Barry Eichengreen added specificity to this in January 2009 with his insightful column “Was the euro a mistake?”, noting: “What started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009. Sober people are now contemplating whether a Eurozone member such as Greece might default on its debt.” He wrote that the alternative to default was “fiscal retrenchment, wage reductions, and assistance from the EU and the IMF for the cash-strapped government.”
He predicted – again dead on – that “[t]here will be demonstrations against the fiscal cuts and wage reductions. Politicians will lose support and governments will fall. The EU will resist providing financial assistance for its more troublesome members. But, ultimately, everyone will swallow hard and proceed … In the end, the EU will overcome its bailout aversion.” The farsightedness is astounding. In January 2009, few knew the Greeks had a problem serious enough to require debt restructuring.
Pointer from Brad DeLong, via Mark Thoma.
That sounds impressive. He also cites other economists. But a couple of cautionary notes.
1. The best way to develop a reputation as far-sighted is to make many vague, conditional predictions. Later, you call attention to those that sound correct, and if necessary you wiggle out of those that sound incorrect by pointing out the conditions or taking advantage of their vagueness. I am not accusing Eichengreen of doing this. I have others in mind. But what might Baldwin have found had he had searched through past articles and looked for bad predictions?
2. How best to generalize this point? My guess is that “Economists’ predictions should always be taken as gospel”
3. Is the correct lesson that we should pay attention when economists warn about sovereign debt issues? Consider that many of us have issued warnings about the United States.
The key question, in my opinion, is how any of this prediction business can be reconciled with efficient markets. If these economists are actually capable of making nontrivial and accurate predictions, how come that these predictions don’t translate into nontrivial and accurate information about future market prices, which should enable them to get insanely rich?
This question has been discussed on Arnold’s blog in the past, but until I see it addressed clearly by mainstream economists, I find it hard to take any of their claims about nontrivial abilities of prediction seriously.
I can offer one hand-waving response. Sometimes it is hard to find a market for your views. Eichengreen may get rich “selling” his predictions to others who have ways to profit from them. The currency in academia reputation.
Because they are wrong. Their models don’t work. And as this blog says, if enough make vague and general points then a few of them will get noted. At the moment mainstream economics is about cheerleading those that agree with you and pushing out those that disagree. When evidence based investigations are done properly (as in the traditional sciences) then there is no room for authority.
A few people did predict the credit crisis. Minsky’s models predicted that a big recession would be preceded by escalating debt and a lack of volatility. The mainstream economists were calling this the great moderation, and patting themselves on their collective figurative backs about what a great job they had done. And when the crisis hit they could not look at themselves and their false models, but instead blamed greedy bankers for causing an exogenous shock that spoilt all their good work. Even now the only thing Krugman admits he got wrong was ‘not being hard enough’ with pushing through regulation.
But the problem was systemic. If a house catches on fire do you say the cause was it being full of gas, or that someone flicked a light switch?
the failure of economists and investors to recognize the strength of the Europeans commitment to the Euro has been one of the big errors of judgement in recent years.
What do economists do in a sentence? Better yet, in a word? It isn’t finance. That takes away a big sphere of prediction ability.
Prices? Efficiency? Incentives? Equilibrium? Trade/specialization?
What would the selection imply about what they are expert enough to offer predictions.
For example, Warren Buffett does value. Thus he doesn’t say he is able to do timing.
The generalization is simple:
“accept economists predictions, when they are correct”.
Wait, is that not helpful?