10 things economists won’t tell you - MarketWatch

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10 things

June 10, 2013, 11:26 a.m. EDT

10 things economists wont tell youWhy the future of the economy is as tough to predict as the weather

ByQuentin Fottrell

1. We cant predict the ne xt crisis...

As political gridlock in Washington threatens to stall a U.S. economic recovery, investors are once again turning to economists for guidance on whathe future holds. But a Ouija board may serve them just as well. From Federal Reserve chairman Ben Bernanke on down, most economists failed to

predict the 2008 financial crash. In his 2011 paper, An Award for Calling the Crash, Mason Gaffney, a professor of economics at the University of

California, Riverside, offers this postmortem: The crash of 2008 surprised most of us. The episode has led many to ask how economists could hav

been so in the dark.

And this wasnt an isolated event. The majority of economists have been surprised by everything from the Great Depression and the spike in oil

prices during the 1970s to the bursting of the dotcom bubble in 2000 and 2001, says Laurence Ball, a professor of economics at Johns Hopkins

University. What made it difficult to predict the mortgage crisis was that subprime mortgages did not really exist 15 years ago, he says. Economist

look at past events to figure out whats coming next, but some events are without precedent. The world changes quickly, Ball says.

Such explanations provide little solace for regular investors, many of whom look to economists as bellwethers. You cant create a model for the

world. Even in projecting interest rates, income and inflation, too much can go wrong, says Robert Schmansky, founder of Clear Financial Advisors

in Bloomfield Hills, Mich. And when economists dont forewarn others, he says, investors suffer. In late 2008 as stocks were free-falling, Schmansky

says, many of his clients were scrambling to liquidate their stock portfolios because they too were caught by surprise.

Jason Scheinder
mailto:[email protected]:[email protected]


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In their defense, economists tend to make decisions based on publicly available information just like everyone else, says Ken Simonson, current

president of the National Association for Business Economics, an international association for applied economists, strategists, academics, and polic

makers. Still, he admits, before the financial crisis, The majority of economists did take way too rosy a view of what was happening in the economy

2. ...but we may help cause it.

While rosy forecasts can leave investors unprepared for disaster, experts say pessimism from economists can contribute to a crash. Juicy sound

bites by economists can impact consumer confidence, says Seth Rabinowitz, partner at management consulting firm Silicon Associates. Among the

factors that influence consumers decisions to spend, he says, are income, stock market volatility and what economists say. If consumers are

overly fearful, they will spend less and that will hurt an economy on the brink of recovery, he says. For this reason, economists have an even

greater social responsibility in how they speak to the press, he says.

3. Were not above a little guesswork.

Given that economists models did little to help alert them to the impending problems in 2008, a growing number are now learning to trust their gut,

say experts that is, theyre guessing. These are educated guesses, to be sure, but guesses nonetheless. Mark Perry, a professor of finance and

business economics at the University of Michigan-Flint, estimates that more than half of economic forecasts are based on intuition. Over time,

economists have started to realize that people are unpredictable, he says, and thats forced them to diverge from what more formal models might

predict.

Others say using a little guesswork may not necessarily be a bad thing, arguing that mathematical models are often rendered useless in the real

world, especially when dealing with events like the terror ist attacks on Sept. 11, 2001 and other unanticipated disasters. These models assume

consistency and predictability when actual behavior is hard to predict, says John Kay, one of Britains leading economists. Relying on consistency

not very sensible strategy, he says.

Any professional economist or researcher has to use a certain amount of judgment and creativity either to detect relationships that havent been

noticed by others or to sort through the many influences that are affecting the economy, says Simonson of the National Association for Business

Economics. No period in time can be replicated based solely on a mathematical model. Thats why people say economic forecasters exist to makeweather forecasters look good, he says.

4. Those bold predictions? Blame the testosterone.

Most economists are male. Only about 30% of new Ph.D. economists are female, a proportion that has increased only modestly since 1995,

according to research compiled by economists John Siegfried and Charles Scott and published in the American Economic Review. The imbalance i

particularly striking because men are the minority in many other financial professions. Female accountants and auditors, tax preparers, insurance

underwriters, tax examiners and collectors all outnumber their male counterparts, according to the Department of Labors Womens Bureau.

Some commentators say the imbalance among economists could have repercussions for economic policy. According to a 2012 survey of American

Economic Association members published in the Contemporary Economic Policy Journal, male and female economists think differently about issues

including educational vouchers, health insurance and policies toward labor standards. Compared with men, women in the study were 24 percentag

points more likely to believe that the the role of the government in the economy is either too small or much too small, and women were 32

percentage points more likely to agree that government policies should attempt to make the U.S. income distribution more equal.

