Shorting Economists: The 'Experts' Keep Getting it Wrong
That modern-day guild known as “economists” has been on a self-righteous rampage lately. This latest rash of finger-wagging was kicked off by the Greek debt crisis. Looking at tiny Greece, these economic Cassandras foresee a menacing future for the entire global economy if President Barack Obama and Europe don’t rein in their budget deficits.
Of course, dramatic tales of impending collapse are good for the economics business. Gloom and doom sell magazines and get you on talk shows. But it is not obvious to me why anyone should take seriously most of the people calling themselves economists. After all, the vast majority of these same “experts,” despite spending millions on research and analysis, completely missed an $8 trillion housing bubble in the United States, as well as housing bubbles in the U.K., Spain and Ireland.
But that was not the only time the economics profession has been so wrong. Remember in the early 1990s, when in the wake of a recession economists predicted that Japan’s surging, export-driven economy would eat America’s lunch and the U.S. was looking at huge government deficits for years to come? Indeed, “deficit obsession” gave Ross Perot his political rise in the 1992 presidential election. Yet by the end of the decade the U.S. budget showed a sizable surplus.
Reflecting the economics profession’s schizophrenia, by the end of the 1990s the experts, led by Nobel Prize winner Paul Krugman, did an about-face and concluded that instead Japan was an economic basket case. They pontificated about Japan’s “lost decade” and even gave a name to its malaise — “Japan syndrome” — sounding like a disease to warn policymakers, as in “you don’t want to end up like Japan.” Yet Japan had an unemployment rate of a mere 3 percent (less than half the U.S. unemployment), health care for all its people, one of the lowest rates of inequality, high life expectancy, and low rates of crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade. But the experts chose to emphasize the wrong measuring sticks, seeing the glass as half-empty rather than half-full.
The experts also warned in the early 1990s that the German economy was “slumped at the razor’s edge,” spouting dire predictions of unemployment, taxes and crime rising to “a level not seen since the Weimar Republic,” reported the International Herald Tribune. Yet by the end of the decade a prospering Germany was the world’s leading exporter.
Not content with being wrong throughout the 1990s, during the 2000s more voodoo economists likened Europe’s economy to that of a “sick, sclerotic old man,” until—surprise, surprise—it was discovered that Europe actually had surpassed the U.S., creating more jobs, higher per capita growth and higher productivity (which lasted until the 2008 collapse).
And how about the experts who still can’t tell us how the Dow plunged a thousand points within minutes on May 7, 2010, in a frenzy of computer trading gone wild. Or the experts who never suspected that the rating agencies, like Moody’s and Standard and Poor’s, were selling their AAA ratings to Goldman Sachs and others for investment derivative bombs that they knew were designed to detonate. Now those same rating agencies have been downgrading Greece, Portugal and Spain, sending them into speculative play. Why does anyone listen to these ratings agencies anymore?
Lately the economic experts also tell us that bubble-plagued, smog-choked, poverty-ridden and authoritarian China is the next economic superpower that will overtake both the United States and Europe. So much for crystal-ball gazing.
Why have economists been so wrong so often? Certainly theirs is a tough job, since the global economy is a complex creature. Yet it turns out that their measuring sticks are woefully inadequate. Indeed, they aren’t even sure what to measure. BusinessWeek’s Michael Mandel, a humbled economist, admitted recently that methodological defects lead us to incorrectly measure certain parts of the economy, including exports/imports and labor productivity. Columnist Martin Wolf from the Financial Times told me that our understanding of how the financial system works is at least 10 years behind reality. Lenny Mendonca, an executive of the business consultancy the McKinsey Global Institute, says that “anyone who tells you we understand what’s going on with the economy, or that we know how to measure it, is lying. Uncertainty is the new norm.”
But if we don’t know how or what to measure, then how come so many economists sound so damn sure of themselves? Lacking any shred of humility, most economists are obsessed with a narrow selection of overused indicators and ideologically preferred measuring sticks, like “economic growth” and “gross domestic product” (GDP). Yet GDP is a perverse abacus that can only add, never subtract. Massive oil spill in the Gulf of Mexico? No problem, the cleanup will add BILLIONS to GDP! And “growth” has become a fundamentalist orthodoxy; that’s why its proponents love China so much and sneer at Japan and Europe. To many awestruck pundits, China is the new frontier where financial prospectors and get-rich-quick investors go panning for gold.
But if you point out that Japan and Europe actually do a far better job than China of providing for their people, they will revert to their talking points: “Have you seen China’s growth rates? There’s gold in those China hills!” The echo chamber drowns out most voices of common sense. To counter this stultifying narrative, Nobel Prize economists Joseph Stiglitz and Amartya Sen are working with French President Nicolas Sarkozy to propose alternative measurements for assessing the health of an economy.
Based on such a miserable track record, I’m shorting economists and financial experts of all stripes. Most of them are wrong more than they are right. But that doesn’t prevent them from pontificating like an order of self-righteous priests. Considering how much damage they have caused, how many economic experts have lost their jobs or been otherwise defrocked? Indeed, many of the same people who caused the disaster — Fed chief Ben Bernanke, Lawrence Summers and Robert Rubin, the latter two being Clinton treasury secretaries who got deregulation done, then split for Harvard and Citigroup, respectively — are still calling the shots. Summers, of course, is President Obama’s top economic adviser. Their economic priesthood protects its own, no matter how offending they have been, relocating them to another university or think tank, another government job or talking-head show.
So when the authorities say “a recovery is under way” or “stimulus rather than deficit reduction” or “deficit reduction instead of stimulus,” remember: These are the same experts who are unsure of how to measure, who too often substitute ideology and partisanship for broken theory, and usually have been flat wrong in their assessments. It is critically important that we find better measuring sticks and employ saner values for assessing what a successful economy looks like. Until then, we are flying in uncharted territory, without compass or radar, surrounded by fog. Heaven help us.
Steven Hill is author of the recently published “Europe’s Promise: Why the European Way Is the Best Hope in an Insecure Age.”