Tuesday, August 16, 2011

Economists and Broken Clocks

Among economic commentators, Nouriel Roubini has a better claim to our attention than most. He was the guy who told us most emphatically that we were about to fall off an economic cliff when the “smart money” was still chasing mortgage-backed securities and bidding up the price of bank stocks. Had you listened to him attentively and shorted those securities you’d have made a lot of money.

Granted, that may just have been a matter of Roubini and the short-sellers’ especially good luck. There's an ample population of economists trying to make a name for themselves with contrarian predictions and investors trying to make a killing in securities markets. Some of them have to be right, if only in the manner of a broken clock telling the right time twice a day.

Come to think of it, that comparison's a little unfair to the clock. It has to be right twice a day because it takes a straightforward position on what time it is. Most economic predictions are vague enough to leave plenty of room for ad hoc explanations as to why the predictor was still essentially right even though things didn’t work out quite the way he predicted.

Say this for Roubini: he envisioned a catastrophic market crash and specified in advance a relatively short time frame in which would happen. His relatively unhedged position having been vindicated by events, he’s entitled to a high rate of reputational return. The mere fact that he was sufficiently forthright and steadfast to be proven right is enough to distinguish him from run-of-the-mill economic commentators before we’ve even had a chance to ask ourselves whether he was only right by accident.

Now Roubini’s using his newfound intellectual authority to lecture us on how to escape from our current economic predicament. His advice, as it happens, consists mostly in liberal boilerplate:
“The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.”
I have no particular quarrel with Roubini’s advice as far as it goes.  Indeed, although evaluating it intelligently is above my economic pay grade, I like the sound of it.  But I can’t help noticing that it doesn’t go very far. It tells us what we need more of (stimulus, progressive taxation, etc.) without telling us how much more is enough and specifying the point beyond which more becomes too much. If you try your best to follow Roubini's advice and it doesn’t work, it'll be because you didn't get the "balance" quite right by doing too little of one thing  or too much of another.

And even if Roubini could calculate what the right balance is down to the budgetary dollar, we’d lack the institutional capacity to do exactly what he recommends anyway. We can’t, for instance, really commit ourselves to make up for spending more money now by spending less later. Every congress and every president has to decide how to spend and how much to tax for themselves and what are the chances that they'll all be dedicated Roubinians? 

The one thing you can know for sure about Roubini’s prescription, then, is that it's far too vague and impractical ever to admit of being demonstrably right or wrong. And he's one of the most forthright economic commentator out there.  Macro-economists seldom lack for serviceable excuses.  So why do we put so much stock in what they say?

At least among non-economist liberals like me, I submit that Roubini's advice owes most of its plausibility to supplying me with an impressive-sounding for doing things I'd like to see being done anyway. I'm already inclined to redistribute money from richer people to poorer people more likely to spend it because it accords with my idea of distributive justice. I already want to delay necessary spending cuts as long as possible in the hope that they can be less draconian after the economy gets back on its feet. And I'm usually not inclined to object to those who want to shovel a little more “stimulus” to Democratic constituencies and using the tax code to stick it to Republican constituencies.

Roubini's telling liberals that they proceed along the path they've already chosen for themselves with a clear conscience.  The congruence between Roubini’s economic advice and liberals other ideological and partisan priorities would be utterly discrediting except for the fact that there’s just as much congruence between the prescriptions of conservative economists and conservative ideological and partisan priorities.  You could be forgiven for the reductionist thought that, for all its ostentatious technicality, macro-economics is just another front in an ideological war.

In any case, macro-economic punditry necessarily lacks the forthrightness, and therefore some of the practical integrity, of a broken clock. Remember that the next time you hear some highly credentialed economist calling his political opponents corrupt fools for listening to other highly credentialed economists.

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