Barry Ritholtz at The Big Picture has long been one of my favorite commentators on the economy. He was one of the first folks, well over a year ago, to start pounding on big media's almost exclusive use of the "U3" measure of unemployment, a Bureau of Labor Statistics measure that understates the job situation significantly as compared with another BLS measure, "U6."
Currently, the difference between the two calculations is 9.8% unemployment vs. 17% unemployment and underemployment, which includes "discouraged" workers and those being forced to work part time hours because they can't find the full-time jobs they really need. After months of hammering by Ritholtz and a handful of other bloggers, several big traditional media outlets now regularly give some prominence to U6 numbers in their reporting.
Earlier this week, Ritholtz wrote "The Hubris of Economics," a scathing takedown of Mark Whitehouse’s piece - "Crisis Compels Economists To Reach for New Paradigm" - in Wednesday’s The Wall Street Journal. Here's a long excerpt:
There are many areas I would have liked to see the [journal's] article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics...
Let’s start with the basics. Hard "science" — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.
The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.
Science is the ultimate "show me" state.
Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.
No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.
[...]
Economics places way too much weight on [models]. It creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management.
This is not to say there are not good, even great economists (some are even friends of mine!) who foresaw the coming crisis and warned about it. Many are aghast at the rigor mortis in the academic establishment; some are horrified at how poorly the profession has done. Forget forecasting the future, too many economists cannot accurately describe what happened yesterday.
George Washington at Washington's Blog gets tougher:
I would go further in my criticism of the economic profession by arguing that the decisions to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.
For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.
Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they’ll make a killing when it busts.
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Note: I am not necessarily saying that mainstream economists were intentionally wrong, or that they lied because it led to promotions or pleased their Wall Street, Fed or academic bosses.
But it is harder to fight the current and swim upstream then to go with the flow, and with so many rewards for doing so, there is a strong unconscious bias towards believing the prevailing myths. ...
As Upton Sinclair said:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it.
That's something always to keep in mind as economists - most of whom were caught flat-footed by the Great Recession - tell us what's likely to happen next.