We just can’t seem to get it right. With continuing weak employment and slow economic growth, the economic profession is again under attack. The economists at the Federal Reserve, the President’s Council of Economic Advisors, and many other forecasting groups predicted three years ago the labor market would be back to normal, with the economy operating at full potential.
So not only did most economists fail to predict the depths of the recession, but we also can’t seem to explain why things remain so bad. Such forecasting errors led the publisher of Business Week in April 2009 to ask on its cover, “What Good Are Economists Anyway?” More recently, Forbes columnist Louis Woodhill wrote that America “doesn’t need economists.”
Economists are good at explaining behavior after it occurs, but not necessarily at predicting behavior. Economics is a social science, just like psychology, sociology and history.
Unlike these other human-study disciplines, we are too often asked to make predictions. Since we can't study human behavior in a vacuum, economists will never have the predictive accuracy of physicists or other natural scientists.
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Many policymakers have become so concerned with the weaknesses of economic forecasting that they want to reduce the power of perhaps the most prominent economists — the Board of Governors of the Federal Reserve. Earlier this year, Congressman Ted Poe of Texas introduced H.R. 1576, the “Dollar Bill Act of 2013.” The objective here is to take monetary policy away from the Fed.
However, H.R. 1576 will not end monetary policy; it will simply transfer monetary policy from the Fed to Congress. As proposed, this new law gives the federal government power to affect the money supply through a number of channels.
First, H.R. 1576 requires the government to set the value of the U.S. dollar based on the price of gold on the exchange operated by the Commodities Exchange, Inc. of the New York Mercantile Exchange, Inc. Since the COMEX operates in a highly regulated market the prices established there are not freely determined. That is, the exchange is not a perfectly competitive market.
There are many rules guiding participation at the COMEX and other commodity trading markets. These rules are written by the federal agencies governed by Congress. When politicians don’t like the current price of gold and the effect it is having on the money supply, they can simply change the rules. Monetary policy or the value of the dollar can be manipulated by policymakers whenever the current price is not to their liking.
Second, H.R. 1576 doesn’t prevent the federal government from manipulating the supply of gold. Again, when politicians don’t like the current price of gold they can simply change the rules related to gold mining (environmental regulations, workplace rules, etc.) or restrict the importation of gold from other countries.
H.R. 1576 looks like politics as usual in Washington.
Why COMEX? Did the operators of this one gold trading market help write the proposed law? H.R. 1576 also has a clause that entitles “all entities that depreciate capital assets for tax purposes to 100 percent expensing of all capital investment for tax purposes in the year that the investment is made.” Why is this in here? Expensing capital investments may be good fiscal policy, but it has nothing to do with monetary policy or the value of the dollar.
Rather than make more laws and write new rules that will undoubtedly have unintended consequences, politicians should take existing laws off the books. In the case of monetary policy, they can simply remove existing tender laws and let the Fed compete with other banks to sell sound money.
The one thing economists have gotten right is the power of competition. If politicians don’t like what economists are doing at the Fed, let them face more competition.