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Saturday, April 28th, 2018

Current events and academic economics

Photo source: Wikimedia Commons

I believe that academic economics should focus more on analyzing current events. I believe this is the main reason why economists did not foresee the 2008 financial crisis. That's not to say that academic economists ignore current events; there are some examples of great current event analysis in economic journals. But as a whole, I believe that current events is of secondary importance within academic economics.

If you examine the papers published in the most recent issue of the Quarterly Journal of Economics, you'll notice that most of the papers are focused on researching general theories about economic phenomena. Although these papers are relevant to current events, it seems as though their focus is not commentary and analysis of today's economy in 2018. Here is a list of the papers in the issue:

• Distributional National Accounts: Methods and Estimates for the United States (Piketty, Saez, Zucman)

• The Morale Effects of Pay Inequality (Breza, Kaur, Shamdasani)

• Human Capital and Development Account: New Evidence from Wage Gains at Migration (Hendricks, Schoellman)

• Nation Building Through Foreign Intervention: Evidence from Discontinuities in Military Strategies (Dell, Querubin)

• Discretion in Hiring (Hoffman, Kahn, Li)

• Transparency and Deliberation Within the FOMC: A Computational Linguistics Approach (Hansen, McMahon, Prat)

• Recommender Systems as Mechanisms for Social Learning (Che, Horner)

• Frontier Knowledge and Scientific Production: Evidence from the Collapse of International Science (Iaria, Schwarz, Waldinger)

• Double for Nothing? Experimental Evidence on an Unconditional Teacher Salary Increase in Indonesia (Ree, Muralidharan, Pradhan, Rogers)

• Social Mobility and Stability of Democracy: Reevaluating De Tocqueville (Acemoglu, Egorov, Sonin)

I believe issue this can also be seen in undergraduate education. First I want to say that my undergraduate economics education has been very useful to me and I learned a lot of great information. I had great teachers and the lectures were always interesting. But during the tests, analysis of present day economy was not the focus. I had only two 2-credit classes focused on current events (Economics of the Pacific Rim and Economics of the European Union). In order to know what was going on in the real world, I had to read The Economist and other publications outside of class.

I also believe this is the main reason why economists did not foresee the 2008 financial crisis. Before the financial crisis, there should have been academic economists devoted to analyzing the current affairs of exotic financial products in the financial system. These economists would have published papers maybe as early as 2005 to ring the alarm about the widespread fraud subprime mortgage securities. Although this type of work would have been useful, it was largely absent.

There was one person who did this type of research but he worked at a hedge fund. Michael Burry, the main character in The Big Short by Michael Lewis said,

"I was in a state of perpetual disbelief. I would have thought that someone would have recognized what was coming before June 2007. If it really took that June remit data to cause a sudden realization, well, it makes me wonder what a Wall Street analyst really does all day."

I believe if you replace the words 'Wall Street analyst' with 'academic economist' the quote would still be true.