Economists' advice

Whom should economists advise? I ask because of something Tim Harford says. He points to the abundant evidence that economists can't foresee recessions, and invokes Keynes' claim that economists should aspire to be like dentists:

We don’t expect a dentist to be able to forecast the pattern of tooth decay. We expect that she will offer good practical advice on dental health and intervene to fix problems when they occur. We should demand much the same from economists: proven advice about how to keep the economy working well and solutions when the economy malfunctions. And economists should bear in mind that no self-respecting dentist would be caught dead forecasting when your teeth will fall out.

To this, Unlearning Economics replies:

People expect dentists to tell them how to *avoid* tooth decay, not just deal with it if it occurs

Both seem to be assuming something which I find questionable - that economists should advise governments.

But why? Even if we knew for sure ways to keep the economy working well or to avoid recessions, there's no reason to suppose governments would follow such advice. If it fell outside the narrow Overton window, or if it clashed with the interests of the 1%, they might well ignore it. Shiller's proposals for macro markets to insure against big risks, and proposals to seriously fix the banking system, for example, have both been ignored. And economists' good ideas for improving well-being - on policies from fiscal policy through immigration to housebuilding - are also routinely ignored.

Dentists do not confine themselves to advising governments on dental health policy - even though they'd probably have more influence than economists - but instead help individuals.

Economists should do likewise. Here, we have a lot to offer. We know enough to give reasonable advice which can at least prevent savers from making terrible errors; this paper by John Cochrane is compulsory reading. For example, in the context of protecting ourselves from recessions, the following might help:

 - Diversify: in many contexts, gilts are a hedge against recession-induced falls in share prices.

 - Try and make yourself anti-fragile. If you have flexibility about when you retire, or if your human capital is portable, or if you can trade down your house, you have more ways of cushioning yourself against shocks. At least never put yourself in a position where you're a forced seller.  

 - When buying shares, use pound cost averaging; this limits our buying when prices are high, and raises it when prices are low. It also gives us an element of dynamic hedging - the ability to use low prices and high expected returns to offset falls in prices.

Dentistry is not much interested in politics - though dentists might reasonably lament inadequacies of dental health policy. I'm not sure economists should be much different, especially as giving policy advice causes people to under-estimate how useful economists can be.

Comments

[Simon Reynolds]

"Both seem to be assuming something which I find questionable - that politicians should advise governments."

Shouldn't that be "economists" not "politicians"

[chris]

Thanks Simon - correction made.

[Dave Timoney]

The prominence of the advice of economists in political debate is a choice made by politicians, not by economists. This is less about the Overton window and more about the instrumental use of science (or pseudo-science) to advance policy.

This was made hilariously clear recently by the self-satisfied marketing for the latest Freakonomics book. Cameron's stony silence when the dudes advocated charging for NHS services was not a mark of their iconoclasm, as they thought, but of their failure to supply what he demanded. Ironic, no?

[Peter K.]

Economists shouldn't advise governments because they don't listen?

Regular people will ignore economists' investment advice when they see their friends and neighbors making money off of the latest bubble.

Maybe it's me but I don't see the point of this blog post or the OP.

Economists can't foresee recessions, but some did see - in the U.S. context - that the trade deficit was a causing a lack of demand which was being filled by unsustainable housing bubble and that the bursting of the bubble would be disastrous. The Indian central banker Rajan saw that the shadow banking system was vulnerable to a bank run and was ridiculed by prominent economists for it. Economists' advice was followed somewhat after the crisis and that stabilized the situation at a subpar trajectory.

Hatford ignores all of this and focuses only on forecasting recessions.

It's hard to predict recessions because it's hard to predict what the Fed is going to do. Fed minutes showed that that the FOMC was clueless going into the crisis. At the very least economists and the Financial Times could focus on that.

[Steven Hope]

Dentists now advise you on your weight and alcohol consumption as the NHS takes every opportunity to have 'brief interventions'.

[Kaleberg]

Dentists also advise the government. That's one reason we have flouridation and various state level dental hygiene and education programs.

I see no reason that economists shouldn't advise the government. Your argument seems to be that since economists can only advise, but not dictate to, the government, then they shouldn't bother.

Governments can always use good economic advice. When they actually take it, good things can happen. Remember, Joseph, one of the first recorded economic advisers not only forsaw the coming fat and thin years, but proposed the government to serve as the grain buyer of last resort in times of feast and the grain seller of last resort in times of famine.

[Metatone]

There's something disingenuous about this piece.

Governments don't listen, in part, because there are plenty of economists who (for example) will contradict Schiller's advice.

Economics needs to sort it's own house out...