What Good Are Economists Anyway?

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Ronald J. Cala II

The Rise, Fall, and Rise of Fiscal Policy
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The mood now is uglier. On the left, Krugman says: "This is really fairly shameful, that we should be wasting precious months as a profession retracing debates that were settled 70 years ago." On the right, John H. Cochrane of the University of Chicago dismisses those who advocate Keynesian stimulus, saying: "Professional economists, the guys I hang out with, are not reverting to ancient Keynesianism any more than physicists are going back to Aristotle when they can't understand how fast the universe is expanding." There are some middle-of-the-roaders, such as Columbia University's Michael Woodford, who argue that macroeconomists are converging on a methodology for asking questions. But even Woodford agrees that "recent debates don't particularly make the field look unified."

The easiest criticism of macroeconomists is that nearly all failed to foresee the recession despite plenty of warning signs. In early September 2008, the median growth forecast for the fourth quarter was 0.2%, according to a survey by Blue Chip Economic Indicators. The actual outcome was a 6.3% annualized decline. The Fed didn't do any better. In July 2008, Fed officials projected unemployment in the fourth quarter of 2008 would end up between 5.5% and 5.8%. The actual number was 6.9%. Their projection for the fourth quarter of 2009, done at the same time, was for a range of 5.2% to 6.1%. Today, with unemployment at 8.5%, most forecasters expect the rate to be nearing double digits by the end of 2009.

Now that fiscal policy is back on the table, economists are fighting over the size of the ripple effect—or "multiplier"—of increased government spending. Interventionist economists think multipliers are large when the economy is operating below capacity—and it certainly is now. According to a Fed report on Apr. 15, one-third of manufacturing's productive capacity is going unused, the biggest share on record back to 1948.

Obama Administration officials believe that their fiscal policy is on the right track. The stimulus program "is putting a little more energy into the consumer," National Economic Council Director Summers told Maria Bartiromo. "Two months ago you couldn't find anything positive." Christina D. Romer, Obama's chief economic adviser and a historian of the Depression, said in March that "at some point, recovery will take on a life of its own." Until then, she said, government should watch closely "to make sure the private sector is back in the saddle" before easing off.

Other economists say increased government spending may actually depress private employment. At a Council on Foreign Relations event on Mar. 30, Chicago's Lucas called the Administration's multiplier math "kind of schlock economics."

The truth is, even backers of stimulus can't be sure it will work. As World War II ended, many economists worried that growth would lapse as military spending fell. Sewell Avery, the CEO of Montgomery Ward, was so anxious about a postwar depression that he refused to open new stores. Economists still aren't sure why he was wrong, so they can't say reliably whether fiscal stimulus will end this recession or just interrupt it. "Is it possible to engineer a durable recovery with fiscal expansion, or are you just buying time?" asks Krugman, who favors coupling stimulus with drastic action to fix the banks.

What, then, is the way forward? Once this crisis is past, the next agenda for macroeconomists will be to help make the economy far more robust—enough to survive the blunders of politicians, bankers, and economists of the future. Taleb, the scholar of unpredictability, notes that nature achieves robustness through a redundancy that economists would consider wasteful: two hands, two eyes, etc. Blake LeBaron of Brandeis University suggests preventing huge crises by tolerating small disturbances, the way foresters use controlled burns to eliminate flammable underbrush. Perhaps out of the ashes of failure will emerge a better macroeconomics profession.

With Jane Sasseen and Theo Francis

Coy is BusinessWeek's Economics editor.

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