You always won, every time you placed a bet. You’re still damn good, no one’s gotten to you yet. Every time they were sure they had you caught, you were quicker than they thought. You’d just turn your back and walk. You always said, the cards would never do you wrong. The trick you said was never play the game too long. A gambler’s share, the only risk that you would take, the only loss you could forsake, the only bluff you couldn’t fake. And you’re still the same. The lyrics to this 1978 hit written and recorded by Bob Seger are supposedly about a number of characters he met when he first went to Hollywood. They could just as well be about economic theories and policy recommendations made by those who tend to advise the American government.
For those who read this blog regularly, it might seem as if I am a biased against the current Democrat Administration; however, if one looks back they would see that my comments about the policies of the prior Republican cabal were just as harsh. And its not just that I want to complain about those in power. The problem as I see it, is that the same group of academic economists tend to advise ALL administrations. And outside of a few crackpots with specific political agendas (for example Paul Krugman who believes that alien invasion (of the space travel sort) can fix an economy, and of course Obamacare consultant Jonathan Gruber who never saw a number that he did not make up), these economists ALL tend to use exactly the same set of economic theories and make virtually the same assumptions.
This can be a huge problem.
Generally speaking, I am certain that all of these advisors are trying their best to give sound and solid information to the Administrations that they serve. I don’t think that any of them (except for a few individuals) think that their models are incorrect, nor do I think that they are trying to present silly or illogical policies or plans.
However, virtually all of the economists whom are in senior policy positions come from the academic world, and to be successful in academia one needs to adhere to a very orthodox view of how the economy behaves. Professors who differ from the crowd are ridiculed, and rarely go on to run departments or, in the case of many of these advisors, run entire colleges or schools. This means that virtually all economists who advise both Republican and Democrat administrations are straight forward students of Keynesian/Neo-Classical economic theory, and those who differ at all only do so in marginal ways.
This does not mean that these individuals are not learned, are not intelligent and do not have something to say. What it does mean is that they all say almost exactly the same thing. For example when the economy moves into recession they all advise that the government perform some sort of stimulus. They may differ on what type of stimulus – tax cuts vs. infrastructure spending vs. lower interest rates, but they all cry out for stimulus. To use my favorite analogy, this is no different than the learned medical professionals called to George Washington’s bed to remedy his fever who all called for blood letting. One might have suggested leaches, while another cupping, while another insisted that only a scarificator should be used, but all wanted to see blood flow.
A recent article in The Economist magazine made an interesting point (On the Other Hands, The Economist, October 10, 2015). The writer examined research by Raphael Silberzahn and Eric Uhlmann who gave the same data set to 29 research teams, and asked each team to answer the same scientific question. The results of the experiment were very interesting. Nine teams found that the data could not produce a significant answer, 18 teams produced a positive answer and 2 teams a negative one. The authors based these discrepancies solely on the study method used to answer the question. The bottom line from this experiment is that when academic research is informing government decisions, asking several different researchers to answer the question and then comparing the results is probably a good idea. The same is even more important in economics.
Economists of all stripes are very good at one thing. That is making the simple seem complex. They tend to use very complicated mathematical tools with data that are simply not very good or are not designed to be used with the models. This may be one reason why they come to incorrect conclusions so often. Another reason could be that no matter what mathematical model they use, they are all based on the same theoretical platform. If you are certain that the economy works one way you will always model to those beliefs. This is the same thing that medieval doctors did when they thought that imbalances of body fluids were the cause of disease.
In the highest levels of policy making this echo chamber of Brahmans all saying hurrumph to each other’s hurrumph will nearly always lead to the same sort of decision – no matter who the President is. Because of this, policy recommendations all tend to be the same. But rather than looking for a wide range of advice from a range of economists including those with Austrian, Classical or even Marxist schooling, the politicians keep bringing in the same advisers over and over again.
The only time that these same old policies are ever put to the sidelines is when a politician with a very strong personality is elected and they ignore the advice of the echo chamber. And while this can lead to amazing economic spurts (think about the economic changes that happened under British Prime Minister, Margaret Thatcher, Lee Kuan Yew, the Prime Minister of Singapore, and American Presidents like Franklin Roosevelt and Ronald Reagan), more often than not these politicians tend to be populists and their ideas are even crazier than those of the Brahmans. Examples abound from US President Andrew Jackson to General Franco in Spain, to Juan Peron in Argentina, to Hugo Chavez in Venezuela to Mao Zedong in China, and even to someone like current presidential candidate Senator Bernie Sanders.
The world economy is in trouble, and this may be one reason why the country is flirting with populists like Senator Sanders and Donald Trump. But populists are like a gambler’s share, and they are risky because you never know if you will get a Reagan or a Mao. Whoever is the next President would be advised to stop trying to play the game too long and bring in a varied group of advisers and weigh their advice appropriately.