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Trying to steer something we don’t understand
Sunday, June 29, 2008
Robert Shiller opines on the impact of the current economic stimulus and the likelihood that more, perhaps much more, stimulus will be needed in this NY Times op-ed piece:Fuzzy as this picture may seem, there is unfortunately even more uncertainty about the rebates’ effects. Much of the recent dynamics of the economy are not captured in Keynes’s theory, in Fair’s Model, or in any conventional econometric model.
For all his wisdom as a courageous lone voice of reason while the late, great housing bubble was still inflating, often times it's easy to forget that Dr. Shiller is, after all, an economist.
For example, these models have not taken account of the reasons for the peculiar lending dynamics in the subprime mortgage market, or of the state of financial institutions’ balance sheets and the confidence that the public has in these institutions. Nor have they taken account of the vagaries of speculative asset markets, mistakes by securities rating agencies and the problems of bond insurers.
THE economy is too complex to capture all these things in any single model. In trying to steer the economy, we are necessarily trying to steer something we don’t properly understand.
We simply do not have the means to quantify all the issues related to the rebates. But the models we do have suggest that the overall effects of the rebates are modest at best.
The reality of the subprime situation, augmented by the energy crisis, at least suggests that we’d better get ready for another round of rebates. There is little talk of it now, but we should be putting in place another stimulus package like the current one, and stand ready for another after that, and another.
As such, his view that better models might enable Keynesian remedies to not only cure the economy's current ills but to perpetuate life as we know it for generations to come, when there is ample evidence that the wheels are now in the process of falling off, is, at best, conventional and optimistic.
At worst, this view is naive.
This week's cartoon from The Economist:
5 comments:
If models were to accommodate such corrupt practices as subprime, the whole model would necessarily be called into question. To argue inability of the model is to assume anything goes, and no model can simulate that.
Keith
Economists' stupid dependence on models and their general lack of common sense are ruining the world.
I would liken economists to recovering heroin addicts. Some of them have better intentions than others, but they're all prone to falling off the wagon occasionally. It seems that once the propaganda of mainstream economic thought is hammered into their heads, no amount of punishment can deter them. Endless wrong predictions and setbacks seem to have no effect. They're hooked for life, even if they do have moments of clarity from time to time. Finding ways to jam the square pegs of reality into the round holes of economic models must produce a high unlike anything else on this earth.
I'm glad I only had three ECON classes in college and escaped before becoming a zombie too! At this point, I'm confident that the average high school dropout has a better grasp of the big picture than the typical economics PhD holder. I wish I were exaggerating.
maybe there's a Dunbar's Number for pieces to an economic model?
"I can't be broke, look at all these checks I have left!"
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