in the '70s, there was a cliche in business circles: "nobody ever got fired for recommending IBM."

nothing new here, and it's not just finance and economics where we see this. life is hard and then you die.

Ouch.

Let's just put in the caveat that you're talking about macroeconomists - of which there aren't all that many in consulting. Most work for the government and for the large banks or investment houses. There are a few here and there in academia, but it's not exactly a growth field.

Well, given that promotion and monetary incentives don't work so strongly against civil servants or tenured academics, I think you're mainly talking about the people working in finance. It doesn't take a rocket scientist to say that people seeing similar incentives and similar information, namely economists versus MBAs / finance PhDs, will tend to have similar problems despite having different job titles.

Sorry, I forgot to mention that a number of us have been seeing huge problems. I can't discuss details, but there was certainly a lot of concern among government economists about lending. There has been concern from a bunch of us labor economists about inequality - we just don't go into the macro picture. And critics have been talking about not understanding the risks involved with derivatives for at least the past 5 years.

In other words, economics is not a science.

Sorry, Ezra

But the circle of economists who foresaw these problems is much wider. The problem is that you don't really read them.

Being a libertarian, I read many economics blogs by libertarians from the GMU group to Mises.org and all persuasions in between.

They were sounding the alarms for years...much longer and much louder than most others and with specific concerns around monetary policy and bubbles.

A steady reading of those economists made our current crisis so unbelievably predictable and simple to understand that I shudder with disgust at how many "mainstream economists" (Read: Keynesian) still fail to understand the real symptoms of the true disease.

I'm with Howard, above.

Conventional wisdom is nearly always conventional.

Management doesn't want to hear bad news (I'm looking at you, George W. Bush, among others), and they rarely therefore get it from advisors.

Isn't this the exact same model that was followed by the foreign policy community in the lead up to the Iraq War? And also, not coincidentally, the same trajectory of the post-war narrative?

Elite opinion is teh awesome.

furthermore, thanks to these economists (mainly Austrian in persuasion)...

my fiance and my sister give undue and totally undeserved respect for having warned them with frightening accuracy about a lot that has happened.

I deserve no credit. None. And I tell them that.

I simple try to grasp and repeat the knowledge I've attained from these economists. And since they were right about Greenspan, housing bubbles, interest rates, dollar exchange values, Bernanke and the basic tenets of market principles and monetary influence, I appear right.

But again, I'm the one who is right...the economists are.

And according to them, BTW, our "leaders" are currently doing the exact opposite of what is needed to right the ship because they continue to do the exact same thing that caused this problem. All this will only make things worse and slow true recovery at the same time.

Perhaps you should add them to your daily reading and stop pretending that they aren't there. If you did this, you wouldn't be so surprised by how stumped "most economists" are.

correction:

"But again, I'm NOT the one who is right...the economists are."

john v, i'm not even close to a mies-ian and i foresaw the outlines of this problem, so please spare us the austrian bromides.

and then explain to us what mies would do now, because i do not think that "allowing everyone to go bankrupt and the market to clear as a result" is a policy that any democratic nation will support.

nor should it.

It's worse than all that. Economics is a profession with a broken quality regulation setup.

It's not just the media, the workings of the profession itself do very little to judge the quality of work against reality. Instead there's a huge concentration on technical formalities, which is nice, but ultimately useless if the base assumptions are broken.

It's worth noting that the bubble broke in almost exactly opposite the way John V predicted. Not to mention that he advocated very strongly for greater deregulation of banks and hedge funds. That should make everyone wary of his pronouncements about solutions.

"Being a libertarian, I read many economics blogs by libertarians from the GMU group to Mises.org and all persuasions in between."

Considering that the mises.org has been predicting disaster every year unless we all went back to the Gold Standard, that's exactly convincing.

If your prediction vector doesn't move regardless of good times or bad, you're a stopped clock, not an economist.

Kudos should go out to Wynne Godley of the University of Cambridge, who looked at the U.S. current account deficit back in 2002 and said essentially that growth in the ability of the U.S. consumer to consume can't continue at this rate, and it's gonna be ugly when it corrects. This recession is (in part) the result of that unsustainability in the growth rate of consumption.

