Wednesday, May 8, 2013

Who to listen to or is it possible for a non-PhD to penetrate economists' echo chamber

Paul Krugman ran an interesting post on who policymakers and the public should listened to when it comes to a solution for ending our current financial crisis (hat tip Jonathan Portes).

According to Professor Krugman:
Jonathan Portes has a nice little essay, which gets better than I have at the essential issue: it’s not just about the individual track record:
My answer to it is that policymakers and the public should listen to economists
While policymakers listening to economists is definitely an improvement over listening to the bankers who got us into our current difficulties, this is an extraordinarily low bar to get over and doesn't suggest why economists should be listened to rather than some other market participants.
who fulfill two critera: first, they have made empirically testable predictions (conditional or unconditional – see Krugman here) that have proved, by and large, to be broadly consistent with the data; and second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive. 
These criteria were the basis for the economics profession to discount the prediction of the financial crisis made by William White and a handful of other economists.  Their predictions were good at using the data.  Their predictions were bad at using an analytical framework.
In other words, getting it right alone is not enough; it should be possible to show your workings – to explain why you got it right. Otherwise, your predictions may be interesting, but they tell you little about how to formulate policy.
Fortunately, your humble blogger has both gotten his predictions right and has been able to show his work using an analytical framework.
Quite. Place not your faith in gurus, even if they got some big stuff right — and that goes for me, too.
Even though it is nice to be a guru, I wouldn't place your faith in me either.
It’s always about the model, not the man....
I would place your faith in the model and the model that did the best job of predicting our current financial crisis and why easy monetary policy combined with austerity or fiscal stimulus has not ended the crisis is the FDR Framework.

This is not surprising as the FDR Framework is the foundation on which our financial system is built.
One side note: One thing that’s striking in Portes’s discussion — and something I very much agree with — is the irrelevance of formal credentials. 
As we’ve debated how to deal with the worst slump since the 1930s, a distressing number of economists have taken to arguing on the basis that they have fancy degrees and you don’t — or in some cases that well, you may have a fancy degree too, and even a prize or two, but in the wrong sub-field, so there. 
But all this counts for very little, especially when macroeconomics itself — or at any rate the kind of macroeconomics that has dominated the journals these past couple of decades — is very much on trial. 
If a PhD in economics counts for so little Professor Krugman, why don't you give me a call so we can discuss the FDR Framework and what it takes to end the bank solvency led financial crisis.

What I can tell you is every economist who thinks they have a solution for the financial crisis or how to fix the banking system I have talked with has been immediately dismissive of the FDR Framework despite its track record at predicting what has actually happened.

You would like to solve the financial crisis and redeem macroeconomics.  Here is your chance.

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