My Pet Peeves: Why Does Anyone Listen to Economists?

Doesn’t anybody know that economists don’t know what they’re talking about?

March 7 2006 by William J. Holstein Editor In Chief Chief Executiv


My Pet Peeves: Why Does Anyone Listen to Economists?

 

Every morning on the drive to work, I listen to the radio and hear economists speaking very earnestly about the American economy. They react to each of the latest statistics coming out of the U.S. government, and financial markets leap and fall in response.

 

But doesn’t anybody know that economists don’t know what they’re talking about? Why are we listening to them?

 

Here are my pet peeves about economists. I hope that you, our readers, and I can guide them down the path toward obtaining a better grip on reality.

 

Pet Peeve No. 1: The practitioners of econometrics, within the economic profession, argue that they have built “models” that can predict the course of the U.S. economy. This is just preposterous. The U.S. economy is far too large and far too sensitive to psychological variables. In fact, I’d argue that over time we have become an even more psychologically driven economy. Fueled by CNBC, the Internet and so many other communications channels, confidence rises and falls each day. The economy is less predictable than ever.

 

Pet Peeve No. 2: Economists, whether econometricians or not, don’t have an understanding of the U.S. economy in a global context. We’ve reached the point that goods, services, people, money and technology are whizzing across our national borders at a dizzying rate (foreign exchange trading has now reached nearly $2 trillion a day, for example), yet economists seem to believe that the economy stops at the water’s edge. Again, preposterous.

 

Pet Peeve No. 3: As a corollary, of Pet Peeve No. 2, economists lack the tools to understand the nature of today’s beast. For example, “capacity utilization” was an indicator that was created in the 1950s to measure the amount of steel going through the nation’s steel mills. Now more than half a century later, semiconductors are arguably more important to the economy than steel. And if we need more steel, we can import it from China, Japan or South Korea. Yet when a capacity utilization number comes out, the economic sages warn about imminent inflation or a turn in the business cycle.  But they are peddling antiquated concepts. They don’t have the right tools for today’s economy.

 

Pet Peeve No. 4: Economists don’t know how to measure or analyze the quality of economic activity. There are different kinds of economic activity that generate more value and that are better for the long-term health of the economy, but economists don’t understand that. Consider:

 

  • We had economic growth of 3.5 percent last year and this year most estimates come in around 3.2 percent. But is that growth coming from construction and retailing, which is relatively “cheap” ephemeral growth that could disappear in the blink of the eye, or is it sustainable technology-based growth?
  • The unemployment rate was down to 4.7 percent in January, and the economics boys are patting themselves on the back. But what is the quality of the new jobs being created versus the old ones being destroyed? There is huge churn going on in the job market. What is the trend line?

Pet Peeve No. 5: Despite all their erudition, economists are bad about making value judgments that would be truly useful to policy makers. Are the huge trade and fiscal deficits good or bad for the long-term health of the economy? The economics profession can’t make up its collective mind, instead falling back on ideological or political nostrums. But if ever there was a time for the profession to pull itself together and provide intellectual leadership, this would be it.

 

I realize that members of the dismal science are easy targets and that I may be accused of destroying straw men. But I hasten to note that millions of people, maybe even important decision-makers, seem to be listening to economists. If we as a nation are listening to a tribe that has lost its way, what does that say about where the U.S. is headed? It’s a major case of the blind leading the blind.

         

What is your opinion. Write me at bholstein@chiefexecutive.net.


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

I had to laugh when I was reading your Pet Peeves. I agree with almost all of your observations, but I’m thinking that you are confusing pundits with economists, and their analysis as economics rather than what it is – primarily justification for some specific political views or just a daily attempt to rationalize changes in short term market psychology. Most of the serious economics I’ve read and studied convinces me that there are huge opportunities to improve the efficiency of our economy and raise our overall GDP if we could accept the fact that every change will displace or disadvantage individuals or groups that benefit from the inefficiencies (e.g., rice growers in Japan) and move forward anyway. I’m guessing that the reason this is so difficult is that the benefits of changes (such as eliminating most tariffs) are spread over a large population and the cost is borne by a much smaller group (e.g., rice growers). It is much easier and cost effective for a small group to fund and coordinate a fight against change than for a large group – in which no one gets a major benefit – to support it. When we address and solve this problem, maybe we could start making policy changes that have an overall net benefit rather than a net cost.

