Several years back, when I had time to watch Oscar-nominated movies, I have a strong memory of watching the Big Short and enjoying its attempts to make economics (and specifically, the complex financial economics that went into the 2008 financial crisis) interesting. Managing to do so was no small feat! However, I did come away saddened at the simplifications that had to be made to make the movie entertaining. I worry that, in many ways, it led to the wrong lessons drawn from the great recession.
One of the movie's main implications were two-fold:
1) That the 2008 crisis was entirely unforeseen, because no financial analyst or economist foresaw the housing bubble. After all, much of the film is scene after scene of seemingly influential people saying “Housing is rock solid.”
2) That the primary driver of the crisis was about the creation of risky financial products (mortgage-backed securities) that were built on greed and speculation by bankers.
If we believe this to be true, the truth is that if you go back and survey the pre-crisis landscape of 2007 and survey contemporary economic experts about what we know now, what you see is a much more complex picture. There are many ways in which the story The Big Short is very wrong, starting with its portrait of widespread ignorance of the risk of a housing bubble:
In the mid-2000s, it was pretty common to see economic experts predicting a housing bubble that was primed to burst and that this would harm the economy. This prediction was the view of the most powerful economist in the country, Federal Reserve chair Ben Bernake, on record in 2006. The Federal Reserve was so confident about housing being in a bubble that the fed raised interest rates to try to calm housing speculation (and pop the bubble) by making mortgages more expensive
Many working in finance, including those trading risky housing-derivative assets, believed the housing bubble would burst but did not anticipate how much “systemic risk” was embedded in the new financial products. As it turned out, a downturn in a select few metro areas would cascade through the economy and turn into a financial panic. Mortgage back securities were supposed to be designed with a hedge against risk, where some mortgage defaults in some markets would not tank the whole financial product since others would stay afloat. As we now know, the failure to anticipate systemic risk created disaster when the crash did come.
Other traders believed that there was a housing bubble, and they were trading risk assets that would drop off in the case of a housing downturn. But many of these traders believed, just as GameStop traders did months ago, that they would be able to time the market so that when it dipped, they would not be holding the bag. The short-sellers were not unique in their belief in housing fundamentals: they were rare in having the discipline not to believe they could make a quick buck.
But there is also increased skepticism amongst some that credit and housing were the real problems in 2008. A newer school of thought, popularized by Kevin Erdmann and Scott Sumner, argues that the 2008 housing bubble was not a “bubble” in the way we think of bubbles. Instead, Erdmann believes that the housing boom was part of a rational response to the long-run undersupply of housing in exclusive coastal cities. To greatly simplify this view, the real problem was that specific housing markets were not building enough housing. People were making rational responses to this problem: building a lot of housing in other more “open” housing markets. LA residents could not build in LA, so they found new housing in Riverside or Phoenix instead. Many economic experts (including the Federal Reserve) were guilty of overlearning the lessons of the 1970s/80s: inflation and bubbles are bad. The Federal Reserve should take aggressive action to stop those bubbles. But, as history has shown, the housing surge may have been in response to structural economic changes, not cyclical bubbles.
If you believe Erdmann and Sumner’s view, in the end, the Fed’s actions to raise interest rates and pop the bubble were far more destructive to the economy than had they merely let the housing market continue without interference. Without intervention, we can foresee some housing speculators losing, but many mortgages would have stayed solvent if the interest rate had stayed low. Not all economists agree with this view, but I find it generally persuasive, knowing what we know now about the housing market in exclusionary cities and how that has endured and even gotten worse in the post-crisis world. If you want a fuller explanation of this view, you can read this paper, hear Kevin Erdmann explain in the video below:
My explanation here is very surface-level; I do not have space to weigh the merits of these different explanations thoroughly. But my point here is to illustrate that being an economic “expert” is very hard. You have to do three things simultaneously: diagnose what is happening in the economy, prescribe what should be done, and explain this all to the general public. It should not surprise us when errors are made in this process, and the general public needs to have some critical thinking abilities to flag and debate these errors.
