Host Russ Roberts:
So, one of the obviously key issues facing economists today, and policy-makers, is the labor market. It's not doing very well. It has not rebounded after this last recession the way I think a lot of people expected it to, would have predicted it to. And so people naturally look for explanations. There were numerous explanations, based on various ways of looking at the world. And some of those are formal models, the kind we're talking about. Some of them are informal, really--people try to jazz them up and make them formal with some math. But basically, one set of views says there's a lot of uncertainty and people are having trouble making decisions. A second view says, well, we've distorted the labor market through a set of policies that we might like, but one of the implications of that is that, because of the high marginal tax rates that we've imposed on workers and on firms that hire them, we've made it harder for the labor market to expand the way it normally would. A third argument says, Well, the real problem is lack of aggregate demand; we should have spent more as a government, should have borrowed more; we shouldn't have worried about this or that, etc. And each side is totally capable of providing evidence, which seems to confirm the underlying assumptions of the model. And I would argue, even though I'm very sympathetic to one set of some of those views and very unsympathetic to others--what's the basis for my sympathy or unsympathy? Where is the science in any of that other than cherry picking both assumptions and empirical evidence?
Russ's statement conjures up a few thoughts: That the labor market is a key issue for economists and policy-makers, as if economists and policy-makers are equipped to provide the solutions (that would be popular opinion---clearly not Russ's). That a lot of people, noted economists in fact, indeed predicted that the labor market would respond markedly to all the fiscal and monetary stimulus. That cherry picking is rife among today's mainstream economists. That the labor "market"---left to its own devices---is entirely capable of healing itself: However, alas, market devices (such as the freedom of employers and employees to negotiate the terms of their engagements) are in short supply for the labor market.
On Janet Yellen and the general conceit of the economics profession:
It's not so much that, well, she has to do something and she has to use the best available evidence. It's: The sociological tendency of our profession to endow what we do with more scientific merit than I think it deserves. So, it's not so much that, 'Well, of course she's got to make a decision and she does the best she can.' But to pretend it's somewhat scientific--which I think she has to do, she tends to do, she has the incentive to do--is the problem. Because it gives it a grandeur it doesn't deserve.
Janet Yellen succeeded the gentleman (Bernanke) who some believe saved us from the next great depression, who succeeded the gentleman referred to as "the maestro" (although Greenspan's legacy has been marred in some circles by the credit bubble of the last decade). My the pressure to... to... um... well... yeah... create jobs and wage increases---while containing inflation---and keeping financial markets afloat. She has her "labor market dashboard", which consists of nine data points that presumably tell her how much slack remains in the labor market. It's up to her, and her team of course, to somehow move those needles to their pre-recession zones, while keeping a watchful eye on the PCE deflator (the Fed's preferred measure of inflation).
But the problem is that when we're talking about the economy, in terms of how to control, or even influence, it, we're talking about the ultimate enigma. We can model centuries worth of historical data, and yet remain virtually clueless as to how today's actors and elements will respond to the schemes of academics whose reasoning comes from the study of yesteryear. Better to be humble. Better to know that we cannot know how to bend the economy to "our" liking. Better to leave the allocation of resources to those who have direct skin in the game. Only in a competitive marketplace, unimpeded by the diktats of politicians and their henchmen, can resources flow to their most productive use...