It must be both a fascinating and horrendous time to be a professional economist. On the one hand, you have court-side seats to the mother of all financial crises, occurring right before your eyes in real time. You don't have to pour through hundreds of dissertations about the Great Depression, read newspaper clippings from the 1930s or create complex, but ultimately, limited mathematical models to understand the causes and cures of past financial debacles.
And now, here it is, unfolding daily, real and raw.
On the other hand, the world is looking to you for advice as to what to do about this mess -- not only government bureaucrats, mediocre politicians and preening TV anchors, but also everyday citizens -- people who don't really want to spend their time thinking about things like the right number to use as a fiscal multiplier (will $1 of government spending create $1.5 of wealth?), the velocity of money, the relative benefits of tax cuts vs. spending increases, and whether the United States will follow the path of Japan (the lost decade of the 1990s), Sweden (temporary nationalization of the banks) or America in the 1930s.
It's your time, wonky economists, and it's not an academic exercise.
A Young Science
Though they may want to view themselves as scientists (it is, after all, called the "dismal science"), economists are not really scientists in the strict sense of the word. They can't dump 600 recessions into a beaker like the kind we used in ninth-grade science class, and then run 600 reproducible experiments, each time slightly changing one variable while holding others constant. They're really more like a combination of mathematician, social scientist, historian and psychologist.
All economists really have to study is the past. And the past offers us some test cases to study, but not many. The laboratory for economists consists of the U.S Great Depression, Japan in the 1990s, Latin America in the 1980s, Sweden's banking crisis, and a few other "science experiments" to study. That's not a lot.
Economics is a young science, if even that, with only a few patients to examine.
And the patients they study -- besides being wildly complex and untestable -- have long been dead.
What was the cause of and cure for the Depression? You'd think that would finally be settled. Nope. Just when you were convinced that it all centered on the money supply (and the poor monetary policy by a new and inexperienced Federal Reserve), another economist comes along to tell you that the real issue was poor fiscal policy -- the Roosevelt administration raised taxes and did not spend enough.
What caused Japan's problems? Was it all those bad real estate loans, or was it an appreciating currency? Pick an economist to get the answer you want.
We can be certain that when the dust clears on the current economic whirlwind, there will be little consensus on what got us out of this mess. Some economists will say it was because of the Obama stimulus plan; others will claim that it was despite the Obama stimulus plan.
Part of the reason for the market's less than overwhelming response to the administration's stimulus bill and the Treasury's bailout plan was not just because of a lack of details, but because the market sensed that the patient may have been misdiagnosed. (If the problem is the troubled banks and the crippled financial system, how is spending money computerizing health-care records going to help?)
Since last September, the government has made several diagnoses of the patient (aka, the U.S. economy) and tried several cures. None has totally worked.
Partly, it's because when a patient has a catastrophic event, there is no substitute for long periods of rest and rehabilitation.
We will get out of this.
We don't know when or exactly how, but it will happen. And when the recovery does occur, a new wave of unresolved economic debates will start, with one side saying it was because of government policy and the other side saying it was despite it.
Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates. He can be reached at: [email protected] .