With Greg Ip, Chief Economics Commentator for the Wall Street Journal
Steve continues his conversation with Greg Ip, Chief Economics Commentator for the Wall Street Journal, on Greg’s article, “In Defense of the Dismal Science,” by asking why economists are disdained by so many different groups, on the left and the right.
Greg attributes this to economists priding themselves on being “scientific” and wanting to quantify everything—human motivation, desire, behavior, etc. But people are driven by factors that cannot be easily quantified such as emotions, a sense of community, a desire for fairness, etc. While economists can measure inequality, they cannot tell you how to distribute things because that depends on your political preferences. Folks on the right criticize economists for praising globalization and ignoring the fact that citizens of most countries are uncomfortable with immigrants that threaten a nation’s sense of community, cohesion, and national identity.
Economists Ignore Human Factors
“In Defense of the Dismal Science” notes that economists are simply not equipped to answer the questions that people most want to have answered. For example, importing tires from China will result in tire factory workers losing their jobs in the U.S., but that’s of little consequence to economists who focus on the economic efficiency of a hundred million Americans getting cheaper tires. And that’s the case with a lot of other goods and services where many Americans would say that the tradeoff is just not worth it. Greg Ip cites free trade as having almost universal support among economists but very little support from the public.
Doctors Of The Economy
Next, Steve talks about economists’ dismal track record making accurate forecasts. Going back to the 2007-2008 crisis, while economists didn’t predict the crisis, they did a lot to arrest it. Greg Ip draws an analogy between economics and medicine. Doctors don’t predict the day you’ll die or how you’ll die; instead, they gauge your health and offer advice on your health risks and how to reduce them. “In Defense of the Dismal Science” says that sort of advice is what we should be asking of economists.
Greg mentions how economists advised President Obama and Congress to pass a very large fiscal stimulus to soften the impact of the 2008 recession. In that respect, economists have been helpful in bringing their experience and knowledge to bear on matters that deeply impacted all Americans. To say that they failed us because they could not pinpoint the occurrence of particular events is holding them to the wrong standard, says Greg Ip.
Minimum Wage Dilemma
The article, “In Defense of the Dismal Science,” talks about how economists are trained to look for equilibrium and cause and effect. Greg considers the controversial increase in minimum wage. On the one hand, people want to increase the minimum wage so that low skill jobs pay more, giving workers more money to spend. On the other hand, economists say higher wages could result in fewer hires, reduced worker hours, higher prices that hurt customers, and possible loss of market share to other towns that have not raised their minimum wage, etc.
Through their analyses, economists often come up with counter-intuitive and surprising conclusions. For example, small increases in the minimum wage do not appear to cause much damage, but large increases do seem to hurt. But the problem economists face is that the public and their elected officials often only hear what they want to hear.
The Explosion Of Digital Data
Switching gears, Steve wonders if the explosion in digital data has impacted economics. Grep Ip says it has, to a certain extent, with some economists trying to scrape the Internet in search of data they couldn’t get before. He gives an example of the “Million Prices Project” that scrapes the Internet for prices on common household goods to see if economists can get a more accurate and timely gauge of inflation than just from government data. This explosion of data helps economists conduct empirical tests to see how their theories actually play out.
Steve notes that “bean counters” everywhere face the same challenges as economists even though they are getting less biased and more data-driven in their findings.
So, the next time you feel like slamming an economist or a numbers guy, think back to Greg Ip’s article “In Defense of the Dismal Science” and consider being more objective in your criticism.
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Steve Pomeranz: I was speaking with Gregory Ip. He is the Chief Economics Commentator for the Wall Street Journal. We’re talking about his article, “In Defense of the Dismal Science.” Greg, I guess I want to ask the question: these days, economists are so disdained by so many different groups, either on the left or on the right, why is that?
Greg Ip: I think one of the problems is that economists pride themselves on being quote “scientific” unquote. They want to quantify everything, human motivation, desire, behavior. But people are not really quantitative by nature. They’re driven by things like emotion and feelings and senses of community and desires for fairness.
And those feelings are often at the center of our most divisive debates. Now on the left, you have people very concerned about inequality and fairness; economists can measure inequality, but they cannot tell you what is the right measure of distribution that we should have in the economy. That’s just not a question economists can answer; it really depends on your political preferences.
