Where Have All the Macroeconomists Gone?

A reporter friend of mine recently asked me for a short list of academic economists he should call to better understand the current financial and economic mess. I found it a more difficult question than it should be.

It really has been quite striking how silent most economists have been in this hour of need. There are, of course, a few notable exceptions. Paul Krugman’s blog has been an interesting source of insight, and his recent column provides the clearest explanation of our current difficulties I have seen. Doug Elmendorf at Brookings has provided some very insightful commentary on the mortgage mess, and Marty Feldstein has offered a very well-thought-out plan.

Economists like Karl Case and Robert Shiller can quite rightly tell us that they saw this coming years ago. I’m sure I’ve missed others, but it remains striking that academic economists are barely visible during one of the most interesting economic disruptions in decades.

Yes, there is an enormous ocean of economic commentary out there, but a lot of it is either the self-interested blather of Wall Street economists, or political rhetoric parading as analysis. (Yes: Republicans are worried that regulation may stifle innovation, while Democrats believe that regulation can help … Oh, and what issue are we talking about? Does it matter?)

Meanwhile our presidential candidates call for action, but ultimately only suggest that we should consider many proposals, and find some experts to ask about them.

Why have the best and the brightest barely dipped their toes in the water?

1. Incentives: Krugman, citing Keynes, has argued that there is no incentive for a public intellectual to challenge the conventional wisdom. Better to be conventionally wrong, than unconventionally right.

2. Career ladders: Interestingly, some of the best analysis is coming from economic journalists, who are unencumbered by either the fight for tenure or post-tenure lethargy.

3. Crowding out: The wisdom of crowds is at its heyday and experts have lost market share in the public square. Everyone with a blog and ten minutes to spare is offering a view (including yours truly), and this is crowding out thoughtful discussion.

4. Reputational market failure: Just as it is tough to identify a good mechanic, it is difficult to identify a good economist. There are thousands of economics PhD’s, but perhaps only a few dozen with the penetrating insight the economy needs. Unfortunately these folks are struggling to be heard.

5. Labor supply: The success of economics over recent decades means that we simply have many more exciting (and important?) issues to focus on.

6. I’m wrong: Academic economists have produced excellent policy-relevant analyses that are providing Bernanke with the ammunition he needs.

I would love to be convinced that this is true. If you have written (or read) first-rate analyses — for a technical, policy, or popular audience — please add a link in the comments.

I suspect that #4 may explain the absence of younger economists from the debate; #1 and #5 seem too strong, but in the right direction; and the problem with #2 is that there is no clear alternative.


John Wood

All Americans must be introduced to Austrian Economics. Free-market Austrians don't sugar-coat the sad reality of how America got into the current situation. Our challenge. The Austrian solution for how we WILL recover requires intelligent politicians with the courage of their convictions because it may condemn them to a one-term office. Truth is seldom easy. Please commit yourselves to study, contemplate, and debate the voluminous library of information here:
http://www.mises.org/

John, Boston

I've been writing to these economists on these topics for months. I called this debacle the second great depression, when I first discovered the mortgage backed securities about 3 years ago. However, so few are actually using keynes analysis of supply side and demand side stimulus initiatives.

First, we have a reagonomics theory of "Supply side" economics. This is really not a supply side policy and is more like a demand side policy, since it's real aim is to increase consumption and not investment, which is a supply side intention. The real idea (not reaganomics) is that by lowering the interest rate you create additional investment and decrease the propensity to save or conversly increase the propensity to spend. now if interest rates are exceptionally high, this makes loans risky, which is why increasing the available funds (voodoo economics) will be unsuccessful at high rates of interest. In times when there are low interest rates, investment money with less risk is more readilty available so organizations will borrow from banks and not individuals, so the increase in available money is irrelevant. In the middle there may be a small space where this sort of policy is beneficial, but according to keynes theory at the majority of equilibrium points, it is not impactful as well as unused. This bears (pardon my joke) itself out in emprical studies as well.

