Saturday, January 12, 2013

Why I don't expect...  

Rational economic solutions here or elsewhere in the globe any time soon. Simply put, we all think we are smarter than economists.

At a recent big pow-wow of economists (I'll bet that was a wild affair!), papers were presented which stunned the assembled experts, and also sobered them as to their effect on public thinking about matters economic. 

Consider this chart:

ECONOMISTS love to argue. Indeed, since the crisis, it has often seemed they cannot agree on anything, and especially not on important matters like how best to boost a sickly economy or when to trim government borrowing. “Schlock economics” was the judgment bestowed by Robert Lucas, a Nobel prizewinner, on the stimulus proposals of Christina Romer, then Barack Obama’s chief economic adviser. Another Nobel laureate, Paul Krugman, labelled a rival view of business cycles “Phlogiston economics”, a reference to a debunked 17th-century theory of chemistry. More soft-spoken economists worry the bickering may carry a reputational cost: the public may simply conclude that solid, fact-based conclusions are beyond economists’ reach.
Such concerns were discussed (politely) at the latest annual meetings of the American Economic Association. Dismal scientists throng together each year (this time in not-so-dismal San Diego) to gossip, test the job market and hear presentations on hundreds of new academic papers. Among them were a handful focused on economists’ image problems. They suggest that economists, in fact, agree on quite a lot but that the public is resolutely unimpressed when they do. [More and chart source]
I think there are several things going on here. First, is a resurgence in anti-intellectualism as our education system slowly worsens, especially in non-STEM areas. Economics is not considered a "fact-based" discipline like math or engineering. In fact, there may be growing contempt for economic thinkers as elites far distant from the real world, which we laymen understand intimately, of course.
Economists might conclude from this that they just need to shout their views more loudly. But communication is only part of the problem. Ms Sapienza and Mr Zingales note that when Americans are told what economists believe before answering a question, their view scarcely budges. Told that economists favoured a carbon tax, the share of the public supporting the tax rose only marginally, from 23% to 26%. The public actually grew more confident in its ability to pick stocks successfully after learning that economists think it is close to impossible. Americans seem to believe that economists operate in a fact-free environment, a bit like Buddhists, commented Robert Hall of Stanford University. [Same]
Interestingly, one response from economists seems eerily familiar: we need to tell our story.
But what do non-economists know about that? They don't go to econ conferences or read econ papers. Most of all, they just see what we write in the press. Now, there's a school of thought that econ's big shame is macroeconomics - that people see us disagreeing about whether to ease monetary policy or tighten, whether to spend on stimulus or tighten our belts with austerity, and think "Man, these economist guys just don't know anything." I do think there's a bit of that going on. But I think that there's another issue that has done far more to hurt economists' standing with the public. An issue on which economists, for once, have extreme consensus rather than disagreement. And on which that consensus is nearly the opposite of what almost every non-economist believes to be the nature of the world.

Trade, of course. [There follows an explanation of how badly the public misunderstands the importance of free trade and other good stuff]
For my part, I think we have for the most part moved beyond economic systems that can be grasped intuitively. Nobody really understands to this day how to manage CDS risks, for example. [I'll post later about an economic problem facing corn farmers that made my brain hurt, and defies easy explanation].

In the face of such complex interconnected and high-speed economic apparatus, many non-economists try to work by analog or metaphor: "Well, the government is just like a business. Or a household." These comparisons are demonstrably misleading, but prevail anyway, like "guns saving lives."
Such mental shortcuts are leading us far astray, I fear, especially the misunderstandings in macroeconomics due to such reductio ad absurdum to something we think we do grasp.

There is also the problem of solutions from an untrusted professions that must be enacted by an even less trusted government.
The public doesn't really trust economists and it really doesn't trust the government to execute policy in optimal fashion. Maybe it's possible to redistribute the revenues from a carbon tax in a way that protects the poor and leaves most Americans at least as well off as they were before, but who actually thinks Washington can manage it? Or who, for that matter, trusts that the government will provide a safety net and public investment sufficient to ensure that open trade is as welfare enhancing as economists reckon it ought to be?
The messiness of public policy-making is an extraordinarily difficult thing to include in a simple model of trade, or labour markets, or the externalities from pollution. But if economists want to be taken more seriously by the public (assuming that government isn't about to start behaving like an optimising social planner with complete information, which seems a safe bet) then they need to do more to figure out which policies are most robust to governmental imperfections and when it is appropriate to talk about second- and third-best alternatives to a politically impossible ideal. [More]
As Otto Von Bismarck pointed out, "Politics is the art of the possible." Increasingly, I fear what is possible politically is so far from effective economically, it may be worse than nothing at all.

The overall result is double-edged. Anti-expert bias seems to me to be growing. It at least makes public policy decisions a teeny bit more predictable (forget logic, check the polls). It also suggests there could be whopping returns to actions based on sound economic thinking when the rest of the competition is doing the opposite.

Such going against popular sentiment is not easy for our brains, however.  We really want to be part of the herd. Only strenuous effort to constantly improve our understanding and place bets carefully will allow this advantage to realism to reach fruition.

Final note: Notice the top line on the first graph about stock prices. Now, answer this question: What is the most popular segment of US Farm Report? 

1 comment:

Anonymous said...

Not sure how this relates, but the only segment of USFR that is a must-see around here is John's World.