Sock Puppet,

A Gold Standard is the issue. It's the misuse of monetary policy by ignoring the very real consequences of its loose, misuse. Gold is but one idea on how to avoid it. But that's the issue here. The problems and where they came from were clearly explained and they were 100% right.

Howard,

Whether others saw it isn't the point. The point is that Ezra was making it sound as if only a handful of economists of his choosing foresaw it. And that's not true.

So spare me.

As for what Mises would do? Yes, that's what he would do....more or less. But asking what he would do know dodges the acknowledgement of Mises WOULD NOT DO in the first place in order to avoid the very crisis in discussion.

All this reaction from is typical on the diagnosis side of the problem: Avoid the cause (which is the whole point!!...without understanding the cause, any cure is pointless) and go right to the cure.

This isn't Mises's mess. Quite the opposite. It's the result of ignoring him.

Correction:

A Gold Standard is NOT the issue here.

Sorry, John V.

I've been around long enough to watch the Austrians predict 15 of the last 3 recessions, and 5 of the last 0 collapses of Western Civilization.

sorry Paul,

But I think you are willfully missing the point about causes.

I have only been reading them long enough to see them predict two of the last two along with bubble that triggered them.

One could easily make that same critque on Paul K who has been predicting recession for the last 4-5 years. But I'm not doing that. It's lazy.

I talked to a lot of economists back in 2005 about my fears of an impending crisis. I met many types of economists. First note that very few economists involve themselves with the happenings of the financial world. Second, even those that do are not entirely up to date on the latest innovations. The drastic growth and changes in the CDO and CDS markets went largely unnoticed by many economists prior to 2005/2006. Its not like Wall St. sends them a memo, and its not like these academic researchers think of themselves as the Police of Wall St. by any means.

I can vividly recall one economist who said, "These people on Wall St. are all very smart people, if they are not worried, I do not understand why you are, or why you think I should be too. They don't want to lose their money and they won't do anything foolish enough to risk losing so much of it."

I convinced another economist to go to a seminar with me on the topic back when the first signs of trouble started popping up. One "famous" economist presented and spent his whole time trying to convince everyone that there would be no crisis. He spent a lot of time talking about the flaws of the Case-Shiller index, etc. The economist I was with basically told me, "well, he knows more than I do about this topic and he says not to worry, so I won't."

But, I also met a lot of people who did agree with me, but no one really cared. People were making millions of dollars, and the general attitude was "how can they be wrong if they're making so much money? Being wrong never gets you rich." And yes, Greenspan, the IMF, etc. all said everything was OK, (and I remember people shoving the IMF reports in my face when I brought up fears about a credit crisis).

But, in general, even if they had...nothing would have changed. People SCREAM about climate change now, and yet, the world's behavior hasn't changed much. Now imagine that you want to change the behavior of certain people. Certain people with powerful friends making bazillions of dollars, and you are asking them to stop making bazillions of dollars. Do you think the will listen? Of course not. They'd rather make bazillions of dollars, even if there is a chance they might lose it all. The only way to ensure that they lose it all is to never get it in the first place.

In short. many didn't know. Some did. People didn't care. No one ever does.

One could easily make that same critque on Paul K who has been predicting recession for the last 4-5 years. But I'm not doing that. It's lazy.

In fact Megan McArdle has made exactly this argument about Krugman--I thought you read lots of libertarian economics blogs? It's an easy criticism but it's still true. If somebody always predicts the same thing then you should be less impressed when they finally get it right than you would be otherwise.

It seems like Dean Baker is just begging the question of why all the "honchos in the profession" were wrong.

As Paul Camp observes, "In other words, economics is not a science."

Well, maybe Economics is a science. Just not one that works very well. I've read a number of explanations for that, starting with the criticism that the mathematics used in economics has been outmoded for a hundred years and, in any case, was applied incorrectly to begin with. Tough to overcome, if true.

As a non-expert, my only question is, "When a science can't accurately predict anything, when does it cease to be a science?"

I read somewhere that Keynes said : It is better to be conventionally wrong than unconventionally right.

yes,aaaa

I know Megan made the same argument about PK. Never said I wasn't aware of it. I also wasn't getting into whether or not that discussion had merit. I didn't even want to go there. I brought it up to show that that superficial standard of "the boy who cried wolf" cuts in all directions. It's a lousy point to make unless you are willing to apply it indiscriminately. And if one does choose to discriminate on it, he should explain why.