What we really need and what the bernanke and other major feds are hearing (most likely) from their analysts is that we need to improve the institutions that govern the process (banks, investment houses, lenders). As keynes wrote, instutions are intended to mitigate the negative side effects of a free market.

Oh and reason #7 is that economists are not stupid. They see that anyone who speaks out against the wealthy and their tax cuts (ill advised), will never be able to get funding or a job again. But that is really what needs to change, so they are all mum.

Email me and we can discuss.

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Debi

This link to an explanation of the situation via stick-figure illustration was in the Neatorama blog on Tuesday.
http://www.joeydevilla.com/2008/03/20/the-credit-crisis-illustrated/

Mike N.

You missed a couple of good economists, all of whom often interact through their blogs (and Krugman with them as well):

NYU's Nouriel Roubini (http://www.rgemonitor.com/)
Univ. of Oregon's Mark Thoma (http://www.uoregon.edu/~mthoma)
UC-Berkeley's J. Bradford DeLong (http://delong.typepad.com/)

Read the three of them, and you'll understand whats going on as any non-PhD or financier can hope to.

Ed Sanders

Along with those already mentioned, add in James Hamilton, Brad Setser, Menzie Chin, Mike Shedlock and Mark Thoma, off the top of my head.

You should also pay attention to Barry Ritholtz at the Big Picture and Tanta and Bill at Calculatedrisk. Not economists, but very educational.

Dave

Have you considered the possibility that it's nearly impossible to predict the future of the market, and therefore that the shortage of economists is no more surprising than a shortage of three minute mile runners, or (to be even more pessimistic) of successful astrologers?

Sean Foley

Most people are making things seem far more complicated than they are. Your point number 3, crowding out is most accurate.

Here is the crisis in a nutshell:
1. Financial institutions created securities (mortgage-backed), a large number of which were worth less than the paper they were printed on. Low interest rates caused rising house prices, and rising prices were a prime reason many of these worthless bad mortgages were created in the first place, because that allowed people to squirm out of their predicaments, either by selling to a person who could pay, or by passing the buck to someone else who couldn't pay for the house either.

2. This "imaginary" money circulated throughout the economy from one institution to another, as it took time for people to realize just how much of this "imaginary" money was in fact imaginary, mortgage payments that would never happen.

3. Once the crisis became widely known, the bad money was everywhere, and so many institutions felt the pain.

4. Extreme leverage, also caused in part by low interest rates, exacerbated the pain, because most institutions simple had no way to cushion the blow they were experiencing.

5. So many institutions were in difficulty that trade and credit slowed down considerably as institutions did whatever they could to avoid new exposures to credit and did whatever they could to repair the damage by cashing in securities and making margin calls.

6. Presto! Extraordinary losses (which was just imaginary money to begin with), followed by a financial freeze.

End of story.

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E.R. Shuping

Dean Baker of The Center for Economic and Policy Research in Washington is certainly one of the best: http://www.cepr.net/

Also, see his blog: http://www.prospect.org/csnc/blogs/beat_the_press

Richard Green

The problem may well lie with the incentives of academia. Macroeconomics has a small number of very large (and difficult) questions, and an equally limited sources of data. It requires a great deal of work to get a good bit of research out there and published, even though this work may be the most useful the world could have from the profession.
But in a "publish or perish" environment, what rational young academic without tenure is going to start on research which has only a small chance of getting a payoff, when microeconomics has a myriad of small questions and technology has provided so many new data sets and ability to process them. many answers to small (yet worthwhile) questions can be answered, and tenure achieved.
Of course, by then their expertise lies in other fields.

There's no real easy answer to this, do we provide security to a few youngsters on the proviso they devote themselves to Macro? It's hard to pick winners.

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Tzipporah

Feldstein's plan is interesting, but it's based on securing against homeowner's future income. One of his main premises is that unemployment will increase, which makes this "security" rather unstable.

Not to mention that homeowners repaying another loan to the government, rather than saving, investing, or even buying major goods (as they could do if they defaulted) isn't necessarily a good thing for them, individually, or for the larger economy in general.

Ed Hamilton

I blame most the entity with the most power:
the mainstream news media
keep well-out-of-sight
real inflation-corrected asset-market price histories.