From the right, you have people criticizing economists for praising globalization. They’re saying, “what about borders?” You know what I mean? You say immigration is good for growth. What about the fact that some people are uncomfortable with a lot of immigrants, illegal or legal? Those are questions about community and cohesion and national identity, that once again, economists simply cannot answer or, in some cases, even relate to. So, I think one of the problems economists are running into in this rejection is that they’re not equipped to answer the questions that people most badly want answers to.
Steve Pomeranz: Yeah, well, economists tend to move towards the globalization concept.
As you said earlier, this idea that if we make tires here efficiently, that’s fine. But if we make, we grow grain even more efficiently, we should sell the grain abroad and buy the tires from abroad. That’s a globalization strategy. That’s an efficiency productivity strategy, but people’s lives are also affected and economics doesn’t take that into account.
Did I say that correctly, you think?
Greg Ip: That’s exactly, right. And economists would say, if importing tires means 10,000-tire factory workers lose their jobs, that’s okay because a hundred million people will get cheaper tires. But a lot of Americans would say, “no, that tradeoff is not worth it. I think that people should be willing to pay more for tires so that those factory workers don’t lose their jobs.”
Steve Pomeranz: Yeah.
Greg Ip: And that is the kind of thing that economists cannot sort of dictate answers one way or the other to. And I think it’s interesting that free trade—it’s one of the most difficult concepts in economics to grasp—but it’s one around which there’s almost universal support among economists, and you find it’s almost the exact opposite among the public. And indeed, one of the things that makes Donald Trump special is that he has been against free trade pretty much all his life as far as I can tell. And he’s the first person to run for president against free trade, and as President, to actually try to implement the protectionist measures that he talked about. In the past, people would run for president and say, “I’m going to stick up for the American worker,” but then they would agree to the free trade consensus once they were in office. So in this one-
Steve Pomeranz: But his businesses is pretty much all supported by free trade, by overseas workers and so on.
Greg Ip: Well, it’s certainly true that Trump has sought to extend his brand overseas. And he’s been a beneficiary of migrant workers here in the United States. But speaking in terms of the political rhetoric and the policy approach, it’s interesting that his opposition to free trade may be the only thing where he and leading Democrats in Congress agree.
Steve Pomeranz: That’s interesting. Everything is flipped on its head. This is not a political discussion, but nothing is as it used to seem. So, let’s get back to this idea about the economist dismal track record of forecasting stuff. I think we can all say with certainty that they’re tremendously lousy at that.
Going back to the 2007, 2008 crisis, while economists didn’t predict it, they sure did a lot to arrest it, didn’t they, to save it?
Greg Ip: They did, and, in fact, I think you can draw an analogy between economics and medicine. We don’t expect doctors to predict exactly the day you’ll die or how you’ll die.
They simply look at your health and they offer you advice on what the risks to your health are and the sorts of things that are likely to increase or decrease your risk of early death, and that’s really what we should be asking of economists. When these crises actually hit, they had learned a lot from events like the Great Depression and crises in other countries, and they were able to advise the Central Bank, the Federal Reserve, to lend heavily to troubled banks and other financial companies to arrest the crisis.
And then they also advised President Obama and Congress to pass a very large fiscal stimulus to soften the impact of the recession. So, in that respect, economists have been helpful in terms of bringing their experience and knowledge and theory to bear on some of these questions. To say that they’ve failed us because they cannot pinpoint when particular events are going to happen, I think, is holding them to the wrong standard.
Steve Pomeranz: You know, economists also look at the consequences of certain actions. If there’s a tariff, it may benefit domestic steel makers and their workers, but it can raise prices for the public. If you raise the minimum wage, it’ll help a certain group of people, but then how will companies actually respond to that?
Are they going to automate more? Are they going to pass those higher costs through to the consumer, which will raise prices? That doesn’t always get a good reception from the common man or from those of us who are lay people like myself.
Greg Ip: Well, that’s right. I think the economist is trained to look for something that we call equilibrium, which is really a fancy way of saying, “Well, if you change this price or this factor, what else will change? Where will things end up?”
So let’s consider something very controversial, which is an increase in minimum wage. Now, a lot of people say we should increase the minimum wage, and that way, people who have low skills and are earning the minimum wage will have more money to spend.
Steve Pomeranz: Yeah.
