I was recently accused (by co-author Goonix) of becoming more libertarian over the past 2 1/2 years. Now I don’t agree, I think I am where I was in July 2007. However, it is evident that the particular focus of the blog has evolved since then.
So there has been discussion on incentive problems in economics here before (here, here, and here). However, now there seems to be a little bit of hard empirical evidence indicating that there is a problem.
It seems that 51% of graduate students at the top 15 US universities think that knowledge of the actual economy was “unimportant” for doing a degree in economics. These weren’t people saying “a little important” or “I’m not sure”, these are just the ones saying “it does not matter at all”.
Now, if the best graduate students do not believe that the actual economy matters for economics that suggests to me that there is a major incentive problem – the same sort of one that Rauparaha tried to convince me about so long ago
Justin Wolfers says Charles Plosser is being a bit silly on the Freakonomics blog.
Specifically he says that:
Now I think he is being a bit sneaky here. Yes there is uncertainty, but the perceived ex-ante risks around this uncertain variable are asymmetric.
What the hell am I trying to say here? Well, we know that potential economic activity seems to be “trend stationary” over time (so it tends to rise at an average rate), however we aren’t quiet sure of the trend. When we measure “slack” in a “recession” we are normally coming off a high point – which biases up our trend estimate. Macroeconomists do heaps of stuff to try and correct it – but we often end up with a higher estimate than seems fair.
As a result, even though slack is uncertain there is a greater likelihood that slack will turn out to be smaller than it is currently thought to be rather than larger.
Of course, on an unrelated note I would say that economists should look at the unemployment rate as a measure of slack a lot of the time – as we have a measure of it, and it does give us an indication of the relative “hole” in the economy. With unemployment over 10% the US should still be looking at substantial stimulus – so Plosser seems a little gun ho.
One of my favourite excuses for the “high” NZ dollar is currency reserves being built up overseas (in order to “keep their currency low” they need to buy up foreign dosh, building up currency reserves you see). It is an argument the US likes to make without actually doing any analysis as well.
However, work has been done … a while back.
The linked to paper found that reserves were not excessive anywhere, expect China. A good point to keep in mind no doubt.
The economist is the last to claim that he has the knowledge which the co-ordinator would need [for planning].
F.A. Hayek in The Road to Serfdom, 1944