially out to about 72 hours. Aviation, the Navy and many other groups find them to be excellent.


  6. Yah. If you watch any cooking show, or go to a fancy restaurant, you will see these terribly complex recipes using a dozen rare and expensive ingredients – and it is all for show, you can generally get the same (or better) results with half the ingredients and nothing you can’t buy in bulk at the local mercado. I have some academic pretensions so read a particular journal that publishes articles on the topic, and it seems everyone feels a need to attempt to express their theory using mathematical equations and logical symbols that are neither standardized – nor explained! – and can take up half the paper. A number of scientific journals have a standard “style” using long sentences chock full of long words, which according to any good word check program will require the reading comprehension of someone with 27 years of schooling.

    I guess it’s important to look good, is what it comes down to, but content is something else.


  7. The Brookings Institution are corrupt.
    If a major organization wants a suitably impressive Policy Paper which reaches the conclusions they wanted, then Brookings offers quite good service.

    Ethically, this falls somewhere between those people who will write your Term Paper and a streetwalker.


  8. The traditional economic models have been disconnected from the real economy for decades now. Wall St. is nowhere near Main St. In any case, the incentives to allocate capital to productive activity don’t exist any longer as the average case, only on the fringes and largely unintentionally. On Wall St. capital is misallocated to share buybacks and executive compensation. In Silicon Valley capital is misallocated to entice the suckers to buy into the eventual IPO. The H1B system is a cheap way to fund the SV mirage.

    I have to admit that even coming out of New York tech and finance, it took me awhile to see this clearly. Guys like Greenspan, Summers, Rubins, Geitner, and Krugman set the course for this system and lost control of it.

    I read a story today posted on Drudge about a Facebook employee, a black woman, living in her car. Someone with a good job who can’t keep a roof over her head. The system is completely broken and there will be a price to be paid.


      • Obama and Trump come out of the same frustration the voters have with the broken system. The voters are sending a message, Iowa 99.9% white, sent the democratic party a black and broke candidate. They sent the republicans a total outsider, Trump. This message was the Occupy Wall Street backlash that the elite media still doesn’t get. No offensive, but academia is just as clueless. This was the soft message. As Trump garners opposition from the entrenched interests, on both sides, the voters are understanding that more than a soft message is needed. There’s an entire strata of frustration out here waiting to take it to the next level. I can see it as clearly as I saw the Obama win coming and the Trump win coming.


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