Wouldn't it be nice if our business, economic and political leaders had the honor and integrity to rise above their workday pressures and made decisions for the common good? Exercising creative thinking and discretionary behavior could be the basis for wise decision making for their stakeholders.
CEOs across the country want to make sure the economy is growing robustly before they commit to new hiring. Yet, economists and federal government leaders are unable to provide reliable information regarding the direction of the economy. CEOs know that until consumer demand picks up, the economy won't lift-off and they won't be able to positively affect a lowering of the rate of unemployment.
Not too long ago, housing was the workhorse of the U.S. economy before the end of the real estate boom. In 2005, housing accounted for 6.1 percent of economic activity in the U.S. Last year, inflation-adjusted investment in new homes probably subtracted 0.17 percentage points from GDP, based on the average of 2010's first three quarters. Some economists have been assailed for having financial ties to the big banks that did so much to precipitate the financial crisis.
Economists, especially those who purport to understand the workings of the macroeconomy, have been kicked in the teeth during the past few years. Their intricate mathematical models largely failed to predict the 2008 financial crisis. And now they are divided about how to get out of the slump and worried that U.S. employment won't return to normal for years.
As macroeconomists grope for new ideas to reinvigorate a profession that has run into an intellectual cul-de-sac, they are looking back to the old masters. The wisdom that's been lost in economic theory is that uncertainty is both unavoidable and potent.
Errors in forecasting that lead to mismatches of savings and investment are crucial to theories of booms and busts. The modern macro "synthesis" tended to give uncertainty only a bit part. Economist L. Randall Wray of the University of Missouri at Kansas City argues that "most of mainstream macroeconomics is dead. It's a zombie. They don't know they're dead yet, but they're dead."
The gloomiest forecast about economics is that the profession's progress will occur only funeral by funeral, as people entrenched in outdated thinking pass from the scene.
Source: Bloomberg BusinessWeek, January 17, 2011