Wednesday, December 10, 2014

The Sound of a Bubble Bursting

What’s the sound of a bubble bursting?

Obviously, it depends on the bubble. A bubble made of soap film will not burst with the same sound  as a bubble made of chewing gum.

Strangely, when people talk about market bubbles, they say that when the bubble bursts it sounds like a crash. It’s more like a poetic conceit than an acceptable metaphor, so it doesn't make very much sense. For no special reason I mention it in passing.

But, what does it sound like when a reputation bubble bursts? Here, I am thinking about the reputations of economists. By all accounts, the world now holds economists in exalted regard.

Naturally, The Economist is on the story:

Despite their collective failure to predict the financial crisis, let alone follow Keynes’s injunction, economists are still very influential. They write newspaper columns, advise politicians and offer expensive consulting services to business-folk far more than other academics. A new paper* tries to explain why.

The paper explains that economists have gained their reputation by having mastered the rhetoric of conviction. They believe in themselves; they believe in their formulae and graphs; they are convinced that theirs is the most scientific of the social sciences. If you ask them they are never wrong.

I don’t know how well this applies to all economists, but the name of Paul Krugman pops into mind immediately.

Of course, as Wittgenstein said, there is no such thing as a scientific fact about what will happen tomorrow. Economists’ predictions about the markets can be hypotheses. They can be prophecies. They cannot be scientific facts.

The Economist tries to put it into perspective:

“For a moderate fee,” jokes Deirdre McCloskey, an economic historian, “an economist will tell you with all the confidence of a witch doctor that interest rates will rise 56 basis points next month or that dropping agricultural subsidies will increase Swiss national income by 14.8%.”

The ironic part of this is: while The Economist is trying to puncture the inflated reputations of economists, MIT star economist Jonathan Gruber was being brought down a few pegs on national television. Yesterday, I posted his colloquy with Rep. Trey Gowdy. It gives you some idea of what it sounds like when a bubble bursts.

Aside from Krugman can you think of another economist who is as full of himself as Prof. Gruber?

Whatever you think of the ACA or MIT, Gruber’s performance before the House Oversight Committee was embarrassing. In fact, his squirming gave new meaning to the concept of shame.

The Wall Street Journal found the perfect comparison. It editorialized this morning that Gruber reminded them of Forrest Gump:

Maybe it’s easier to get tenure at MIT than we thought. At least that’s our reaction to the Forrest Gump routine put on Tuesday before Congress by MIT economist Jonathan Gruber, who sounded for all the world as if he knew nothing more about politics and health care than the lovable bumpkin who always showed up when history was being made.

And this:

But on Tuesday before the House Oversight Committee, Mr. Gruber distanced himself from his remarks while refusing to say if they were true. He apologized for the tone, arrogance, glibness and the inappropriate nature of his remarks. But his response to substantive questions suggested that he is mainly sorry for getting caught on tape.

The Journal offers the perfect coda to the episode. In the immortal words of Forrest Gump: “stupid is as stupid does.”


Ares Olympus said...

Hmmm.... I was thinking Peewee Herman as a closer fit that Forrest Gump. "I meant to do that!"

And that reminds me, perhaps Kinsley gaffe applies?
A Kinsley gaffe occurs when a political gaffe reveals some truth that a politician did not intend to admit. The term comes from journalist Michael Kinsley, who said, "A gaffe is when a politician tells the truth – some obvious truth he isn't supposed to say."

Whether you're a police officer or a college professor, everything you say will soon be recorded, and used against you in a court of law, or political theater.

Dennis said...

Economics is a social science that, in many ways, isn't scientific. It is predicated of the economic habits of human beings. Human beings are neither rational buyers or rational sellers. The number of business that fail in the first year is very large and the number of things people buy defy logic. Here I am not immune.
As far as I know there is not an econometric model that can predict the past much less the present or future. The fact is that most models only reflect the experiences and biases of the people who create them.

Sam L. said...

Paullie "The Beard" Krugman is in a class all by himself. Not that many would want to be in that class.