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NYT Helps to Cover Up for Incompetent Economists

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Sunday, 01 August 2010 04:44

The NYT had a piece comparing efforts to detect financial crises to efforts to detect earthquakes. This implies that some fundamental new methodology is needed.

In fact, the economic crisis was entirely predictable and predicted by people who understand economics. The more obvious problem is the incentive structure within the economics profession. It provides economists with no incentive to break with conventional wisdom even when it is obviously wrong and provides no sanction against those whose failure to break with conventional wisdom led to disastrous consequences for the economy and the country.

Unless this incentive structure is changed, no improvements in methodology will make any difference at all.

Comments (5)Add Comment
Privatizing Economics Into a Hard Science
written by izzatzo, August 01, 2010 8:02
From the NYT article, this quote:

“We can have sound financial institutions but still have major financial earthquakes if the policies that governments pursue are fundamentally unbalanced,” said Lowell Bryan, a senior partner at McKinsey & Company. “Nobody seems quite interested in going through the pain.”


True, it wasn't incompetence as much as willful incentive to ignore the bubble, to avoid the pain of revealing it. Not only have activist whistleblowers become an endangered species, thousands of employees well aware of significant problems won't speak up anymore for fear of reprisal. One example among many is the BP oil spill, which effectively was predicted internally by competent engineeers who were suppressed or ignored.

Economists are no different, even ones in protected government or academic jobs. There's no equivalent alternative employment available. There's no counteracting force to join up with against the bubble. It's like the war, one can be against it publicly, but not without great personal sacrifice. Cowering without being obvious has become an art necessary to remain employed. Baker is the exception, not the rule.

To appreciate how laughable are the "new econophysicists" who plan to pursue the detection of financial crises like earthquakes, one need only take notice of the stunning widespread ignorance of the causes and cures of the last economic earthquake, the Great Depression of 1929 combined with deer-in-the-headlight reactions to the current Great Recession.

But never fear. There's always a private management consulting firm like McKinsey and Company available for hire at huge fees, to repeat the obvious, to stroke bruised executive egos and appease shareholders or taxpayers, to buoy up employee morale with the latest pop tart economics education on systemic risks, to lay the blame at the feet of "fundamentally unbalanced" government interference with "sound financial institutions".

It's time to privatize economics into the hard science of econophysics that it really is. If you can't take the predictions out of the economics discipline, then take the discipline out of the predictions. That way, we can keep ignoring the after effects of each earthquake, on grounds that predicting and avoiding them going forward are even more important than understanding what caused the last one.
But what about the listening-problem?
written by Nerrie, August 01, 2010 5:06
I remember Tom Campbell once explaining to Congress that there was a serious problem in the housing market. Congress didn't want to listen. They liked the bubble. A bad case of being blinded by short-term self-interest, or short-term constituent-interest.

Did Rep. Campbell need to hire McKinsey?
I'd like to think there's another way to get past the problem of economic ignorance and short-sightedness.
Chelsea's Wedding: Let Them Eat Cake
written by Scott ffolliott, August 01, 2010 6:12
They feel our pain.
If Predictable, Then Preventable, Then Criminal?
written by Union Member, August 01, 2010 6:25

Economics is a cult, not a science. At least that is the way it is presented in the media and (sadly) on the floor of Congress.

I can't even get over some of the jargon like "creative destruction," or "moral hazard."

Greenspan, at one point - early on in the financial crisis, before he scarcely admitted any responsibility for this worldwide catastrophe - said that "Risk was underpriced." (regarding credit default swaps and collateralized debt obligations) --as though you could put a price/value on the truth, or that you could somehow monetize reality. Is this what the NYT's piece is hinting at? That reality just needs better metrics? Whereas consistently enforced laws and regulations to compel honesty and decency and fairness, with sure and certain punishment, for those who don't or can't comply, are inefficient, "activist?"

By the way: President Obama has become a Community Organizer for the rich.

Maybe non of this is what Dean is getting at here; but it seems the political world is taking its cues or guidance on this from the media/academia and the best they can come up with is to cut taxes, undermine Social Security, and that they don't have the votes to confirm Elizabeth Warren.
What on earth is a prediction?
written by magpie, August 02, 2010 6:49
After reading the NYT story linked, I can't but observe the following:

Eric Dash (the author), other than the econophysicists', hasn't tried to get any information about alternative views on the financial crisis, that us here Down Under call GFC (great financial crisis). Dean Baker does not mention it, but, for those not in the know, Baker and two others have been recognized as three economists who did "see the crisis coming" (see http://rwer.wordpress.com/2010...onomics-2/). These three economists did predict a housing bubble crash, with serious complications elsewhere in the economy, without using neither neoclassical nor econophysics tools.

Dash uses the word "prediction" in a rather funny, incoherent manner (and, in this he probably follows the general trend). At times, people seem to demand from a correct prediction a completely unrealistic and unattainable degree of precision.

Ironically, for instance, Dash mentions a geological prediction, but is unable to recognize it as such: "Seismologists, for example, can monitor the Earth's daily gyrations along the San Andreas Fault and know that the chance of a devastating earthquake - one larger than 6.7 on the Richter scale - over the next 30 years is greater than 99 percent. But they can't pinpoint exactly when or where one will hit, or how big it will be."

That, I would say, is a prediction. Dash on a geologists' failure to "pinpoint exactly when or where one will hit", concludes that predictions are impossible.

However, who on earth said that predictions have to include the precise date, time of the day, magnitude, number of casualties, damage in dollars (plus/less 5%) and colour of your underwear when it happens?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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