The economic news was bad this week. Jobless claims hit 500,000, the third consecutive weekly rise, and the highest number since November, 2009. The Philly Fed Manufacturing index contracted sharply, marking its first foray into negative territory since July, 2009. There was more bad news in housing, etc.
Yet economists remained clueless, a theme that Mike "Mish" Shedlock picked up on—
They may call economics the "dismal science" but it would be hard pressed to find a more optimistic lot than economists anywhere in private industry.
Fresh on the heels of a perfect 42 of 42 overoptimistic predictions on weekly claims (Please see Weekly Unemployment Claims Hit 500,000, Exceed Every Economist's Estimate; No Lasting Improvement for 9 Months), a perfect 58 out of 58 economists were overoptimistic regarding the Philly Fed Manufacturing survey.
The surveyed economists were unanimous in their overly optimistic opinion. Will Rogers said—
An economist's guess is liable to be as good as anybody else's
But, apparently, Will was wrong. Here at DOTE, we ask—
If economists are so smart, why are there so many of them? And why do they all think the same way?
What we are looking at here is pervasive positive (confirmation) bias. I found this gem on the web in a post by an economics instructor called positive and normative bias—
When the latest batch of freshmen shows up for Econ 1, textbook authors and instructors still try to separate students from their prejudices. In the words of the famed economist Paul Krugman, they try "to vaccinate the minds of our undergraduates against the misconceptions that are so predominant in educated discussion."
Is there a fundamental difference between positive bias and normative bias? Normative bias is opinion, and represents healthy disagreement...
Positive bias is more problematic. It could be accurately called "being wrong". That's the kind of problem that leads the designers of introductory economics courses to swing wildly to the extreme of trying to batter the bias out, looking suspiciously like indoctrination in the process.
Where does this bias come from? And how does it relate to the expectations game? Let's face it, we've got a serious problem if every economist was overly optimistic about new jobless claims. It is helpful to look at a biased report on the economy I heard on NPR this morning.
Another day, another piece of disappointing economic data. This week housing numbers, unemployment claims and other economic indicators all came in worse than economists had predicted. NPR's Tamara Keith has more.
Tamara Keith — It sure would be nice if economic recoveries moved in a straight line, up, up up. But most of the time, that's not the way it works. Ken Goldstein is an economist at the conference board.
Ken Goldstein — The warning here is that what you see in August may not be much better come Christmas time.
Tamara Keith — Goldstein says there's just not a lot of momentum. The jobs picture is bleak, consumer confidence is weak, spending is flat.
Ken Goldstein — There's a technical economics term, it's called "death by a thousand cuts."
OK, this was just Tamara's warm-up. Here comes the spin—
Tamara Keith — But William Rogers, an economist at Rutgers, says this type of lull has happened before, in 1991 and 2001. But he worries about what could happen if too much bad economic news rolls in.
William Rogers — "I think you could start to see Wall Street and ... Main Street could really start to psychologically begin to prepare ... [for] a double dip."
Tamara Keith — A double dip recession that is. But Rodgers and most economists still believe that doomsday scenario isn't likely. More likely? A long, slow slog to recovery. Tamara Keith, NPR News, Washington.
What's going on here? Tamara introduces bias in her very first statement: it would be nice if economic recoveries moved in a straight line... This presupposes that we are in a recovery, although the data show we are moving in the opposite direction. She then quotes Rogers, who says this type of lull has happened before, in 1991 and 2001. This presupposes that the world works exactly the same way in 2010 that it worked in 1991 and 2001. For Rogers, the only thing that has changed is the date, but that's just plain wrong. For example, there was no Housing Bubble prior to 1991, or 2001, etc.
And then Rogers worries that psychologically people might begin to prepare for a double dip. Thus the only real danger is that people will get further depressed about our economic prospects, which would be self-reinforcing with respect to future economic activity. The fact that a double dip—assuming we ever left the recession to begin with—is concordant with reality does not enter into Rogers' thinking. And finally, Tamara wraps this bullshit into a nice, tidy package by explaining that most economists still believe [a] doomsday scenario isn't likely. Instead, we will have a long, slow slog to recovery, which is still a recovery after all is said & done some months (or years) from now.
The bias in this NPR report is subtle but pervasive. We can now explain why, as 2010 winds down, almost all economists are almost always wrong almost all the time. Their positive bias stems from their belief system, which includes the following tenets & consequences—
- Progress is inevitable, irreversible and endless
- Progress is expressed through the Business Cycle, which assures an ever-upward path of economic growth (measured by GDP) punctuated by brief setbacks (recessions)
- Thus the Business Cycle is timeless (ahistorical, i.e. it exists outside history)
- And therefore recessions are always followed by recoveries, and vice versa.
Thus for economists, we were in recession, but now we're in recovery—that's the way it is and it can't be any other way. See my post Economists — The High Priests of Progress. And that explains why 42 out of 42 of economists underestimated jobless claims this week. And it explains why we must be patient and not get too depressed during the current "lull" in our inevitable recovery.
When Paul Krugman spoke above of trying "to vaccinate the minds of our undergraduates against the misconceptions that are so predominant in educated discussion," he and other economists apparently forgot to vaccinate themselves.
Quis custodiet ipsos custodes?
"Who will guard the guards" indeed.
I could only think in reading this about:
A) Historical- Americans have a positive bias due to a postivie history compared to say, extremely pessimistic and cynical Russians.
B) Biological-Humans always want to see everything from the sunny side due to some sort of genetic bias which better allow survival for any living creatures.
The fiction of the scientific method is that we can be "objectively rational", considering every side of an issue without taking inot account our own interest. This is of course false. This is why there is positive bias. At this point in time if man had rationally understood what is going on most would certainly be tighening the noose and preparing to kick the chair or ladder away. But suicide is not a purely rational decison made on evidence calculated on a piece of paper. This is the essence of hope. As the dour John Lennon quipped in reply to Paul McCartneys mindless optimism in the song "It's Getting Better All the Time": "It can't get much worse". http://www.youtube.com/watch?v=gP4apO4dbhw Obviously that duo would never have been anywhere near as successful separately as evidenced by their history in the 70s. Biological success needs therefore a balance. I remark myself that any euphoric mood is often followed by an equally long and deep depreesive mood, i.e. my ups and downs balance one another out.
The economic expectations readjust and reduce themselves over time. I stop expecting a cool job with real status and good income (self developmental career path) but hope to have some sort of way to get by, make do and mend. This is what we are looking at. The five stage path of denial, anger to acceptance is a long haul for a Titanic sized economic system of the global economy. I bet it takes a generation to work the debt out of the system and replace the positive bias majority of those born in the good old postwar days with those who have no expectations and nothing to lose by getting their hands dirty and making it on their own without a molly coddling super state controlling their every move.
Posted by: Edward Boyle | 08/20/2010 at 11:53 AM