The Patriot Post® · Economics 101: How Little They Know

Has the recession ended?

Yes, says Larry Summers, the president’s top economic adviser and a former secretary of the Treasury. He told ABC’s George Stephanopoulos on Sunday, “Everybody agrees that the recession is over.”

No, says Christina Romer, who heads the White House Council of Economic Advisers. The official definition may suggest that the economy has bottomed out, she said on NBC’s “Meet the Press,” but when moderator David Gregory pressed her on whether the recession is over, Romer replied: “Of course not … The people on Main Street … are still suffering. The unemployment rate is still 10 percent.”

If the administration’s top economists can’t agree on something as fundamental as knowing when a recession has ended, how can they possibly be certain that they know how to end it?

Back in January, the incoming Obama administration warned that passing an immense “stimulus” package was an urgent priority if unemployment was to be held below 8 percent; without it, the economic team forecast, unemployment would climb as high as 9 percent. Congress gave the new president the stimulus he wanted — at $787 billion, it was the largest spending bill in US history — yet the share of the workforce without jobs rose well above the promised 8 percent. By November it had reached 10.2 percent, the highest level since 1983, before dipping to 10 percent in December.

What do economists really know? Are their insights into the workings of a modern economy comparable to, say, the medical profession’s understanding of the intricacies of human health? Are economists’ grasp of the forces that drive the business cycle on a par with aerospace engineers’ grasp of the forces encountered by aircraft during flight? Perhaps no apples-to-apples comparison is possible. But consider: Medical science has conquered polio, tuberculosis, and smallpox; air travel is safer than ever. Yet economists still don’t know how to prevent recessions, or whether stock prices will go up or down, or whether it is possible to “stimulate” a $14 trillion economy without causing harm.

As the Obama administration’s senior economists were declaring the recession over/not over, Paul Samuelson, the first American to win the Nobel Prize in economics, died at 94. In a column published during an earlier crisis a decade ago, Samuelson suggested that modesty is appropriate when economists diagnose an ailing economy.

“What we know about the global financial crisis is that we don’t know very much,” he wrote. The formula for economic recovery was unclear, and it was worth remembering that “economics has never been a science.” In words as apt today as in 1999, Samuelson observed that officials trying to ease the economic distress were essentially winging it. “It would be reassuring and dramatic to declare that they had succeeded. But the duller truth is that we don’t know — and neither do they.”

In testimony before the congressional Joint Economic Committee last week, George Mason University economist Russell Roberts made a similar point with regard to job creation and the stimulus. “There is no reliable way of knowing whether the stimulus package has averted a worse situation — or whether it’s part of the problem. There is no consensus in the economics profession on this question, and no empirical evidence that can settle the dispute.”

Most people assume that fixing the economy is the government’s responsibility — that it needs to do something to get the unemployed back to work. “That may not be possible,” Roberts said. Government fixes have a habit of generating unintended and unfortunate consequences. Government intervention, far from dispelling economic anxiety, often exacerbates it. “Doing less might, paradoxically, be more successful than doing more.”

Economics isn’t rocket science or any other hard science, and never will be. Human motivations, appetites, relationships, expectations — the raw stuff of economic life — cannot be perfectly modeled or reduced to an unvarying equation. Unlike the tides or electromagnetic waves or chlorophyll, human beings have free will. Men and women choose for themselves, and no economist or policymaker can ever know with perfect certainty what those choices will be. Roberts quoted Friedrich Hayek, another Nobel laureate, who had that uncertainty in mind when he summarized the economist’s truest function:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”