Economics and economists: part trois

So who can we trust?

Which economists, what economic models, which schools of thought within economics?  Isn't economics, after all, just a bunch of math-obsessed eggheads arguing over stuff, using big words most of us can't understand?  Doesn't economics have the same predictive accuracy as what those chirpy TV weather people offer?  How many internet arguments conclude with some arrogant jerk pompously intoning, in tones of fatuous certainty, 'well, if you understand basic economics. . . "  Like, say, I've been doing for two days now?

I take it as given that there's no such thing as objective analysis.  The academic discipline of economics tends to call itself a 'science,' but to suggest that there's not a political or ideological component to the ideas of any economist is silly.  Economists do collect and analyze data, and they do make predictions based on that data, but no one has a perfect track record. (Although some guys, as I'll show, come pretty close).  They all make mistakes.  And they disagree with each other, pretty ferociously at times.   In the current political environment, both sides have presented their 'economic plans' (which tend to be pretty platitudinous and vague), and both sides claim that 'leading economists' agree with even their rosiest predictions.  And most citizens don't have time to read tons of economic theory, don't have time to check the math.  Folks got lives. 

So people vote their gut. People distrust any statement by any economist.  People care a lot more about family members who are out of work.  And ideology becomes a convenient shortcut.  'I'm a conservative,' so I support conservatives, and I believe conservative economists.  'I'm a liberal', and so I support liberals, and believe in pronouncements by liberal economists.

I get all that. I do it too.  But doesn't intellectual honesty require that we do pay attention to data, that we do, at times, change our minds based on facts and evidence?  As a liberal, I tend to think government-provided welfare is a good thing.  I tend to dismiss arguments about welfare dependency.  I tend to think that dependency doesn't actually happen much, and that it's not generational.  I no longer think that.  I've seen enough evidence to consider welfare dependency quite damaging, and to think that we need to re-think welfare programs.  I do think we have to use our resources as the richest nation in the history of the world to provide for the less fortunate.  I do think we need to be smarter about it, though. 

Okay, so, a year or so ago, I decided to write a play about two economists, in fact about two guys famous for disagreeing with each other.  Nobel laureates both.  John Maynard Keynes, the Cambridge economist, and Friedrich Hayek, the Austrian. Keynes' great book was The General Theory of Employment, Interest and Money.  It's essentially the book that created the field of macroeconomics, and is considered one of the most influential and important books ever written in the field.  It's also a chore to read, I gotta tell ya, sparkling prose interrupted by lots and lots and lots of math.  And I suck at math.  Hayek's great book is The Road to Serfdom: it's one of the most important books in the history of libertarian economics.  It's also a lot easier to read; it's actually dazzling, terrifying, brilliant.  And while I was at it, I also read everything else I could find by those two guys. 

A friend also suggested that I read Robert Heilbroner's The Worldly Philosophers, and boy am I glad I did.  It's probably the best book ever on the history of economics.  That kinda grounded me, and encouraged me to read several other guys.  Read me some Malthus, some Adam Smith, some Ricardo and Veblen.  And now our economy is in the tank, and I've read probably twenty books about the financial crisis and what caused it.  Fascinating stuff. 

And we're in a mess, and we need to claw our way out of it.  To which end, for years now, I've been reading Paul Krugman.  His latest book is End This Depression Now.  Which, I promise you, you need to read.  Liberal or conservative or libertarian: read it.  It's not a tough read, and it's a big best-seller.  And you may disagree with it.  But read it.  It's a book worth taking seriously. 

So here's what I think we should look for in an economist.  First, is this person respected in the larger profession?  Has the economist won the Nobel Prize in economics?  Or a Sloan Fellowship?  Or some other prestigious prize in the field?  (Paul Krugman won the Nobel Prize in economics in 2008.)  Second, is this person an expert in the specific economic area we're concerned about.  In the case of the US economy, that means a macroeconomist, not a microeconomist.  (In other words, a big picture, national economy guy, not a small picture, everyday market efficiencies guy, like the Freakonomics guy, Steven Levitt.) Paul Krugman is a macroeconomist, with a specialty in international trade.

I would also say this: how practical are this economist's theories?  I remember reading a Heritage Foundation plan to fix problem of American health care.  First item on this proposal: get rid of the AMA.  I don't know whether it would be a good thing or a bad thing to get rid of the American Medical Association---I suspect it would be a very bad thing indeed.  But since that's never happening, that's not a realistic proposal.  Same thing with economists who say things like "we should go back to the gold standard," or " we should get rid of the Federal Reserve."  I don't know what the effects of those decisions would be--I think pretty bad.  But since neither is ever going to happen, why talk about it?  

On the other hand, we do want an economist who is maybe a little counter-intuitive, someone whose ideas aren't part of the mainstream discourse.  To the extent that there is a mainstream consensus (right now, that deficit reduction should be our biggest priority), we should look for someone who challenges it.  After all, the status quo ain't great, right?  But here's the big question: what's the economist's track record?  What predictions has s/he made and how have they panned out?  How accurate has s/he been? 

The reason I trust Paul Krugman, the reason I think every policy maker in the country should read his new book and implement the policies he recommends, the reason I think he's the most important economist working right now, is not because he's a liberal and I like liberals, but because his track record is amazing.  He's been right over and over again.  As he says himself, it's not because he's personally brilliant.  It's because the models he uses (largely based on Keynes, who also had a freaky habit of being right all the time), are good ones.  They work. 

Examples: when the Obama administration proposed their stimulus, Krugman said it would stop the bleeding, it would save some jobs, but it was too small to make a real difference.  He predicted an unemployment rate of around 9% post-stimulus.  He nailed it within a few decimal places. When Standard and Poor's reduced the US credit rating, there was tremendous consternation, both in the White House and on the Right. Krugman said it would have no effect whatsoever.  It hasn't.  When the Cameron administration (in Great Britain) proposed their austerity measures, Krugman said they were condemning their country to double-figure unemployment--their economy has been even worse than Krugman predicted.  I could add example after example: I can't one where he was wrong.

So when a recent Nobel laureate in economics, with a track record of being right pretty much without exception, who most mainstream academic economists all quote and track and read and listen to, says we can fix our economy in eighteen months without doing long-term damage or anything, I think we should try it. 

And President Obama, finally, seems to be listening.  His jobs bill (stalled in the House) is a huge step in the right direction.  It's too small, but it will help, and if it were to pass, it would do so measurably, leading to further steps in the right direction. 

The other possibility, of course, is that Romney wins, rips off the mask, and comes out as a closeted-Keynesian.  But I'm not counting on that.