Rick Goldfien, VP Finance & Treasurer, InteliStaf Healthcare, Inc.


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

Please tell me how the fed “fights inflation by raising interest rates”… preposterous…it causes inflation. Also tell me why as they talk about iinterest rates, they ignore what they (the fed) are doing about the money supply. Which also has an important effect on inflation. Add these to your list of pet peeves !

And thanx for the article

John


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

 

While I tend to agree with all your points, Pet Peeve #5 stands out. How can our economic leaders avoid taking a stand on the impact of budget deficits and the current account deficit? (Although these are really quite different phenomena, as Warren Buffett articulatedin Fortune.) We deserve more leadership from our economists.

 

Kenneth S. Voelker, President, Mighty Distributing System


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

I just read your piece on economists and thought I’d offer my two cents. In the spirit of full disclosure though, I should mention that back in the Mesozoic era, I was a teaching assistant in Finance and Economics at UT-Austin.

 

You are quite correct in pointing out that data problems are widespread in predicting or reporting changes in a government’s economy. The United States has some of the better statistics available and yet they leave us wanting more and better information. The world of commerce, trade, etc. of the 1940s – 1960s, when many economic models were developed, is not the high velocity, flat world of today.

 

To your point, service industries and intellectual property firms (e.g., film, software) are now huge contributors to U.S. GDP and exports. Yet, few systems really exist to capture the value of either of these sectors well. 

 

There are other measures of the €˜health’ of an economy and maybe that’s what you could have written about. For example:

-          Optimal Job Creation/Productivity Growth – Many countries measure €˜productivity’ by dividing company revenue by the number of employees used to create that revenue. In the U.S., we have experienced huge growth in productivity in the last couple of decades. Most of this was due to exceptional deployments of technology which have obviated the need for many managers, factory workers and others. When rapid deployments of these productivity creating technologies occur, it tends to destroy a number of jobs in the process. Job creation occurs when new companies are launched or existing companies launch new products/divisions/etc. What economists should be tracking is how the U.S. is both growing jobs while simultaneously improving productivity. They don’t today. Furthermore, Wall Street doesn’t seem to care whether a company grows through increasing productivity or growth but we should!

-          Self-Sufficiency Index – Net declines in some industries are profound. Look at what’s happened to the U.S. textile and metal foundry businesses. Hopefully, we’ll never find our country in another World War scenario, but, if we did today, we couldn’t make hardly any of the material needed to fight a sustained conflict. The U.S. lacks the petroleum, the productive plant & equipment, etc. to do so. What economists need is a €˜self-sufficiency index’ to measure a country’s ability to operate independently. This doesn’t mean countries and economies should scale back their global sourcing/trading. This does imply that government leaders need to sensibly review the cumulative impact of global trading on a government’s long-term well being.

-          Over-reliance Index – Economists need to assess the impact of currency revaluations and other external risk factors on the U.S. economy. Today, if the Chinese Yuan were to suddenly float or get re-valued vis-à-vis the U.S. dollar (or the Euro), the effects might trigger a wave of inflation. Would this be short-term or long-term? Who knows? China isn’t the only country/economy of concern though. We should be re-assessing this based on oil pricing scenarios, too. It’s not in a country’s self-interest to be massively tied to one other economy so that puts its own economy at risk.

-          Better employment status reporting – I know of many people who are now self-employed, not by choice, and are making far less than they did when employed. Should we count them as employed or not? What about those who gave up on the idea of getting a full-time job? The U.S. government needs to seriously re-evaluate how it measures employment as it’s no longer a binary, short-term thing. This is one area where the government is badly out of touch with the dynamic world of job creation and destruction. 

-          Product/Service Index – We need to see more granularity in which goods and services are declining in overall price and why. Technology components have really dropped in price in the last decade (via Moore’s law, offshore manufacturing and other forces). So, too, have the costs of IT services, telecommunications and other sectors. We need to understand two things about these deflationary events: what triggered the drop and how this affects the domestic economy.  No one seems to look into the root cause much and that really bothers me. If the cause were due to domestic firm productivity gains, I’d be delighted. That change is good for the domestic economy and improves the trade balance situation. If the drop occurred because of a shift to low cost country sourcing, I’m not so happy. This shows a movement of jobs and capital out of the country. What I want economists to tell me is whether the U.S. is gaining or losing on this front.

