The Season for Economic Myopia
This is the weekend for New Year’s wishes. And it’s also the end of a week in which thousands of journalists and economists polish their crystal balls and play the forecasting game.
What’s in store for the economy in 1990? Should we be bullish or bearish about output, employment, prices and interest rates? Will the graphs continue edging up, or will they suddenly take a plunge?
With such a torrent of forecasts, I’m reminded of one of my persisting and intensifying peeves about the economics profession. More and more economists are obsessed with the short run. A year or two is about as far ahead or behind as they gaze. And the time horizons are getting shorter. Much of the profession is becoming chronically myopic.
This column vents my frustration at this myopia, exploring sources of this fascination with the short term and illustrating the kinds of critical structural issues that are missed as a consequence.
I don’t pretend that I can confidently or exhaustively account for endemic shortsightedness among economists. I nonetheless think that two explanatory factors are especially important.
First, large numbers of economists tend to support the established economic constellation of wealth and power in this country and are therefore oriented toward “fine-tuning” the economic system for more effective performance. The economics profession in general tends to work closely with banks, corporations and the government--all institutions that benefit from keeping economic arrangements much as they are.
Within that working relationship, economists serve the function of keeping their eye on the bouncing ball, tracking and helping established institutions anticipate short-term movements in economic fortunes and misfortunes.
There’s a second source of this myopia that is more recent and helps explain what seems to be an ever shorter time horizon in my chosen profession. Since the mid 1970s, investment capital in the United States has moved more into paper investments--into mergers and speculation and arbitrage. There has been a dramatic shift of resources, personnel and institutional power away from industry toward finance.
As the wealth goes, so go many economists. I haven’t done surveys or collected data, but I have a strong impression that much of the economics profession has become more involved and intertwined with the needs and interests of the financial community. A rising proportion of economists quoted in the business news are employed by banks and investment houses, for example, and growing numbers of economists listed on the program of the annual economics convention are affiliated with the financial community.
Virtually by definition, to draw the connection back to professional myopia, the financial community is more concerned with the short term than most of the rest of us. Speculators want to know exactly when the lines on the screen will jump so that they can hedge short or long. An investment in “fixed capital"--in productive plant and equipment--repays its investors over the relatively longer term, over roughly eight to 10 years. But the returns to many paper investments fluctuate with hourly, daily, weekly and monthly oscillations.
Increasingly, as a result, many economists serve the function for the financial community of trying to anticipate economic movements over the shortest time horizon possible. Historically, for example, almost all of the major macroeconometric forecasting modelers of the U.S. economy have relied on and projected for quarterly data, limiting themselves to summaries and forecasts for three-month intervals. Within the past couple of years, however, more of these modelers have concentrated their energies on the possibilities for and potential reliability of forecasts based on monthly rather than quarterly data. Shorter is better.
So what’s so bad about myopia? We live from day to day and month to month. Why shouldn’t economists concentrate their energies on tracking the economy over those same horizons?
The problem, posed quite starkly, is that the short run is shaped by longer-term developments. And long-term developments are shaped by basic economic institutions. If we don’t understand the logic and contradictions of those institutions, then we’re not in a position to understand the movements from one short-term position to the next.
This problem is especially pressing in the current global economy. Nearly everything is changing very rapidly. And many basic institutional structures are up for grabs. Here are merely a few examples of major institutional restructurings in the U.S. and global economies to which I wish economists would pay more attention:
Unions in the United States are on the verge of becoming a minor and increasingly insignificant player on the economic scene. In countries like Sweden, 90% of the work force is unionized. In the United States, union representation has dropped to barely 15% of non-farm employment and continues to decline from year to year. Do we really want an economy in which so few workers have any kind of collective instruments for self-protection and self-expression? What’s going on here?
The United States is moving toward an increasingly low-wage economy, building much of its industry and economic well-being on relatively lower wages for huge chunks of its work force. This breeds social problems. It accentuates inequality. And it also reinforces inefficiency by allowing firms to avoid the pressure to modernize. Do we really want an economy whose internal logic increasingly comes to resemble that of a Third World country? What’s going on here?
The structure of the global economy is being almost totally transformed. The United States has lost its special place as the premier economic power. Europe is unifying. Japan has gained tremendous leverage. Many Third World countries teeter on the brink of collective bankruptcy. Trade patterns are changing dramatically. Does it really matter that economists focus so much attention on next week’s gold prices? What’s going on here?
Tonight is the night for New Year’s resolutions. I wish that economists would make a collective professional resolution: I wish that they would all go to the eye doctor and get fitted for glasses to improve their long-distance vision. As it is, they can scarcely see beyond their noses.