Why some economists got it completely wrong

28 Jun, 2012 at 12:08 | Posted in Economics | Comments Off on Why some economists got it completely wrong

In a post the other day I was complaining about macroeconomists that go on teaching macroeconomics after the crisis as if nothing really happened in the Great Recession 2008-9.

To be honest, it really gets me rather gobsmacked. I find this rather self-congratulatory and complacent attitude both unwarranted and intellectually dishonest. The line of repentant mainstream neoclassical economists ought to be long, and  it’s abolutely outrageous that we haven’t seen even one single prominent economist who has had the courage and integrity to admit that he or she got things completely wrong.

As an appendage to that post – and having a Ph. D. in both economics and economic history – I therefore can’t restrain myself from citing Brad DeLong’s complaint about economists obviously not being able – or wanting – to learn from history:

We economists who are steeped in economic and financial history – and aware of the history of economic thought concerning financial crises and their effects – have reason to be proud of our analyses over the past five years. We understood where we were heading, because we knew where we had been.

In particular, we understood that the rapid run-up of house prices, coupled with the extension of leverage, posed macroeconomic dangers. We recognized that large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, and that preventing a deep depression required active official intervention as a lender of last resort.

Indeed, we understood that monetarist cures were likely to prove insufficient; that sovereigns need to guarantee each others’ solvency; and that withdrawing support too soon implied enormous dangers. We knew that premature attempts to achieve long-term fiscal balance would worsen the short-term crisis – and thus be counterproductive in the long-run. And we understood that we faced the threat of a jobless recovery, owing to cyclical factors, rather than to structural changes.

On all of these issues, historically-minded economists were right. Those who said that there would be no downturn, or that recovery would be rapid, or that the economy’s real problems were structural, or that supporting the economy would produce inflation (or high short-term interest rates), or that immediate fiscal austerity would be expansionary were wrong. Not just a little wrong. Completely wrong.

Of course, we historically-minded economists are not surprised that they were wrong. We are, however, surprised at how few of them have marked their beliefs to market in any sense. On the contrary, many of them, their reputations under water, have doubled down on those beliefs, apparently in the hope that events will, for once, break their way, and that people might thus be induced to forget their abysmal forecasting track record.

Brad DeLong

Blog at WordPress.com.
Entries and comments feeds.