One of the few pleasures of the dismal science is getting to watch the surprised faces of economists and economic analysts when things don't turn out as they expect. NAFTA didn't lead to a boom in Mexico, who could have imagined? The 1990s stock bubble burst and took the economy and those big budget surpluses with it, how could that be? The housing bubble exploded, sending house prices plummeting and the financial system into the abyss, who could have imagined?
We got a smaller item in this sequence in response to yesterday's weak job report. The 126,000 jobs reported for March was far below most analysts' expectations. This report, coupled with weak data in other areas, is now leading many to question the predictions of an economic boom. One especially visible questioner was Wonkblog's Matt O'Brien. He told readers:
"the depressing message is that things weren't as good as we thought they were [emphasis added]."
I am going to beat up on Matt for the use of the plural here. Some of us knew that things were not very good and we said that repeatedly. For example, here I am back in early February making fun of Matt for telling readers that the U.S. economy is booming. I don't mean to make this personal. Matt was pretty much in tune with most people writing about the economy at the time, he was just perhaps a bit more forthright in putting his assessment into print.
But the issue is not that Matt was wrong and I was right, the point is that dissenting voices routinely get written out of the discussion so that the consensus can treat an economic outcome they did not expect as an unpredictable event, like a fluke storm. So the failure of NAFTA to provide much benefit to Mexico (it had the slowest per capita GDP growth of any major country in Latin America in the next two decades) is treated as a surprising outcome, rather than something that had been accurately predicted by its critics. The collapse of the stock bubble and the disappearance of the widely touted Clinton budget surpluses is again a fluke event. And most importantly, the collapse of the housing bubble that sank the economy and wrecked the financial system is written as once in a hundred year event that no one could have seen coming.
This telling of the story is not accurate. The consensus assessment was wrong because it insisted on ignoring important evidence, and the people who were trying to call attention to this evidence were largely shut out of the debate at the time. (Hey, do you recall anyone having a good explanation for why house prices were 70 percent above trend levels in 2006 even when rents were pretty much in line with long-term trends?)
When events prove the experts wrong, the rewriting of history to disappear the critics has the effect of immunizing the experts from accountability. There should have been a lot of economists fired at places like the Fed, the I.M.F., the Congressional Budget Office and elsewhere for failing to see the housing bubble and the consequences of its collapse. This was their job and they messed up as much they possibly could.
There is an extensive economics literature on the importance of firing as disciplinary device. If we can't fire the waitress who messes up the orders, then she has no incentive to keep her customers' orders straight. If we can't fire the custodian who doesn't clean the toilets, then he has no incentive to keep the toilets clean. If we don't fire the economists who completely mess up in understanding the economy, what incentive do economists have to actually understand the economy, as oppose to just repeat whatever everyone else is saying?
If there is no disciplining of those who get it wrong along with everyone else, the obvious incentive is for economists and economic reporters to just repeat the consensus. This is not a formula designed to get us a good understanding of the economy or good economic policy.
Anyhow, enough of my tirade. The basic story on the economy is that it was never as good as boomsayers proclaimed. Yesterday's weak job numbers were depressed by the weather. The economy will continue to grow (the second and third quarter of this year will look good as a bounce back from a weather weakened first quarter), but we are still far from making up the ground lost in the downturn and we will not close the gap with growth that is just equal to the trend rate.
Note: Typo corrected, thanks Manuel.