Economists surveyed right before the Collapse of 2008

by philg

Lecture 3 within “Modern Economic Issues”, by Robert Whaples, is titled “Economists’ View of the Future”. The course seems to have been published early in 2008 and perhaps recorded in 2007, since many statistics from 2006 are cited. One of the lecturer’s aims seems to have been to present listeners with a comprehensive view of thought by economists around the U.S. Nearly every lecture presents at least two sides of every issue and oftentimes refers to surveys of American economists. Whaples himself conducted a survey of economists and their predictions about the years 2008 through 2018 right before giving these talks.

Whaples starts by pointing out that for most of the field’s existence economists have erroneously been predicting a flat standard of living, thus entirely missing the growth in real personal income that has been the main story since the Industrial Revolution. Classical economics predicts that new ideas or methods may lead to a temporary improvement in per-capita wealth but that the result of this new wealth will be larger families and more children surviving to adulthood. These new workers will compete with each other and the result will be a market wage that is near the subsistence level. Worldwide GDP may grow but population will expand so that the average person is living with only the bare necessities of life.

This prediction has failed to come true, according to Whaples, primarily because (1) the pace of technological change for the last 200 years or so has been so rapid that humans have not had a chance to have enough kids to soak up all of the benefits, (2) the rising wages of women have discouraged many from spending a lot of time out of the workforce and therefore fertility has been lower. Other economists have gone farther, claiming that the larger the population the more opportunities there are for new ideas to be developed, which will make everyone richer per capita, not poorer.

Given this backdrop of pessimism and continually being proved wrong by events, what did the economists surveyed circa 2007 predict about 2008 through 2018 in the United States? Nearly all predicted the strong growth that had prevailed in the 1990s and through 2006 to continue virtually unabated. The only real debate was among those who through the strong growth was permanent and those who thought there would be reversion towards a less spectacular level of growth. Of those interviewed by Whaples, not a single economist, apparently, predicted the Collapse of 2008 and subsequent stagnation!

So next time that an economist shows up in an Op-Ed column or on TV to explain why lackluster growth is the new normal for the U.S. remember that, not too long ago, probably the same person was predicting a very bullish 2008 through 2018 and that the growth of 1991-2006 was the “new normal”.

8 thoughts on “Economists surveyed right before the Collapse of 2008”

  1. Yet policy makers keep listening to these guys, especially Uncle Ben at the Fed who has been wrong with every prediction he’s made since 2006. And now he has commited to $85B of new debt every month(!) until unemployment falls to 6.5% (which we may actually reach soon given the large numbers dropping from the workforce). And this is after the Fed bought $3T+ of bad mortgages from banks at 100% face value (enabling them to repay their TARP loans with a “profit” for the govt).

    I’ve come to believe that economists are witchdoctors, that finance is all a scam, and that the Wall Street is just parasites trying to get something for nothing. The one bright spot on the horizon is the emergence of BitCoin – it could do to banking what Napster did to record companies. BitCoin = financial revolution.

    Check out David Stockman’s recent youtube interviews, or go crazy and visit MaxKeiser.com

  3. This all seems pretty in line with all the Crash of 2008 – ? books you’ve also reviewed (many of which I’ve read solely based on you reading them). It’s struck me as ironic that we’ll cherry pick economists as being saviors and totally right and say that all the rest are terrible; that economists themselves seem to argue that they shouldn’t be taken seriously because everything’s so ephemeral and changes too rapidly to really form solid scientific conclusions or to in anyway predict the future, and yet we all seem, in the end, to put huge stock in what they say regardless of what’s actually happening. (We meaning people who base their decisions on their claims.)

  4. “Of those interviewed by Whaples, not a single economist, apparently, predicted the Collapse of 2008 and subsequent stagnation!”

    Krugman pointed out in a 1998 talk (“The return of demand-side economics”) that anyone who thought a modern industrial economy couldn’t get into a prolonged slump should take a close look at Japan.

