It’s Time for Economists to Admit What They Don’t Understand

The disappointing jobs numbers today, including an actual increase in the unemployment rate, should serve as the wake-up call to American policy makers and the media that mainstream macroeconomists have failed to understand what is happening in the U.S. economy. We have been in a “recovery” now for two full years, as of June, and the economists have kept promising that we were going to have a return to the status quo ante. They argued about whether it would be a V shaped recovery or a U shaped recovery. But they always insisted that we were on the verge of a recovery in the business cycle. Housing would recover, retail spending would bounce back and unemployment would decline to a “normal” rate.

But it’s not happening. We are facing more than a routine recession and recovery. The business cycle theory, which worked in previous situations, does not work in this one. We face deep structural problems. Much of the hot money that coursed through our system, first in the dot-com speculative bubble and then in the housing bubble, is gone. Our bubble has burst, and trillions of dollars are in the hands of foreign governments or sovereign wealth funds. The withdrawal of easy credit has exposed deep structural challenges in the U.S. economy, namely the need to respond to competitive challenges, mostly from East Asia, and to begin easing our dependence on imported petroleum. We need a national strategy to unlock our innovation to create new industries on U.S. soil while easing our energy addiction through lithium ion batteries, solar and wind power, and other promising technologies.

But the economists do not know how to change the American economy—to create a smarter brand of American capitalism–so that we can adapt to the new realities. They have a static model that goes up, then goes down, and then goes back up. That’s why we don’t hear economists talking about “competitiveness,” a critical concept. Their economic models also too U.S.-oriented–they don’t understand how dependent we have become on global supply chains of all sorts, as recent events in the Mideast and Japan have demonstrated.

It’s time to acknowledge that simply waiting for the economy to “recover” is not going to work.  We face a depression if we don’t understand the true nature of our ailment, and if we don’t adopt conscious strategies at the federal, state and regional levels to create industries and jobs and wealth.

The economics profession does not understand how the different participants in innovation ecosystems work together to encourage the flow of ideas from universities and research institutes into the private sector. The process requires angel investors and venture capitalists. It takes incubators and mentoring. Large companies have a key role to play in nurturing smaller companies. In my book, I did nine case studies of how regions in the United States have organized themselves to create wealth, relying on crucial inputs from the federal government.

But the economics profession does not understand what happens at the microeconomic level, which is where the real work of economic development takes place.

That’s why they insist on looking for silver bullet solutions at the macro level. But it’s likely that the federal government has exhausted its macroeconomic solutions. Massive amounts of federal stimulus–hundreds of billions of dollars–have not put a bottom in the housing market, nor lowered the unemployment rate. Much of the money has been taken offshore to markets where investors expect faster rates of growth.

It’s time to allow fresh ideas into the debate about the future of the American economy. And they won’t be coming from macroeconomists.

One Response to "It’s Time for Economists to Admit What They Don’t Understand"

  1. JPBulkoMBA   June 7, 2011 at 6:18 am

    Here's a fresh idea: Launch an entrepreneurial blitzkrieg fueled by the financial power of Wall Street to create lots of jobs on Main Street! This will ramp up employment quickly and put money directly into the hands of the people who need it now: the consumers (whose spending represents 70 percent of GDP). This enormous financial turbo-boost to the economy will reinvigorate economic activity and quickly return the eight million jobs lost during the Great Recession. How do we make this happen? Read my proposal:

    Joseph Patrick Bulko, MBA