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.