Monday, March 2, 2009

Don't you economists know anything?

It seems like economists should have something more to offer everyone with regard to the current recession. Why don't we have an economic early warning system, so that we can track economic crises like we track hurricanes, and get people out of the way before they hit?

The problem is that this comparison gives a) too much credit to NOAA and hurricane forecasters, and b) too little credit to economics.  Think for a moment about what NOAA does.  It identifies tropical depressions out in the Atlantic, and then starts estimating if they will turn into hurricanes, and if they do, estimating where they will go. NOAA does an okay job of that.  You know those bigs "cones of death" that surround the projected path of the hurricane? That's because NOAA is guessing, and lot's of times they are *wrong*.  Remember Katrina? It wasn't supposed to go that way, which was part of the reason New Orleans was unprepared.

Fine, but we don't even have a "cone of death" for the economy, do we?  Actually, we do. The Fed and other macro-economic forecasters have plenty of models (just like NOAA) that predict where the economy will go over time. Some of them have the recession ending this summer, some have it ending this fall/winter. Most have economic growth resuming in 2010.  So the failure of economics is not one of failing to track and predict the path of the crisis.  The failure, if there is one, was in not predicting the crisis was coming in the first place.

This, though, asks for a lot out of economics.  Consider the hurrican analogy.  NOAA is very good at tracking hurricanes, conditional on the presence of a tropical depression.  They are very *bad* at predicting when, where, and how often tropical depressions will form in the Atlantic.  (Remember that 2006 was supposed to be the mother of all hurricane seasons?  Whoops.).  Asking economics to have predicted this recent financial crisis is like asking NOAA to predict (with near certainty) when, where, and how many hurricanes will hit this year.

That said, it seems fair to ask why economists haven't focused more on the nuts and bolts of the financial markets and how they *could* create a crisis, so that we could write down some clearer rules about what to do when those crises actually strike. There is a sense that the Fed and Treasury are really just making this up as they go along.  Well, they are. We've had one (maybe two) of these financial crises in the last 100 years in the U.S. prior to this one.  There isn't exactly a big body of evidence to draw conclusions from.  NOAA has the advantage of at least having a few hurricanes a year, regularly, to study.

The additional problem is that "fixing" the economy is not a technological question for engineers. You cannot enact economic policy without, by definition, redistributing wealth.  From taxpayers to financial companies. From shareholders to taxpayers. From employed workers to unemployed workers. From some corporations to other corporations. From future taxpayers to current taxpayers. From home-owners in the middle of the U.S. to home-owners on the coasts. Or vice versa on any of the above.

Engineers can get into arguments about the best way to fix a problem.  But no one in the engineering meeting ever stands up and says, "Your argument for using 15 millimeter bolts to secure the exhaust manifold to the differential gear assembly is just another example of left-wing bolt-and-tighten liberalism. America was founded by welders and for welders, and therefore we should weld the exhaust manifold to the differential gear assembly!  That is what true Americans want. Your bolts are just another example of trying to import European-style bolt sizing and attachment mechanisms into our economy."

Economics is necessarily strung up together with politics.  So that makes it hard to separate political disagreements from economic one. Economics is pretty good at monetary policy. We have some decent ideas about how/why fiscal stimulus works.  But the failure to have some consensus about "what the government should do" is not the fault of economists. This is how policy gets made.  People argue and dispute with each other.  This is it. This is as certain as things get.

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