When I was trying to figure out if there was a housing bubble or not, the academic economists I had come to trust said no, the fundamentals explain this. Sometimes this was backed by econometric analysis. But many people outside of academics, or at least a few, said there was a bubble. This was often backed by logic, intuition, and simple charts rather than sophisticated econometrics based upon theoretical constructs. For the most part, I dismissed the people I should have listened to, especially if it contradicted what the academics were saying. Most of all, I relied too much on the experts in the academic community instead of listening to all the evidence and then thinking for myself.
One of the reasons I didn't listen is that until I started blogging, I was pretty arrogant about academic economists. As far as I was concerned, pretty much, academic economists knew more about everything related to economics than anyone else. But one thing I've learned from the wide array of voices in the blogosphere is that I was wrong. Academic economists have a lot to learn if they are willing to listen.
I thought I would weigh in with some thoughts.
I remember one of my first economics classes where a professor was talking about consumers and how they plan for inflation. She argued that consumers wake up every day trying to figure out what the inflation rate would be. I disagreed, saying this is not a conversation many people have on a regular basis. She responded by saying I thought that people were stupid, thus ending the conversation. What she was arguing was that all people are rational -- a basis of the Chicago school of economic thought. I felt then -- and still argue to this day -- that this is a faulty premise on many levels. Hence, I believe that any model based on this theory is inherently wrong and should be completely ignored.
This leads to my two basic problems with most academic economists. The first is the use of models to predict behavior and economic performance. The US economy is over $14 trillion dollars in size with over 300 million people spread out over an incredibly diverse and wide ranging geography that has literally millions of different cultural biases and preferences. There is no way you can model that. Period. To argue that you can model that is folly.
Second, the basic assumption that people are rational and make all of their decisions rationally. No. That does not happen at all. We are not Vulcans, we are humans with a tremendous amount of emotional complexity that prevents purely logical decision making. To argue we are rational is to ignore reality. And to base an entire discipline on that assumption is the height of arrogance or stupidity (or a combination of both).
In short, I think a fair amount of academic economists are stuck in a theoretical world that has absolutely no bearing on reality. They remind me an awful lot of law professors who write articles on incredibly bizarre topics that get published in law reviews to be read by other academics who then write more obtuse responses. This creates a great, self-perpetuating cycle of more and more ridicules research that has no use to the everyday legal practitioner.
What I do look for are economists who utilize relevant information. A great example is David Rosenberg, who use to be with Merrill Lynch and is now with Gluskin Sheff in Canada. He uses all sorts of information to derive his conclusions. Mark Zandi at Moody's is another good example, or Paul Kasriel at Northern Trust or Dr. Ed Yardeni or the folks at the Liscio report. I should also add that a fair amount of economic blogs fall into this camp, which makes them that much more relevant. All of these people look at data, compare it to other relevant data and try to figure out what is going on. As such, a lot of these people wound up being right about the housing bubble, the recession and a whole lot more. And in case you're wonder -- this is the type of analysis we try and do here at the Bonddad Blog -- look at the data to see what is happening and figure out where things might be going.
The primary difference that I see between the academic world and the real world economists is the difference in the use of their information. Academic economists seem to be interested in writing for their own little bubble world of other academic economists while the real world economists are trying to create "actionable information" to determine where to allocate money. As such, the academics seem pretty irrelevant to those of us in the real world.