    A country that does not need to defend its exchange rate can fight recessions easily, simply by cutting interest rates as low as necessary – all the way to zero. But what if a zero interest rate isn’t low enough – if, even at a zero rate, businesses do not want to invest as much as consumers want to save? This is the dreaded “liquidity trap”, in which monetary policy finds itself “pushing on a string” – in which attempts to expand the economy by expanding credit fail because banks and consumers alike prefer holding safe, liquid cash to investing in risky, less-liquid bonds and stocks.

    On the face of it, the U.S. and U.K economies would seem to have been in or near a liquidity trap during the 1930s. But by 1990 the general view might be summarized as being that a liquidity trap can’t happen, didn’t happen, and furthermore won’t happen again.

    Then came the problems of Japan. After the bursting of the “bubble economy”, Japanese authorities were at first reluctant to cut interest rates, for fear of reinflating the bubble. Since 1996, however, short-term rates have been well under 1 percent; today they are only 0.25 percent. Yet this was insufficient to prevent a slide into recession, let alone to reverse the stagnation that has characterized the Japanese economy since 1992.

    As I have just suggested, until this experience many economists believed either that such a situation could not really develop, or at any rate that it was unlikely to happen in the modern world. Moreover, even if a liquidity trap should emerge, there seemed to be a ready answer: pump up demand with deficit spending.

    And yet the Japanese economy has stagnated for 7 years, and at time of writing is in a serious slump. Why haven’t the Japanese been able to come to grips with the problem?

  5. Russil: That 1998 talk does indeed sound like a very precise prediction of the Collapse of 2008. Maybe Krugman is the reincarnated Nostradamus. Perhaps Krugman, who very plainly saw exactly what was coming, was too busy shorting mortgage-backed securities (John Paulson-style) to take Whaples’s phone call back in 2007.

  6. There’s actually an interesting story here. Until the 2008 crash, most economists believed in what was called the Great Moderation: since Volcker and others had brought down inflation (through punishingly high interest rates) in the early 1980s, it appeared that central banks had figured out how to use monetary policy to stabilize the economy, raising interest rates to head off inflation and lowering them to combat recessions. Leading figures like Ben Bernanke and Robert Lucas described the prevention of future depressions as a “solved problem.”

    From that point of view, what’s surprising isn’t the 2008 crash itself. Unexpected shocks happen–the bursting of the dot-com bubble, the 1998 East Asian crisis, the 1987 stock market crash, etc. What’s surprising is the prolonged aftermath. After previous shocks, the economy recovered quickly. Not this time: after five years, unemployment is still very high.

    The point of Krugman’s 1998 talk is that economists probably shouldn’t have been so surprised by this prolonged slump. The “professional ambulance-chasers” who study international crises were already starting to suspect back in 1998 that if it could happen in Japan, it could happen elsewhere.

  7. >his is the dreaded “liquidity trap”, in which monetary policy finds itself “pushing on a string”

    Scott Sumner has criticized the existence of liquidity traps. There are many things, such as QA, that central banks can do at near-zero interest rates. Krugman has only this week grudgingly acknowledged this, saying that the Japanese central bank had been too cautious.

    This line of think also explains why the prolonged aftermath we’re now experiencing. Bernanke has also kept to tight money (although confusingly, by some measures the policy appears loose). Lack of money hurts AD. Lack of AD causes continuing recession.

  8. In most of the Old World this is actually the case. In areas that have been civilized for millenia, populations have grown in pace with technological development, so that wages are rather low. It is only the New World, specifically North America, that was first (densely) settled when humanity was at an already high level of technological development.
    To give backing to this claim, I divide the population of the Old World (Asia, Europe, Africa) by its total land area, and the New World (The Americas) by its total land area.
    Old world: 5,961,278,000/84,980,532 = 70 human per square km
    New world: 911,000,000/42,549,000 = 21 humans per square km
    So we see that the New World is less than a third of the pop density of the Old, and had the advantage of a much higher level of development from the relative moment of starting up.
    When the New World fills up, the wage gap between New and Old will probably disappear.
    (Data from http://en.wikipedia.org/wiki/Americas, http://en.wikipedia.org/wiki/Afro-Eurasia)

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