Are Economists Completely Clueless?

The following is a frustrated rant. React accordingly.

I am slowly reaching the conclusion that the current debate over fiscal stimulus — like prior debates over monetary stimulus, and the causes of the financial crisis — has exposed the cluelessness of (many? most?) professional economists and ought to be considered an embarrassment to the profession.

In the debate over economic stimulus, I hear many otherwise brilliant people making a lot of baseless conjectures about mass psychology — about consumer and creditor “fear” and “uncertainty,” and what to do about it. But, as far as I can tell, none of them has even a rudimentary theory about the causes of micro-fear or how it scales up to aggregate consumer demand or aggregrate credit supply, etc. So I feel like I’m hearing a lot of smart people talking out of their asses about a subject they’ve never actually studied –the psychology of coordinated expectations — and pretending it is “economics,” a subject with much greater rhetorical prestige and political power than amateur psychology. 

For example, if individuals’ decisions about consumption, savings, and debt are rooted in beliefs about their future incomes — a view I think most economists share — then it would seem that an economy-wide decline in personal consumption would indicate that a lot of individuals have more or less simultaneously revised their expectations about their future economic prospects. As far as I can tell no one has a theory of the events that predict revisions in an individual’s estimates of her lifetime income, much less a theory of how the perception of events predicts the magnitude of these revisions. Nor have I encountered a story about how these revisions become coordinated and scale to the macro-level. 

Nevertheless, I hear economists saying things about how easy money is needed to soothe investor worries, about how a surge of government spending is needed to quell consumer anxieties, about how the government’s “doing nothing” would cause people to panic and make everything worse, and so on. Do any of them have any idea what they are talking about when they say these things? I’m afraid they don’t. And, frankly, I think they should be ashamed of themselves.

If booms or recessions are really based in coordinated psychological changes, then why should we think that monetary or fiscal policy is the most relevant policy lever? If the thoughts and feelings of the population are the issue, then maybe the real problem is that the mass media are unduly scaring people. Wouldn’t it follow, then, that good economic policy would have at least as much to do with controlling the media as controlling the money supply? If the problem with handing Maria Bartiromo a script of state-mandated talking points is that it wouldn’t work, how do we know that?

It would be pretty interesting if it turned out that manipulating the money supply is what an efficient state turns to when it can’t more directly manipulate “animal spirits” through propaganda. If the problem with turning the entire media into a servant of state macroeconomic engineering is not that it wouldn’t work, but that it’s repulsively illiberal, then we ought to face up to it. Maybe we focus so much on certain not-very-effective policy instruments because those are the ones we consider within the state’s legitimate power. We think it’s okay that the state attempt to manipulate our thoughts and feeling by printing money, nationalizing banks, and building highly-publicized public works, but we don’t think it’s okay to do it by intervening in the media in the way the state very much did do during the Great Depression and WWII.

Alright, but then why do we think we can draw policy lessons from those earlier periods when, for moral reasons, we’ve taken some of our state’s formerly favorite tools of economic policy — outright propaganda and control over media — off the table? If you think we’ve taken these tools off the table for practical reasons, who was it that showed us that they don’t work?   

Maybe I’m being unfair here. I hope someone will explain to me how it is that economists, and by extension the American state, isn’t just winging it.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center