You’ve seen him lots of times on TV. He’s usually in a suit. There’s something a little haughty about him. He understands something you don’t. He’s here to explain it to you. He’s an economist and he’s here to help. (He’s almost always a ‘he’). He went to graduate school, studied the economy, something has gone wrong, and now the media want him to tell their audience what’s going to happen next.
I’ve been this guy quite a few times. It’s not the worst job in the world to have. But I’ve always felt a little uncomfortable about the quality of my knowledge. Holding forth as an expert on the economy is something I’m supposed to do. I’ve spent the majority of my youth in studying to be able to do this. Despite all the training I’ve received, how confident can I be that what I’m saying has any correspondence to reality? And what consequences are there when I get something wrong?
There’s an old adage about economists: the more we mess up, the more the economy needs us. So right now being an economist is a bit like being an undertaker during an outbreak of the bubonic plague: It’s not pretty, but business is good. In Ireland, economists are ubiquitous public figures. No Sunday radio show is complete without one. This is not the case for sociologists or for political scientists, who can claim an expertise the public (and therefore the media) should be interested in.
Let me say at the outset that as a card-carrying economist (yes there is a card) I’m not here to bash economists. There will be lots of other Irish Independent columnists to do this.
Rather my question today is: how do economists know things, where do their predictions about the economy come from, how much should we trust them, and what happens to the economists themselves if they are wrong?
The American science writer Michael Sherman once wrote that “Humans are pattern-seeking story-telling animals, and we are quite adept at telling stories about patterns, whether they exist or not.” Economists are no different.
Economists, if they are any good at all, look at the data produced by the economy, like the value and volume of private consumption, or investment, or government spending, or export and import volumes, or taxation or bond yields or a host of other data, and try to tell a story that fits the pattern they see in that data.
The patterns economists usually talk about come from the data. For example, if the quarterly data show that the value of private consumption expenditure is rising over time, the economist will reasonably infer that it will continue to rise until some threshold is met. This threshold is normally something like the ratio of debt to disposable income. So far, so scientific. We’re basically fitting lines through points on graphs and describing the lines.
The story economists tell about this pattern is much less scientific. The story is usually conditioned on the economist’s training. If consumption is going up and the levels of personal debt are increasing, and prices are rising with wages, some economists will say ‘great, let the market allow the interest rate on debt to rise, which will cut out some of the higher levels of debt, and reduce consumption increases into the future. No need to do anything’. Other economists will call for regulation of banking and call for the Central Bank to increase its base interest rate to curb the excesses of the market. The story each economist tells depends on several important factors. First, their own training. Second, their individual political biases. Third, who is paying them.
It is the case that in the dying days of the boom, economists paid by banks foretold a soft landing, urged us to buy more houses, told us to fill our boots with bank shares, and more, while economists paid by the public said the exact opposite. This is not to tar all economists who work for banks with the same brush—some are excellent analysts. Nor is it to exonerate all economists who work in the public sector, either.
The point is that when it comes to an economist’s predictions, it is important to gauge the strength of their argument relative to the source of their salary. In this I believe there isn’t much difference between economists and other professionals. Like other professionals, if something goes wrong and our analysis should have caught it, I think economists should personally pay a price for getting things wrong.
In the medical and legal professions, one is insured against malpractice. I think the same should happen in the case of economists. Economists should be regulated, with an accrediting professional body and enforced ethical standards. It may strike readers that these don’t already exist, but they don’t.
Where it is conclusively shown that an economist knew one thing, but publicly said another, then an economist could be publicly ‘struck off’ and barred from using the title.
This would put skin the game, and temper some of the more egregious public pronouncements. It would also, by the way, make being an economist more costly, hiring an economist more costly, make the profession more regulated, more circumspect, and more elitist.
There are costs to every change, but if economists are public figures the public trusts, then it makes sense to charge the economists who abuse that trust in order to maintain it more generally.
Next week, my plan is to show you what economists do when they aren’t writing columns in newspapers. I think you’ll be surprised.