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Friday, September 16, 2005

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The subfield split on the dollar

Brad DeLong has a very good post up detailing the split among economists at a Jackson Hole conference (poor Brad) about what will happen when the dollar falls in value:

My conversations quickly exposed a deep fault among the conference attendees. Those who analyzed or forecast the U.S. domestic macroeconomy agreed that a steep decline in the value of the dollar sometime in the next five years was overwhelmingly likely, but by and large they did not think that such a decline would pose a big problem for the U.S. economy. (They agreed that it might well pose a very big problem for some of America's trading partners.) By contrast, those who analyzed or forecast the international economy as a whole were typically terrified by the prospect of a steep (30% or more, perhaps much more) decline in the value of the dollar: they thought a severe U.S. recession was a definite possibility, and that the situation would require exceptionally skillful handling to keep from becoming a serious economic problem....

Martin Feldstein said something very smart just after we had both taken off our shoes at Jackson Hole airport. He said that the domestic-side economists were keying off the past experience of the U.S. after 1985 and of Britain after 1982, and so were saying "no big deal"; while the international finance economists were keying off of the experiences of developing countries that had run large current-account deficits--Mexico 1994, East Asia 1997, Argentina 2001. Each side had its own preferred models that functioned very well at explaining the past historical cases that they focused on. But there was no way right now of settling, empirically, whether a model built to explain the U.S. in 1985 or Korea in 1998 was more applicable to the U.S. in 2006--you had to make a bet, either that continuities in U.S. economic structure were important, or that financial globalization was important, in choosing your model and your terms of analysis.

It was very interesting. And very disturbing. Brilliant economists, thinking hard, unable to reach even the beginnings of analytical agreement about how to model the distribution of possible futures.

Read the whole thing.

posted by Dan on 09.16.05 at 11:57 AM

Comments:

Because the problems go into how large numbers of people (many grouped into institutions) would react to extreme events. This isn't minor shifts in a supply/demand curve, it's things which would radically alter the value of investments and the terms of trade throughout the world.

posted by: Barry on 09.16.05 at 11:57 AM [permalink]

Wasn't it Harry Truman who wished for a one-armed economist so he didn't have to hear "But on the other hand" anymore? The fact that people that smart can't agree on the best model to predict the future doesn't give me a lot of confidence, given the government (both parties) by and large falls short of demonstrating overwhelming intelligence. Perhaps the devastation of Katrina and its revelation of the fragility of our social structure carries lessons for the world economy as well. We're not nearly as strong and stable as we'd like to think we are.

posted by: Bob on 09.16.05 at 11:57 AM [permalink]

Perhaps it is based a bit on the tendency of all humans, even very smart and accomplished ones, to avert their eyes from dysfunction and impending failure within organizational/social structures of which they are a part.

I was once in the sad position of watching a family fall apart as the parent slowly succumbed to an illness that was socially unacceptable (at that time) but which had an inevitable outcome. Seeing the children (ranging between 7 and 15 years old) working as hard as they could to support the parent and maintain some sense of normalcy in their lives, while the extended family and community averted their eyes, was horrifying. But it was amazing how well they were able to do that right up until the last few months when the final stages occured and the inevitable outcome ensused.

Personally, I believe that is where the US economy stands at the moment: no adults in charge, most citizens averting their eyes (not excluding academics), and a few essentially powerless people trying to bail out the boat with baby spoons.

Cranky

posted by: Cranky Observer on 09.16.05 at 11:57 AM [permalink]

Complete this for 40 points:
Social science is to science as (blank) is to (blank).

posted by: clarice on 09.16.05 at 11:57 AM [permalink]

The only thing I truly remember from college is this: "If you laid end-to-end all the economists in the world, you still wouldn't reach a conclusion."

posted by: rastajenk on 09.16.05 at 11:57 AM [permalink]

Economics should be a branch of psychology- what they're trying to do is predict human behavior given certain stimuli, yes?

With that in mind, my picks are Astrology and Astronomy.

posted by: rosignol on 09.16.05 at 11:57 AM [permalink]

It all depends on how quickly it happens.

The US dollar has already declined dramatically.

For example, relative to the Canadian Dollar (Canada was until last month the USA's largest trading partner), the dollar has declined from 1.60 USD/CAD in Jan 2002 to 1.17 USD/CAD in Sept 2005. That's a decline of 27%.

Has it caused catastrophe? I didn't think so.

posted by: M1A1 on 09.16.05 at 11:57 AM [permalink]