For the purpose of this topic Ezra posted so as to not veer away from the simple point at hand, I wasn't going there....like I said.

But I will say that I don't see how this argument applies to the Austrians. They had warning about the impending crisis for several years and for the right reasons. It's not like they came out every month and said:

"This is it!"

No. They warned of the same root problem and how it was getting worse: the monetary-fueled housing bubble.

Ezra, do you really expect information from experts? That's what seems puzzling. Experts merely exist for social proof, rarely for domain knowledge. Thus no one cares if the economists are actually right or wrong later. If you wanted accurate information, you would do better statistically to ignore experts and open a prediction market.

In fact Megan McArdle has made exactly this argument about Krugman--I thought you read lots of libertarian economics blogs? It's an easy criticism but it's still true. If somebody always predicts the same thing then you should be less impressed when they finally get it right than you would be otherwise.

Followed by:

I know Megan made the same argument about PK. Never said I wasn't aware of it. I also wasn't getting into whether or not that discussion had merit. I didn't even want to go there. I brought it up to show that that superficial standard of "the boy who cried wolf" cuts in all directions. It's a lousy point to make unless you are willing to apply it indiscriminately. And if one does choose to discriminate on it, he should explain why.

The reason not to go there is because Megan's talking point has been thoroughly debunked, exploded, disposed of out back like a horse with a broken leg. And everyone - including you - knows this. And I think _that's_ why you don't want to go there.

And, as far as picking winners go, as another poster notes:

It's worth noting that the bubble broke in almost exactly opposite the way John V predicted. Not to mention that he advocated very strongly for greater deregulation of banks and hedge funds. That should make everyone wary of his pronouncements about solutions.

Said nostrums and predictions being based on the same principles being advocated here. Iow, a stopped clock, or rather, someone who stubbornly insists on using the clock, even after being made very aware that's it broken. A self-declared 'right of center' person at that. Yeah, I know, 'right of center' and Austrian economics don't exactly go together, but that's what John is trying to push. And like 'fetching', it's so not going to happen.

Ezra, do you really expect information from experts? That's what seems puzzling. Experts merely exist for social proof, rarely for domain knowledge.

Wellll . . . I think that the rule of thumb should be that if the 'expert' makes regular television appearances, you might be right. Otherwise, maybe not.

Well, SOV,

It never fails. It's gotta boil down to personal attacks and placing ill-gotten motives on others. It's always about uncovering deception and someone trying to push a bill of goods on the unsuspecting crowd. I'll just turn the other cheek and not go there.

As for the content that is there:

Notice how the real point is getting swept away and covered over?

Ezra is making a point that only some economists saw this coming (ones that he happens to agree with ideologically...how convenient) and that something may be wrong with economics. I'm saying that he is overlooking many economists readily available online who saw it coming and explained along the way why exactly it was coming and in gory detail.

Since then, others have tried to discredit the point that Austrians and related schools of thought also saw this coming...not by showing that they didn't and for the right reasons...but by showing their displeasure for what they would do now or by pointing to one idea that some of them hold on how to avoid the problem in the first place. Of course, none of this is really that pertinent to the matter at hand since we're talking about correct diagnosis. And of course, lost in all this the fact that one of the Austrians' primary insights is the perverting and insidious effects on bad monetary policy on economies and how bubbles seemingly always trace back to blunders of this nature.

I brought up that point about Krugman predicting recessions almost every year BECAUSE someone chose to use that pointless (and unfounded) critique on the Austrians.

You seem to fall over yourself in a rush to explain how that point isn't true about Krugman and imply further that I am saying it was true. I didn't. Whether it was true or not wasn't the point. But all that piddle is a side show to the real point.

Now I'll spell out what could have been extrapolated from point if one chose to see it:

It's unfounded on the Austrians as well. Show me.

People choose to read PK's recession pronouncements in their strongest possible light to show that the "broken clock is right twice a day" claim doesn't apply to Krugman. Now go read the Austrians and tell what you find. Go ahead.

