My Pet Peeves: Why Does Anyone Listen to Economists?
Doesn't anybody know that economists don't know what they're talking about?
William J. Holstein, Editor in Chief, Chief Executive magazine
Every morning on the drive to work, I listen to the radio and hear economists speaking very earnestly about the American economy. They react to each of the latest statistics coming out of the U.S. government, and financial markets leap and fall in response.
But doesn't anybody know that economists don't know what they're talking about? Why are we listening to them?
Here are my pet peeves about economists. I hope that you, our readers, and I can guide them down the path toward obtaining a better grip on reality.
Pet Peeve No. 1: The practitioners of econometrics, within the economic profession, argue that they have built "models" that can predict the course of the U.S. economy. This is just preposterous. The U.S. economy is far too large and far too sensitive to psychological variables. In fact, I'd argue that over time we have become an even more psychologically driven economy. Fueled by CNBC, the Internet and so many other communications channels, confidence rises and falls each day. The economy is less predictable than ever.
Pet Peeve No. 2: Economists, whether econometricians or not, don't have an understanding of the U.S. economy in a global context. We've reached the point that goods, services, people, money and technology are whizzing across our national borders at a dizzying rate (foreign exchange trading has now reached nearly $2 trillion a day, for example), yet economists seem to believe that the economy stops at the water's edge. Again, preposterous.
Pet Peeve No. 3: As a corollary, of Pet Peeve No. 2, economists lack the tools to understand the nature of today's beast. For example, "capacity utilization" was an indicator that was created in the 1950s to measure the amount of steel going through the nation's steel mills. Now more than half a century later, semiconductors are arguably more important to the economy than steel. And if we need more steel, we can import it from China, Japan or South Korea. Yet when a capacity utilization number comes out, the economic sages warn about imminent inflation or a turn in the business cycle. But they are peddling antiquated concepts. They don't have the right tools for today's economy.
Pet Peeve No. 4: Economists don't know how to measure or analyze the quality of economic activity. There are different kinds of economic activity that generate more value and that are better for the long-term health of the economy, but economists don't understand that. Consider:
-- We had economic growth of 3.5 percent last year and this year most estimates come in around 3.2 percent. But is that growth coming from construction and retailing, which is relatively "cheap" ephemeral growth that could disappear in the blink of the eye, or is it sustainable technology-based growth?
-- The unemployment rate was down to 4.7 percent in January, and the economics boys are patting themselves on the back. But what is the quality of the new jobs being created versus the old ones being destroyed? There is huge churn going on in the job market. What is the trend line?
Pet Peeve No. 5: Despite all their erudition, economists are bad about making value judgments that would be truly useful to policy makers. Are the huge trade and fiscal deficits good or bad for the long-term health of the economy? The economics profession can't make up its collective mind, instead falling back on ideological or political nostrums. But if ever there was a time for the profession to pull itself together and provide intellectual leadership, this would be it.
I realize that members of the dismal science are easy targets and that I may be accused of destroying straw men. But I hasten to note that millions of people, maybe even important decision-makers, seem to be listening to economists. If we as a nation are listening to a tribe that has lost its way, what does that say about where the U.S. is headed? It's a major case of the blind leading the blind.
© Chief Executive Group 2006