For rappers and cartoon orphans, we know it’s a hard-knock life. But for money’s biggest thinkers?
By Heidi N. Moore, contributor
The indignities of being a macroeconomist in the era of the financial crisis are indeed too many to count, according to a report last week by Federal Reserve Bank of Richmond analyst Kartik Athreya. The piece is titled “Economics is Hard. Don’t Let Bloggers Tell You Otherwise.” And yes: He names names.
Athreya holds a PhD in economics and makes sure to say that he is not speaking for the Federal Reserve, but merely sharing his own outrage about how his profession has been derided in the blogosphere as being accessible and easy to understand. In fact, he argues, it’s incredibly difficult and should not be tried at home – and particularly not second-guessed at home by anyone holding less than an advanced graduate degree. Athreya admits that, even with a doctorate, he finds aspects of the discipline mystifying. “What makes macroeconomics so very complicated is that economic actors … act,” Athreya writes. “Firms think about how to make profits, households think about how to budget their resources. And both sets of actors forecast. They must.”
Athreya adds to support his point about the difficult of economic analysis: “Of course, all parties may be terrible at forecasting, that’s certainly a possibility, but that’s not the issue.”
Isn’t it? The problem doesn’t seem to be that the study of macroeconomics is difficult; the problem is that, in a crisis, it was not particularly accurate. It seems that if the economics profession is suffering a lack of populist awe, perhaps the inability to forecast how households and companies will act is precisely the problem. Being terrible at forecasting — for financial firms, households, and, yes, even economists — is very much the issue, as many have questioned whether economists were working with the right models or assumptions. In August 2007, Federal Reserve Chairman Ben Bernanke predicted high growth for the U.S. Economy; 10 days later, the Fed reversed its position as the extent of the housing crisis started to become clear. Alan Greenspan’s once-saintly reign is now often criticized for its persistently low interest rates that encouraged outsize borrowing.
Economists missed some of the major factors in the crisis. Financial firms that adopted crippling levels of risk acted in ways completely unpredictable to the economics profession, as did households that took on big mortgages or giant refinancings of existing debt. Indebtedness in the United States reached absolutely pornographic levels before the crisis, with household debt in 2007 reaching 100% of U.S. GDP.
The economics profession did not widely predict that a crisis was coming or how long it would play out. We still don’t know. In fact, according to charts from the St. Louis Fed, the recession seems to have ended in 2009 even though unemployment numbers and other economic indicators have led even skeptic Paul Krugman to declare our current malaise a full-blown Depression. Rumors are even swirling that economist Peter Orszag, the White House budget director, did not quit his job to spend more time with his bride, but because the deficit is well out of his control.
Consider, too, the absence of many prominent economists from the drafting of the new Dodd-Frank reform bill. The best ideas of the industry were largely disposed of. In 2008, a dream team of economists started creating The Squam Lake Report, a slim volume that contains the best prescriptions of the brightest minds of economics about how to save the financial system.
It turns out that very few of the Squam Lake idealistic ideas are actually a part of financial reform. The Federal Reserve was not made a super-regulator as the group wanted; bank capital levels, including the idea of holding “contingent capital,” were largely ignored, and the zombie regulatory system lives on; and financial institutions have no “living wills,” as the Squam Lake Group suggested. In fact, very few of those ideas were on the lawmakers’ table for very long.
So are bloggers the problem with macroeconomics’ perception problem? Probably not. This seems like it might be a bigger war that the profession has to fight — among themselves.
–Heidi Moore is Sweeping the Street for the next two weeks while Colin Barr is on Vacation.