Academics study economics, not the economy

I mostly liked this Bloomberg View piece by Noah Smith, but got stuck on one point.

Smith is hard on the academic economist’s excuse that a model’s inability to forecast is no big deal because the purpose of models is only policy analysis. Smith says that is lame because a model that cannot forecast is likely to be plain wrong. Nice!

Smith also points out that forecasters have been horrible at predicting recessions, because the macro data they use is just not worth much (in terms of forecasting itself).

The old Wall Street joke that “all financially useful data costs money, which is why macro data is free” seems to hold true.

I remember thinking about this during 2008, when a lot of the guys who (flukily?) forecast calamity were so hard on those (like me) who had not. I think the in-your-face expression was “whocouldanode” or something like that.  That is what it sounded like. I may have the spelling wrong.

It was very condescending. It would have been more gentlemanly for those guys to say they had achieved something difficult than to disparage others for being stupid.

And this brings me back to Smith’s point.  I do think there were guys who anticipated the 2008 Crisis non-flukily and were right for the right reasons.  It is just that they were not mostly macroeconomists. *

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It must have taken me at least 20 seconds to find a picture for this post.

For 2008, the guys in the right seats were those who were specialists in the financial system.  For example, banks analysts or mortgage derivatives traders.  At my shop, the super-bears – to whom I should have listened – were the financial analysts and those who paid close attention to them.

So it seems to me that Smith is being somewhat ironically an arrogant economist even as he disses economics.  Economists are not the only people with the ability to understand the economy. As the seasons change, the people with the best insights also change.  And they are not usually economists. **

Academic economists are sometimes hard on practitioners, which is fine and often fair.  But one could also say that academics study economics as opposed to – you know – the economy.  They are trying to build a replicable science, and not to understand what is going on right now. That is fine, but they might want to dial back the arrogance.

I have noticed that some academics draw a distinction between being an academic and being a central banker.  I like the honesty in that. Central bankers need to try to know what is actually going on, leaving aside whether they can do so reliably.

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* Roubini correctly identified that the huge balance of payment deficit was not sustainable, but he got backwards how it would be corrected.  It was corrected through a domestic rebalancing, not an external lenders’ strike. Bond yields collapsed and the dollar went up. Still, for a while there, Nouriel’s last name was spelled Roubiniwhopredictedthefinancialcrisis.  Goldman was much closer. They worried about a slowdown of MEW crushing consumption, and shifted to the real story — banking system collapse — in a very  timely and seamless way. It was seamless because the new story, like the old, had the word “mortgage” in it. All Jan had to do was take the elevator to talk to the guys in the middle of the maelstrom — and he had the brains to do it, unlike me. Bravo.  (A strategist at my shop handed me a 100 page paper on something called CDS. He said, Gerard you should read this.  Seemed like a rather long paper at the time.) But it was people with insight into the financial system who nailed that.  In fairness, some of these guys were economists.

** I remember a couple years ago when the energy patch was about to go into a funk because of the low oil price, we had a conference call with a good Wall Street sell-side shop. They had their economist and their energy credit team on board. The economist said that energy patch capex growth would slow to zero and deliver xx bps of drag to GDP. The energy guys said energy patch activity was going to collapse. As the buy-side economist, my contribution was, let’s not go with the economist, eh?