Greg Ip: The economist says, “well that’s true as far as it goes. But what happens on the other side?” Do employers employ fewer of these people? Do they reduce the wages of other people? Are they forced to raise prices and that hurts their customers? Do they lose market share to other towns that have not raised their minimum wage?
And sometimes when you work your way through all these different interacting conditions, you come up with surprising answers. Little increases at minimum wage don’t seem to hurt. Large increases do seem to hurt. Now, the problem economists often have is that the public often only hears what they want to hear.
So, if you’re a politician and you’re inclined to oppose the minimum wage, you only hear the second part, which is large increases hurt jobs. If you’re a politician inclined to support the minimum wage, you only hear the first part, small increases don’t hurt jobs.
Steve Pomeranz: Yeah.
Greg Ip: And economists, I know, drove Harry Truman crazy that they would always say, “on the one hand and on the other hand,” but often that’s the type of advice that they offer; it all depends exactly how you go about implementing a policy.
Steve Pomeranz: Great. Switching gears here, we are experiencing an explosion of data through all the media that we’re consuming. The social media and other ways that the internet is digitalizing everything and, just as I say, creating this massive amounts of data.
And I know that scientists are starting to use that data to get more accurate predictions of what’s going on. Is that happening in economics as well?
Greg Ip: It is, to a certain extent, you do have some economists out there trying to scrape the internet in search of data you couldn’t get before.
So, one example would be the Million Prices Project which is a project that scrapes the internet for prices on stuff to see if you can get a more accurate and timely gauge of what happened with inflation than just listening to the government data. And companies like Uber that generate a lot of data in the process of fulfilling their services, sometimes they’ll make that data available to economists who want to do interesting studies. Now we can really find out if we change the price of a taxi ride how does it change demand for taxi rides?
Steve Pomeranz: Yeah.
Greg Ip: And what do drivers do? So, yes, the explosion of data has offered a lot of new ways to measure some problems. I would say the more significant change you’ve seen in economics actually predates the availability of that data.
And it’s really a bottom-up desire to put a lot of the things that were always theoretical assumptions of economics to empirical tests to see what really happens. And so, if you actually look at the types of articles and studies that economists publish, you do occasionally have a theoretical paper that’s stuffed full of Greek letters and doesn’t seem to have any connection to reality.
But much more often, you’ll see a very careful attempt, and you can go through data, some of which is widely available, like unemployment, the data the government publishes. Or sometimes maybe a very specialized set of data that only economists managed to get a hold of because they have a special relationship with a company or a particular information provider.
And that way, they’re able to test all sorts of interesting questions and propositions. In that respect, economics is becoming a less politicized, less Ideologically driven discipline. Even though, to be sure, economists can still be ideological and political, and that will affect, sometimes, the advice they give.
Steve Pomeranz: I want to add my two cents here, with your permission.
First of all, I want to make a change the title of your article. I want to call it “In Defense of Bean Counters Everywhere.” A bean counter is an accountant, it’s an economist. It’s anybody who’s really using math or using real data to make decisions and to analyze. In today’s times, the proliferation of opinion masquerading as fact is all around us.
And it’s gotten to a point where sometimes it’s quite difficult to know the real facts. When I was coming up in my profession as an investment advisor, there was some less than positive talk about businesses that were run by accountants. Accountants were kind of looked at as not great business people and so on, and that even economists were detrimental to good investment results.
I remember reading in the Peter Lynch book, who managed the incredibly popular Fidelity Magellan fund, that the reason he thought that he was so successful was that Fidelity did not have an economist on its staff.
Greg Ip: [LAUGH]
Steve Pomeranz: [LAUGH] So back then, entrepreneurism was the new wave, and creative thinking and great sales made the day and kind of bean counters were considered to be holding businesses back from attaining its true potential.
But I think right now times have changed. Now it’s time to raise up the bean counters everywhere, forensic accountants and auditors and economists, all those who serve us with facts and statistics and use science to quantify the world around us. Yes, as Greg states economists should be defended, but let’s defend other dismal sciences as well.
So, this is to all you great bean counters in the world. I thank you, and I also thank you, Greg, for joining us today. Thanks, Greg.
Greg Ip: All right, it was great to talk to you.
Steve Pomeranz: To learn more about your money and to interact with us, don’t forget to go to our website, which is stevepomeranz