Several other studies, including one in 2011 by Barclays Wealth, a private banking and wealth management firm, and Ledbury Research, a marketresearch firm based in London, have also concluded that men tend to engage in more reckless behaviorthan women. One possible reason,

according to the study: testosterone, which increases appetite for r isk. Men tend to be a bit more impulsive, less willing to admit their mistakes, and

more focused on the big idea and the really high- flying investment, says Scott Beaulier, executive director of the Manuel H. Johnson Center for

Political Economy at Troy University, in Troy, Ala. Excessive risk-taking, for economists, could translate into bold predictions that have more to do w

making newspaper headlines than being proven true, he says.

5. Our measures of prospe rity dont work.

Economists rely on many measures to gauge the health of countr ies, but many may not be the accurate yardsticks theyre believed to be. For

example, the growth of gross domestic product one of the measures most closely watched by economists doesnt necessarily indicate whethe

an economy is healthy or not, especially since major economic crises often occur on the heels of periods of rapid growth.

The U.S.s own halting recovery casts some doubt on the value of GDP. Based on that measure, the Business Cycle Dating Committee of the

National Bureau of Economic Research declared that the recession officially ended in June 2009.But statisticians like John Williams, editor of

ShadowStats.com, a website that analyzes government economic and unemployment statistics based on methodologies used by previous U.S.administrations, argue that the U.S. economy still has not recovered. The latest GDP figures are related to distorted inflation numbers. Since 2009,

the economy has been stagnant. Williams says that current GDP numbers with inflation stripped out would leave annualized growth about 0.4%

instead of 2.4% during the first quarter of 2013. Unfortunately the base number is meaningless, he says. The best that can be said for the data is

that the GDP either grew or contracted for the quarter.

Same goes for unemployment measures. According to official government estimates, unemployment was 7.6% in May, but Williams says that stat is

misleading. Discouraged workers those who are not actively seeking employment are not included that estimate; adding them pushes the ra

closer to 23%. I always advise people to look beyond the headline figure, says Jeffrey A. Frankel, a professor at the Kennedy School of

Government at Harvard University, adding that the Labor Department provides stats on discouraged workers.

Still, experts say even the basic metrics have their uses from home prices and personal consumption rates to trade balance and inflation. GDP

and unemployment are very good basic measures, says Ball of Johns Hopkins University. Countries with high GDP have better education and

health than poorer economies.

6. Ours is a dismal science, but not an exact one .
http://www.marketwatch.com/story/women-are-better-investors-and-heres-why-2011-06-14


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As a group, economists are nothing if not inconsistent, says Doug Short, vice president of research at the financial advisory service Advisor

Perspectives in Lexington, Mass. According to The Wall Street Journals April 2013 survey of economists, predictions for 2013 GDP growth ranged

from 1.8% to 3.9%. For 2014, they ranged from 2% to 4%, a disparity Short describes as the difference between tepid and robust growth.

The reason for the imprecision? Economists are under pressure to be more exacting than their science allows, says Lynn Reaser, chief economist

the Fermanian Business and Economic Institute at Point Loma Nazarene University in San Diego. They are reluctant to confide in their clients that

the best they can do is provide a significant range, so they pinpoint an estimate. Economists are also too quick to change their forecasts, Reaser

says: They overreact to the latest data point, but in many cases theyd be better off taking a longer-term point of view.

Rather than put faith in any one economist, Short advises, look at the average. And in times of financial stress, he says, even the average forecas

should be taken with a grain or a shaker of salt. Economists in the April 2013 Wall Street Journal survey, for example, forecast 2.4% average

growth in 2013. Meanwhile, he says, there is good news: Hurricane Sandy is behind us, the fiscal cliff turned out to be a minor bump, and

sequestration hasnt torpedoed the economy at least not yet.

7. We lean to the left.

As of 2008, nearly half of members of the American Economic Association said they were registered Democrats, while only 17% said they were

Republicans. Furthermore, in the same survey (commissioned by Scott Adams, the Dilbert cartoonist) , 60% of the economists said that among the

presidential candidates at the time, they thought Barack Obama would make the most progress on important economic issues if elected. (The surve

was managed by The OSR Group, a national public opinion and marketing research company.) A similar survey of members carried out that same

year of the National Bureau of Economic Research found that 46% identified themselves as Democrats and 10% as Republicans.