Just look at the compelling structure here (first and last charts):
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
Price history, on a real basis, is the simplest truth -- no big deal!
BUT, they 'edit' using importantly: "What is intellectual honesty's cash flow?" -- and their income is overwhelmingly from paid advertising.

Elaboration: see Letter "The public be suckered" at
http://www.durangotelegraph.com/telegraph.php?inc=/08-01-24/soapbox.htm

Fair phrasing: the brainwashability of the people when the news media are well bought.

luz

I agree with (1). Roubini rocks! He was wonderful to listed to as a professor, now I am hooked on his RGE monitor. You should do the same.

MarkG

Warren Mosler has done some of the best work I have seen. He wrote a paper several years ago called "Soft Currency Economics". He explains the macroeconomic workings of a fiat money system with floating exchange rates and fractional reserve banking. Randall Wray also has some easy to read work on the subject of fiat money. You can find some of his work at CFEPS.ORG. I do not know if either have any specific work on recent events, but unless you know how the system works - can you understand how to fix it?

Maryann

You should have linked the NYT article by Schartz and Creswell, *Who Created This Monster?* http://www.nytimes.com/2008/03/23/business/23how.html?scp=3&sq=debt+obligations&st=nyt
This is the best explanation I've seen in layman's terms. I did have to Wiki "collateralized debt obligations" in the middle of the article, but it was otherwise understandable.

Kevin

I regularly read Brad DeLong and Jim Hamilton and Menzie Chinn. Both are tremendously well-informed with trenchant comments about the current macroeconomic conditions. And for a European viewpoint, Willem Buiter's blog is great fun -- much more sharply critical of current monetary policy.

Anonymous

I was actually reading Chalmers Johnson last night on Japan, prompted by his recent writing on the US's eminent decline. The thought that economics has shied away from "big picture" questions crossed my mind; I know there was at least one NYT article, in which Alan Blinder figured prominently, that captured this. (And a Norweigian banker lamented none of the economics PhDs he tried to hire knew anything about how banking actually worked.) Has the discipline failed? I was wondering if Johnson's ideas actually "worked" - the idea of "military Keynesianism" certainly merit testing, in my view. I was also wondering if they were too interdisciplinary, or conversely, whether the micro-/macro- divides within economics are too big to overcome. For example, Johnson cited an engineering/operations research professor (now-deceased) whose specialty was, apparently, machine tools. Are there people (i.e., economists) who could incorporate that level of specificity into their analysis? Greenspan apparently could - I remember reading he knew each of the bridges across the Mississippi (useful for understanding commerce flows in the case of a flood).

Apologies for a rambling email, but hopefully perhaps some ideas in here, which can be summarized as: disciplinary failure.

anon

PS - I wonder if I'm exporting too much from political science disciplinary self-criticism. But who knows, if these hold for economics as well, it will go a long way to rectifying the import/export balance between the two disciplines.

PPS - How do real economists feel about the Journal of Economic Perspectives in terms of career paths, tenure requirements and the like - it arguably is not too technical, and can handle big-picture questions?

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achilles3

Mr. Wolfers,
I love your posts! You have great, timely ideas and your blogging "style" is complete with out seeming full of it. You're interested and curious and that totally comes off in your work.
Not to say that the others (props to Dubs/Levy) aren't good (they are) but your stuff rocks man.

Thanks:-)

David

Instead of trying to understand the causes of this economic crisis, we should instead be appreciating the benefits of it.

Romain Wacziarg

Justin,
Here's the best thing I've read on the mortgage/credit meltdown:
http://www.brandeis.edu/global/rosenberg_institute/usmpf_2008.pdf
Written by some pretty serious people...
Romain

Dylan

I can't believe you would recommend Feldstein's solution to the mortgage crisis. Please read this entry thoroughly debunking his plan:

http://calculatedrisk.blogspot.com/2008/03/feldman-plan-just-get-yourself-latte.html

Also, calculated risk a great place to go for general information and commentary on the mortgage meltdown.