I have been blogging and tweeting a lot about diversity in economics, but I have not explained why I am so interested in this topic. And no, it’s not because I am woman in economics and feel shortchanged. I have a great job and two wonderful kids. Sure I’ve heard some crap along the way, but who hasn’t? What motivates me is a concern about the quality of advice we give as economists and how that affects individuals and communities.
I arrived at the Board in the summer of 2007 and started forecasting in 2008. Can you imagine what my first year was like as I learned how to forecast consumer spending? I was barely keeping my head above water, and only with many colleagues helping me. I remember the night in January 2008 when I was in the office late slowly preparing my first forecast meeting presentation … Miles Kimball had sent me an email about some hopelessly overdue research … and then a Board colleague stopped by to check on me. He reminded me that everyone wanted me to succeed, and our staff work is very much a team effort. Reassuring but I still felt like an imposter and that feeling only got worse as the largest recession since the Great Depression took hold.
Fast forward three years to 2011, when we had gotten past the financial crisis and coffee no longer ran out in our cafeteria before 9am and the stress of the work was less acute. The recovery was moving along but not as expected … that was the hardest time at work for me. (Yes, I added a broken heart to a forecast evolution chart.)
One thing nagged at me in particular in 2011 … what if we are wrong? Maybe the economy doesn’t always recover? Maybe we aren’t doing enough? I was surrounded my smart, hard-working colleagues at the Fed and I was closely following the related academic research. But if we, economists collectively, are so smart how did we miss the signs of the financial crisis? The no-doc loans, the house prices can’t fall mentality, the subprime is “contained”, and on and one … If we couldn’t put the pieces together correctly then, what were we missing in the recovery?
Thinking I might find some lessons in the past, I spent some free time talking to people, reading archives, etc. Much of my reflections here are on the Fed, but I think these issues exist through out the economics profession. Granted mine is not a systematic or an expert evaluation. I have mainly been interested in a bigger picture of why not the specifics of what we learned about financial contracts or monetary policy tools.
So what does any of this have to do with diversity in economics? A lot, I think. The financial crisis, Great Recession, and recovery were times when the standard economics playbook was often incomplete or in some cases just plain wrong. A common retort is that some model from way back when foresaw the specific case of financial frictions or even the general case for stimulus. But I don’t buy it. It’s how we use our knowledge … giving advice and making decisions … not the sum total of everything ever written down that matters. If the same person who wrote the “financial accelerator model” could also utter the words subprime “seems likely to be contained” in 2007 then the economics profession was out of its league. I come back again and again to how hard it is for us to think beyond our economist assumptions.
Of course, there were economists who recognized the imbalances in housing markets before the crisis. For one example, see remarks by Josh Gallin and Andreas Lehnert, staff economists, at the June 2005 FOMC meeting (pg 4-11). But it’s much easier to find examples of the economic consensus shutting down or discounting such concerns. At that same meeting (pg 46), I was shocked (but not surprised) to see Greenspan say “Shall we break for coffee?” right after Susan Bies delivered a prescient summary of risks building in mortgage markets. 2005 was fairly late in the game, maybe it would not have mattered much then? However, as early 2000, before the big run up in mortgage debt, there was a call for the Fed to do more about predatory lending practices. Some non-exhaustive bits on this: a push from the Federal Trade Commission in September 2000, Board staff work (lawyers) on a regulatory proposal at the end of 2000, but no real traction as seen in a speech by Ned Gramlich in 2001 containing lots of economist assumptions. And that was even from an economist policy maker who was one of the most aware of the problems.
My point is not to argue that economists are always wrong or that our models are worthless. Quite the contrary. Quantifying issues, modeling historical statistical patterns, thinking hard (and dispassionately) about causal factors is a very important set of skills. Likewise, I was told that the Council of Economic Advisers’ key role in policy making to shoot down bad ideas … a great story from Ken Arrow and I saw it in my rotation there too. Economists think differently than many others and that’s great until it’s not. Being unusually good at counterfactual thinking, trade offs, comparative advantage, and other non-intuitive bits of logic, as well as a love of numbers, are useful attributes of economists BUT only as part of a larger team. For example, we tend to have blind spots at times from our assumptions about efficiency, credibility, rationality, and markets, in a way that a non-economist would not. And yet, economist are known for going it alone. Sigh.
Groupthink … the lack of meaningful diversity … in economics has real consequences for real people. We give advice to Congress on how hundreds of billions of dollars in stimulus are spent. We make decisions at the Fed on interest rates. And in many capacities, we have input on financial markets, regulation, and business practices. This add up to profound effects on many, many lives. And yet, our closed-system culture puts great emphasis on top five publications (an internal status marker) and the credibility of our economic institutions (making sure economists remain central to policy). I doubt that hiring more women and minority economists alone will remedy our grouthink, but it should help. And I hope that making diversity a priority in our own ranks will help us finally see the benefits of working more closely with and listening to others.
PS The title of my post is a bit of play on the title of an upcoming conference on “Rethinking Macroeconomic Policy.” It’s an esteemed group of speakers, each of which has waaaay more perspective and expertise than I do on economic policy in the past decade. I am sure it will be a thoughtful discussion and I am happy that they are live streaming it so others like me can listen in. I hope that the topic of diversity in economics comes up or that I hear another view on why we culturally got it so wrong and how we can improve the economics profession.
PPS This post … as with all of my macromom posts … reflects my own personal views and should not be ascribed to anyone else in the Federal System or to my role as a staff economist there.