 

I apologize that my remarks are probably longer than your original post, but, the new economic world that we live and work in requires a new set of economic metrics to guide us.

 

Oh, Chief Executive is a nice publication,

 

Brian Sommer


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

You certainly make a number of good arguments as why we should be distrustful of Economists and their statistics. However, I would ask you that if we are to dismiss economists, how are we going to gather information to make intelligent business decisions. There have been many times throughout history where the learning process has provided less than desired results, but we keep refining the processes to get more valuable information. Being less than perfect is hardly a reason to give up on the entire process.

Sincerely,

Tom Karwin, CEO, Fireside Distributors of Oregon, Inc.


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

The bigger question is “why do you even listen to the radio?” Economists, analysts, academics, etc, need to get attention in 30 second sound bites on TV and radio. Most of them have never built businesses. What could they possibly have to offer a CEO? Especially a CEO who is in

the thick of things, making money, driving the economy, listening to customers, adding value, building wealth and creating jobs.

 

My advice to CEOs — Stop listening to economists. Stop hiring inexperienced MBAs. Stop reading the newspaper. Stop listening to the radio. Stop watching TV. Use common sense and run your business. Trust me, your common sense is 10 times more effective than their models,

simulations and 20/20 hind site from talking heads and consultants.

 

“Oh my god, I can’t live without my daily dose of the Wall Street Journal!” Try it. Not only will you survive, you’ll thrive. If anything really earth shattering happens, someone in your company (or your customer) will tell you, and you can act appropriately. If you have to “predict” something. Do some common sense market research and “eye ball” it based on your experience. The daily “news” just causes you to run around in circles like Mo, Larry and Curly.

 

I like Steve Jobs. He does what he thinks is right, independent of “conventional wisdom”. Consequently, he makes money and creates markets. Toyota probably ignores economists and “sound bite” style conventional wisdom. They use a huge amount of common sense and long term focus.

 

Mike Juran, CEO, Altia Inc.


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

I read with interest your article and I agree whole heartedly. A couple of weeks ago I just read an article in Business Week about “Unmasking” the real economy. I thought that article fascinating in regards to what and how we measure the economy. Back in the depression years they started to measure widgets to determine if we were getting better or worse. In World War II we continued to see it the US economy could produce the weapons and supplies needed for the war. Greenspan, according to this article was the first to start measuring a best practices economy. An example they used was all the time devoted to the design and success of Apple’s I POD. None or this is measured in our economy numbers. We only count the I POD 2 times, once when imported and once again when sold. Just the other day in a meeting with some top engineers of Ethanol Plants they were talking about all of the resources they were sending overseas for building Ethanol Plants. This is part of the US economy and once again it is not measured in the traditional sense. Bottom line is there are many different ways nowadays to measure the economy and just counting what is produced it not the way, If it was we would all have to yell about the sky falling. I have made the word “Traditionally” banned from our planning, budgeting and forecasting meetings. Thanks for your article. Mike

Michael L. Etheridge, Chief Operating Officer, Brenner Oil Company


Response To: My Pet Peeves: Why Does Anyone Listen to Economists?

 

1.  I generally enjoy your thinking Bill, and admire your willingness to let it all hang out once a month!

 

2.  There is no single “Economy!”  There are lots of them, and together, they constitute a global “Economic Hive.”

 

3.  “Hive” activities are not easily predictable, because many of the motives (to say nothing of the activities themselves) are not visible from our vantage point. I’ve been impressed with some of the Harvard Business School stuff on cooperative group activities, but you have wear your heavy thinking hat for at least ten uninterrupted minutes to let their stuff sink in…

 

4.  There’s a whole industry (of which you and Chief Executive appear to be a part) which exists solely to prognosticate about various things… because people feel bettter if there are smart appearing people saying smart sounding things about issues which are really too big for anyone to actually predict, let alone comprehend. 

 

5.  What can you do on the air in a 90 second sound bite anyway, except hope to appear erudite enough to keep people listening through to the commercial?  But if you do, they’ll ask you back — and that will look good on your “Public Appearance Resume.”

 

6.  There are many such industries, which keep many of us gainfully employed; focusing our expertise on “keeping people informed and feeling in the know.”  The Economy Industry.  The Mar