Those surveys, the most recent on the topic, suggest that economists skew further Democratic than most of the populationeven compared to

people with advanced degrees, who have long been skewered as the liberal elite. Among people with education beyond a bachelors degree, self

described Democrats had a 14 percentage point lead over Republicans among college graduates with 39% identifying themselves as Democrats

and 25% as Republicans according to a 2012 study by Pew Research Center.

Left-leaning political views can even be seen in economists reports, some experts say. A 2008 article in the journal American Economist argued thaeconomists over the past half-century have helped sell voters on bigger government. We find that the increased role of economists in society and

policymaking has led to an increase in favorable attitudes toward government intervention, wrote the authors, economists Scott Beaulier, William J

Boyes and William S. Mounts. (Boyes describes himself as more libertarian than right or left wing and Beaulier describes himself as a free

enterprise economist.) Mounts did not reply to requests for comment.) Others say that only tells half the story. A disproportionate number of

academic economists favor a limited role for the government, says Frankel, the Harvard University economist, but you tell me whether thats left or

right.

8. We might have an agenda.

Many influential economists work in academic institutions, which can confer an aura of unbiased authority. But in reality, experts say, most economi

have political and economic motives of their own. Most economists are paid by financial institutions that have an agenda to keep you invested

long-term, says Schmansky, the financial adviser.

Whats more, around 70% of university economists have financial interests outside of academia, according to Gerald Epstein and Jessica Carrick-

Hagenbarths 2010 study Financial Economists, Financial Interests and Dark Corners of the Meltdown, which analyzed media appearances, article

in the press and research published by economists from 2005 to 2009. But in spite of these ties to business and the private sector, economists rareidentified themselves as working in the private sphere, the researchers concluded.

Economists should disclose their consulting work and universities should have clear procedures of disclosure when it comes to possible issues of

ethics, Frankel says. For his part, he says he makes public any consulting work for which he earns $1,000 or more, and says economists would do

well to keep track of consulting jobs. The problem with many academic economists is that their heads are stuck in the clouds theoretical models

and that they are unwilling to take a clear policy position, which is quite different from having an agenda, he says. The National Association for

Business Economics says economists from the organization report their affiliation when quoted in surveys or in the media.

9. We may as well be speaking Klingon.

In the theory of trickle-down economics, tax breaks or other economic benefits provided to the wealthy will benefit poorer members of society by

improving the overall economy, but in practice, it doesnt usually work out that way. Similarly, economic theories dont always trickle down to the

people who need them most. Among the reasons: No one really understands what economists are saying, Reaser says.

Of course, all professions have a tendency to speak in jargon. And when they show up in the news media, economists often try to keep the jargon ta minimum, experts say, using the most basic language to explain often very complicated concepts. And yet dumbing down economics doesnt seem

to be helping much: Despite economists efforts to explain their concepts through the media and through research and books, Americans have a po

understanding of even the most basic economic and financial concepts, concludes AnnaMaria Lusardi, a professor of economics and accountancy

George Washington University School of Business.

In a 2009 study, Lusardi, along with Peter Tufano, a finance professor the Harvard Business School, found that only one-third of the population

understands how credit cards (and compound interest) work. Whats more, nearly half of all adults grade themselves with a C, D or F for personal

finance knowledge, according to a 2013 survey by the National Foundation for Credit Counseling. This is bad news for consumers, says Gail

Cunningham, spokesperson for the foundation. The lower peoples financial literacy, experts say, the more likely they are to forgo saving, incur deb

and pay higher credit card fees. In fact, 57% of Americans are currently worried about their lack of savings, the NFCC survey found.

10. We sell you what you already know.

Do we really need economists? Some experts say thats open to debate. Economists provide a service for banks and other institutions, but in some

ways, they dont know anything more than the average Joe. Yet we hope nobody notices that this proposition would drive down the demand for ou
http://www.people-press.org/files/legacy-detailed_tables/Detailed%20tables%20for%20Party%20ID.pdf


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service, says Frankel.

Economists rational expectation hypothesis states that workers are rational, investors are rational and consumers are rational, and that prices for

assets like stocks and real estate reflect all available information, Frankel says. People have already factored in the information that is publicly

available and supplied to them by economists in terms of trying to beat the stock market, Frankel says.

Still, the market and publicly available information are a good arbiter of how much assets are worth right only in the present moment, not of what th

might be worth in the future, says Ball of Johns Hopkins University: If you want to know whats going to happen to the economy five years from now

economists provide a lot of judgment.

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