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 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 a night in January 2008 when I was 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. Our staff work is very much a team effort. Reassuring but I still felt like an imposter, a feeling that only got worse as the Great Recession took hold.
Fast forward three years to 2011. We had gotten past the financial crisis, coffee no longer ran out in our cafeteria before 9 am, and the stress of 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 this forecast-evolution chart.)
One thought nagged at me in 2011 … what if we are wrong? Maybe the economy doesn’t always recover? Maybe we aren’t doing enough? I was surrounded by 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 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 folks, reading archives, etc. My reflections here are on the Fed, but I think these issues exist throughout the economics profession. Mine is not a systematic or an expert evaluation. (Feel free to stop reading and turn to this paper by former Fed Governor Tarullo.) Also I have been interested more in the why than the specifics of what we learned about financial markets 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 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 role of financial frictions, specifically, or the need for stimulus, generally. I don’t buy it. It’s how we use our knowledge … giving advice and making decisions in real time … 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 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). 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 sad (but not surprised) to see Greenspan say “Shall we break for coffee?” right after Susan Bies delivered a summary of risks building in mortgage markets. 2005 was fairly late, maybe it would not have mattered then? However, as early 2000, before the big run up in mortgage debt, calls came for the Fed to do more on predatory lending. Some bits on this: from the Federal Trade Commission in September 2000, Board staff work (lawyers) on a regulatory proposal in late 2000, but no traction as seen in a speech by then-Fed Governor Ned Gramlich in 2001. And that was from an economist policy maker who was one of the most aware of the lending problems.
My point is not to argue that economists are always wrong or that our models are worthless. Quite the opposite. Quantifying issues, modeling historical statistical patterns, thinking hard (and dispassionately) about causal factors are a very important skills. Similarly, I was told that the Council of Economic Advisers’ key role is to shoot down bad ideas … a great story from Ken Arrow … and I saw it in my time there. Economists think differently than many others and that’s great until it’s not. Being good at counterfactual thinking, trade offs, comparative advantage, and other non-intuitive logic, as well as a love of numbers, are useful attributes of economists BUT only as part of a larger team. For example, we, economists, tend to have blind spots from our assumptions on efficiency, credibility, rationality, markets, etc., 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 to spend hundreds of billions of dollars in stimulus. We make decisions at the Fed on interest rates. And in many capacities, we have input on financial markets, regulation, and business practices. This adds 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 key to policy). Hiring more women and minority economists alone is unlikely remedy our grouthink, but I think it would help. Clearly, diversity in ideas spring from many sources, but life experiences shaped by gender and race are some drivers. Above all, I hope that making diversity a priority in our own ranks will help us see the benefits of listening to others.
PS The title of my post is a bit of play on the title on the recent “Rethinking Macroeconomic Policy” conference. It had an esteemed group of speakers, each of which has waaaay more perspective on economic policy than I do. I only had time to watch the opening remarks (busy new job for me), but I hope the topic of diversity in economics got some attention. Or maybe I will hear other views on why economists culturally got it so wrong and how we can improve?
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.