Common sense trumps economic mumbojumbo

In today’s Financial Times, Gideon Rachman has written a compelling piece called "Sweep economists off their throne." You can guess at the substance from the title, but the thrust is that Rachman was trained as a historian with a resulting bias toward basing conclusions on things that actually happened and that he has grown tired of the claims of economists that theirs is a field that "resembles hard science such as physics or chemistry" concluding, "maybe it is time for an alternative to the brash certainties, peddled by those pseudo-scientists, otherwise known as economists."

His use and reuse of the term "science" underscores just how abused it is by economists who claim rigor and scientific method but regularly produce work that is seldom more than guess-work clouded by politics. Evidence is everywhere to support this view, which is precisely why so many economists seem to have missed the point given that evidence-based analysis has never been their forte. If it was, perhaps there might be a consensus among them on even one of the great economic issues of our time. But there is not.

Take this weekend’s suggestion by President Obama that the U.S. ought to spend more on infrastructure as a way of strengthening the U.S. economy. He was immediately assailed by Republican economists and their spokespeople for going back to stimulus approaches that have already proven to be failures (see the editorial in today’s Wall Street Journal.) Yet over the weekend, we heard, for example, from CNBC reporter Erin Burnett on "Meet the Press," that in speaking to Wall Street economists she found widespread agreement that the stimulus program had actually helped avoid even more dire outcomes for the U.S. economy than we have already seen.

Such cognitive dissonance is not uncommon. With great regularity economists dazzle us with their unique blend of certitude and stupefying wrongness. No one illustrates this better than "greatest economic mind of our time" Alan Greenspan who just utterly and completely misread the consequences of under-regulating and over-heating global financial markets. Or, for fun, go explore the views of the very best of Democratic economists on the issue of your choosing. Take, say, the four most publicly prominent such economists: Larry Summers, Paul Krugman, Joe Stiglitz and Jeff Sachs. The differences and debates will make your head spin like a bottle of cheap tequila.

tWhile the idea of treating economics like a science is an appealing one, the problem is that we simply lack the data to actually do the scientific method justice. There are too many variables for every equation, too many independent actors, too many unknowns, too many exogenous factors, too many psychological issues. So what we are left with is oversimplification, models that may or may not resemble markets, prescriptions that may or may not work.

What is worse, the people who apply some of these conclusions were trained in a pseudo-science that makes economics look as rigorous as molecular biology. That field is the one that shows up in the dictionary next to the word oxymoron: "political science." Honestly, if there were a government agency demanding academic truth in advertising from universities that sought federal financing, there wouldn’t be a political science program left in America. 

So you have the policy process led by the march of the pseudo-scientists. Is it any wonder we are where we are? (In a ditch.) I’m with Rachman: It’s time to recognize that our gurus range from the deeply flawed to the fraudulent and to reintroduce a little more humility and common sense into the process.

When it comes to the U.S. economy, such an approach will actually bring you precisely to where President Obama arrived this weekend. Our infrastructure has been gutted by neglect for decades. We need it to compete and to attract investment. We have a jobs crisis. Restoring our infrastructure is a way to create jobs that is not "stimulus" or "big-government spending" but is investing in our future. The biggest plus with the president’s proposal is that a bank is the right mechanism and that it is multi-year in nature. The biggest flaws are that it is too small and that he has introduced the issue of "paying for the program." The gap in funding here may be two trillion dollars. Some of it can pay for itself. But it all does not have to. We should, like any company, treat real investments that produce pay-back for years differently from pure spending programs. 

It doesn’t take a degree in economics to know that the above approach makes sense. It takes two eyes, two ears and a brain. In fact, a major infrastructure bank program is so urgently needed, so obvious, so overdue, so well within our power to make work, so beneficial to all of society, that perhaps even an economist or a political scientist could see its merits.