Archive for April 21st, 2009

From TIME:

In the past year, a number of top financial professionals have decided to swap toxic assets and big acquisitions for academia.


Frank Yeary, Citigroup’s former head of mergers and acquisitions, left the bank last summer to become a vice chancellor at the University of California, Berkeley. Apparently, Yeary’s boss at the time was a little jealous. A month later, Citi’s head of investment banking, Michael Klein, left for Princeton University. Harvard has nabbed a top Wall Streeter as well: Edward Frost left the job of Goldman Sachs’ head of investment management to join that school as executive vice president.

The money quote (no pun intended):

“You get a tiny office, none of your colleagues talk to you for a while, and you have to figure out what to say to students for 36 hours a semester,” says Roy Smith, who left Goldman 21 years ago to become a professor at New York University. “It’s hard work for little pay.”

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Via Mark Thoma, this interview with behavioural economist Daniel Kahneman talks, among other things, about the failure of models:

“In the last half year, the models simply didn’t work. So the question arises: Why do people use models? I liken what is happening now to a system that forecasts the weather, and does so very well. People know when to take an umbrella when they leave the house, or when it will snow. Except what? The system can’t predict hurricanes. Do we use the system anyway, or throw it out? It turns out they’ll use it.”

On prediction:

“The problem is there were other economists who predicted this crisis, like Nouriel Roubini, but he also predicted some crises that never came to be.”

“Ten out of three is a pretty good record, relatively. But I conclude from the fact that only five people predicted the current crisis that it was impossible to predict it. In hindsight, it all seems obvious: Everyone seemed to be blind, only these five appeared to be smart. But there were a lot of smart people who looked at the situation and knew all the facts, and they did not predict the crisis.”

When asked why people didn’t simply use the right economic models, Kahneman, drawing on an earlier metaphor, said,

“Look, it’s possible that there simply is no map of the Alps, that there is nothing that can predict hurricanes.”

That’s not an admission you hear every day.

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Yesterday, via Mark Thoma, I saw that the New York Times has an 18 question economics quiz, based on questions from the AP Economics Test. I excitedly went there to see what loaded questions and faulty premises pervaded it. Sadly, I found most of it to be pretty vanilla- in the 18 questions, I didn”t really come across anything that was controversial or that would be called into question by the current crisis (look for yourself and see if you come to the same conclusion).

Now, I see that Catherine Rampell, who posts for Economix, the NYT econ blog, has a post on this same quiz. Rampell writes,

I’ve heard from some high school economics teachers, though, that their duties have gotten inordinately harder over the last six months because government actions have deviated so far from what the College Board would recognize as correct.

For example, here’s one sample question:

44. Policy makers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions?
a. sell bonds…/…reduce taxes
b. sell bonds…/…raise taxes
c. no change…/…raise taxes
d. buy bonds…/…reduce spending
e. buy bonds…/…no change

The correct answer is supposed to be ‘E’: Policy makers “would most likely recommend” no change in fiscal policy, either in spending or taxation. But that answer does not even remotely resemble what policy makers have actually done in response to the current crisis (or, for that matter, in response to previous recessions).

Now that’s interesting. Note that increase government spending is not even an option for fiscal policy.

At what point do the neoclassical answers to these questions become so out of touch with reality that even high school economics teachers will have to abandon it? I’m not saying AP economics should be so rigorous as to question all the assumptions of neoclassical economics and do reality checks. At the same time, however, undergrads are supposed to be getting the same stuff in their principles courses.

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