Why Do We Continue To Listen To Economists?

Yves Smith’s, Naked Capitalism blog, has quite a good post this morning about economists. She essentially asks why economists haven’t stepped forth and admitted that they were missing in action for most of the decade. She notes that none called attention to the dangerous practices and developments of the early part of this century and when things began to fall apart they were in her words, “constitutionally unable to call its (the recessions) trajectory.”

It’s very good stuff and raises the question, at least in my mind, as to why we are now putting so much faith in their pronouncements. For it seems that despite the profession’s gross errors, they have stepped forward and said, “forget all of that, now let us show you how to fix things.” By all reports, we seem to have agreed that yes indeed they have the answers and we should follow them wherever they might choose to lead. In this case, that happens to be down a very expensive road.

But, just as there were a few cassandras (Roubini, Shiller, Taleb) during the good times, there are now a few emerging that are speaking out for some sober assessment of our future course. A couple cases in point today are Kevin Hassett writing at Bloomberg and Gary Becker at the Becker-Posner blog.

Gary Becker, an economist at the University of Chicago, sets forth in his analysis the reasons that he feels the Obama stimulus plan as presented by Romer and Bernstein overestimates the positive effect on employment. He reasonably states his reasons for reaching this conclusion and in the process puts forth some fairly important considerations to keep in mind at the stimulus plan is implemented. For my money, though, a point he makes towards the end of his post is the most intriguing. He says:

As Posner and others have indicated, there appears to have been a huge conversion of economists toward Keynesian deficit spenders, but the evidence that produced such a “conversion” is not apparent (although maybe most economists were closet Keynesians all along). This is a serious recession, but Romer and Bernstein project a peak unemployment rate without the stimulus of about 9%. The 1981-82 recession had a peak unemployment rate of about 10.5%, but there was no apparent major “conversion” of economists at that time. What is so different about the present recession compared to that one, and to other recessions since then, that would greatly raise the estimated stimulating effects of government spending on various types of goods and services?

It is relevant in answering this question that the origins of this recession were in the financial sector, and especially in the excessive mortgage credit to sub prime and other borrowers. The widespread collapse of the financial sector, and the wholesale retreat from risky assets, clearly has called for a highly pro-active Fed. But it is not obvious why this should lead to greater confidence in the power of government spending stimulus packages. Of course, perhaps the prior emphasis on crowding out, and skepticism toward the stimulating effects of government spending, were wrong, or that recessions were too short and mild after the 1981-82 recession to call for Keynesian-type stimulus packages.

He doesn’t go as far as I will with this thought, so please treat this as my take as I don’t want to seem to be putting words in his mouth. If President-elect Obama’s economic team doesn’t forecast unemployment on the order of the 1982 recession, and since we were able to weather that storm without an historic expansion of budgets and deficits, what is it that they currently see that argues in favor of their prescribed approach. Are we engaging in knee jerk responses when graduated action might be more prudent?

Kevin Hassett’s article takes on the proposed plan from a different angle. His argument is that the assumption of debt by the federal government at the level proposed may forever cripple the American economy. Congress’s penchant for baseline budgeting will ensure continuing blockbuster deficits, leaving only the options of hyperinflation or massive tax increases as solutions to the problem.

He seems to go a little off course in that he concedes the need for dramatic action but then tends to dismiss it as ultimately of no help. It would have been useful had he completed the thought but his comments on business confidence are well taken, noting as he does, that businesses are unlikely to invest when faced with the long-term prospects of massive tax increases. Read this article mostly for the fine job he does on describing the impact of trillion dollar deficits.

There seems little chance that an incremental approach will be taken with respect to the recession. If nothing else, economists provide the perfect cover for politicians who always want to be seen as doing something even if it may be counter productive. Once again, the voices calling for a bit more thought are probably going to be drowned out just as they were during the boom and we’ll be off again following group thinking academics on a path to who knows where. Maybe someday we’ll learn.

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