As for this quote:

"It's worth noting that the bubble broke in almost exactly opposite the way John V predicted. Not to mention that he advocated very strongly for greater deregulation of banks and hedge funds. That should make everyone wary of his pronouncements about solutions."

I have no idea where that came from and in what context but I am struggling to remember what I could have said that makes that quote in any way valid. Perhaps you could provide a link next time.

The funny thing is that Paul Krugman stated in a 2007 interview that his prediction of The Great Unraveling was wrong and that the economy was much more resliant than he had anticipated.

"I was overly pessimistic"
7:15 to 9:40

http://jp.youtube.com/watch?v=B2Znw7vCGa8

Ed,

Come now. PK was humble and pretty accurate in his qualification as to why he may have been “overly pessimistic”; the continued housing boom that had been running from 2003 had sustained the market. He just explained a basic market rotation that had helped stave off current events for another 2 years. Been reading PK for a good 15 years now and there are few who have been as consistently correct and insightful. I think the Austrians should find someone else to tussle with, unless of course they’re just trying to get mentioned in the same sentence.

Isn't this the exact same model that was followed by the foreign policy community in the lead up to the Iraq War? And also, not coincidentally, the same trajectory of the post-war narrative?

Elite opinion is teh awesome.

Posted by: Steve Balboni | December 23, 2008 12:13 PM

And this, friends, is why "nobody could have foreseen" yadda yadda yadda. Yes, of course they could have foreseen. Lots of people foreseen. (Foresaw. Foresooth. Whatever.)

But the important thing is not to be right. Being right means sweet fanny adams unless you're making somebody money. The important thing is to have the opinion that will advance your career while ensuring that you can't be blamed when you get it wrong. And as we've seen in both these cases, there is enormous safety in numbers.

As for "Paul kept on predicting a recession until it happened?" The point was not the timing of the prediction. The point was the substance: a popped housing bubble and the threat of Japanese-style deflation.

On both of those, he was right. Just as us negative nellies were on the tossed flowers of Baghdad.

Here is a little fact:

"""For the fourth quarter of 2004, according to OECD, (source Employment
Outlook 2005 ISBN 92-64-01045-9), normalized unemployment for men aged
25 to 54 was 4.6% in the USA and 7.4% in France. At the same time and
for the same population the employment rate (number of workers divided
by population) was 86.3% in the U.S. and 86.7% in France.

This example shows that the unemployment rate is 60% higher in France
than in the USA, yet more people in this demographic are working in
France than in the USA, which is counterintuitive if it is expected that
the unemployment rate reflects the health of the labor market"""

Number of economists using unemployment measure as is to prove
superiority of X or Y policy/country: 100%
Number of economists studying this discrepancy: 0% +/- 1% (1) (2)

Raw economics data is also top secret: there is a big incentive
for the profession to keep data out of the public eye to
avoid embarassing debates (inflation comes to mind, why
are hedonic adjustments not public for example?).

Laurent

(1) of the hundreds of economist I presented with this evidence
only Dean Baker reacted positively, but he also predicted this crisis
(correlation is not causation :)
(2) it's easy to disprove this affirmation: cite a paper

John V. fights the good fight...

The real issue is what THEORY do the predictors use to predict events. Or are they simply pulling it out of their back ends?

Krugman believes that recessions are because people, for unknown reasons (meaning he has no clue) stop buying stuff. To him, the business cycle is some natural failure of capitalism - as though he forgets that it's illegal for capitalists to print money - only the holy rollers at the FED are clever enough to do this and not hurt the economy.

The Austrians have a quite elaborate theory which anyone can read. It states WHY creating excess credit leads to bubbles - but it does not predict specific areas the bubbles arise, because that depends on where the credit bubbles up. Sometimes it's stocks, sometimes housing.

They do predict, however, that most problems begin to surface in the "higher" orders of production. Farther away from the consumer. This is because those producers have larger time frames for their decision making and thus are more dependent on interest rates to provide accurate information on the time preferences of consumers. So, when they expand because interest rates are low, they can't see that the low rates are artificial.

You can check it all out at mises.org - a virtual library of economic theory that makes sense. Not that rubbish about ending recessions by doing precisely what got us into them.