To greatly simplify what is and was a very complex debate, to the degree there was a consensus among Economists, it seemed, from my novice eye, to have two cognitive errors, which unknowingly, contradicted each other:
Economists did not trust the market’s ability enough to avoid inflationary bubbles on its own, given the experience of the 1970s when inflation ran rampant. Thus they prescribed government action (through the fed) to curb inflation by raising interest rates before they probably needed to (especially now, given the last 12 years of minimal inflation)
Economists trusted the market in the financial sector too much when it came to complex financial transactions (like collateralized debt), not creating market failures when those assets proved to be riskier than expected.
As I have outlined before, we need to remember that all experts have trouble knowing the completeness of their understanding and expertise. They overlearn some historical lessons and under learn others. At any point in time, their knowledge of a given field will not be 100% correct. The economic profession proved to not be perfectly reliable in diagnosing what was happening in the mid-2000s. But this is not because economics is useless or bankrupt (as many have concluded). After all, there is much they did get right amid the crisis!
Ultimately, the bigger problem for the economics profession was its failure to message the general public. As an expert, you have to do the job of trying to understand what is happening; you have to be good at messaging and explaining what is happening to the public and what should be done. When it came to the fallout of the 2008 crisis, I think there was a widespread disconnect between the general public and economic experts when it came to why specific government actions should be taken. As a rule, people in the general public see government actions in primarily moralistic terms: we should help people who deserve help and not help those who do not deserve support. However, as a rule, economists do not suggest specific government actions because they think the sector in question deserves help or deserves punishment. Economists mainly think about decisions in consequentialist terms: what matters to them is the effects of this action on the economy as a whole?
The bank bailout was the most prominent example of this: No economist thought that the banks and investment firms that had made risky loans deserved help. But they generally believed that if we did not help the financial sector, the whole economy would tank, and the general public would suffer more. The calculation was a consequentialist one: if we do not bail out the banks, more people will suffer in the long run, even if common sense rule-based morality would seem to say that bailing out the banks is a very unfair action. But economists have a habit of assuming that everyone else will understand and agree with their consequentialist logic. Many people see the economy first and foremost through the lenses of “fairness.” Thus, Economists need to do more to separate their analysis from their prescription of what to do. Failing to do so meant the general public received a message that was not intended: our country’s elites think banks are more valuable than hard-working Americans.
Could this messaging problem have been fixed if economic experts had resisted the urge to be so normative in their messaging? I am not sure. But I call it the “show your work” principle: you need to make explicit where your analysis ends and your prescription for what is the “right” thing to do begins. Being more explicit and upfront about their thought process and moral assumptions allows others to engage with places where they might disagree, rather than simply telling them what to do. It trusts the general public to reason like adults.
I think allowing this space may have created more opportunity for post-2009 recovery actions in a way that would have been “fairer” to working people. Specifically, the Federal Reserve could have extended homeowners the same loan terms as the banks, allowing many to restructure their debt and stay in their homes. The failure to address economic fairness in the relief and recovery of the 2008 financial crisis is a big reason we have seen inequality rise in the last ten years. But more importantly, the failure to recognize how this messaging would go down is a big reason why we have seen the rise in nihilism over the past ten years in American politics. And I worry that the long-run effects of this messaging failure eroding trust have made creating good economic policy much harder in the long run.
I bring this up because I see strong parallels between the 2008 crisis and economists and the current debate over public health expertise in the wake of the ongoing COVID pandemic. After all, public health experts had had an arduous task through the pandemic: they had to diagnose what is going on, prescribe what to do about it, and explain and message those decisions to the general public. While the expertise of public health officials has been invaluable, just like economists in 2008, they have seemed to make specific, predictable errors in this process.
Zeynep Tufekci has been one of the most visionary writers throughout the COVID-19 pandemic, often a canary in the coal mine when the media was getting something important wrong. She was an early proponent of masks, the importance of ventilation, and the incredible potential of vaccines. She is not an epidemiologist but a sociologist who has studied “viral” internet movements and thus seems to reside at the right balance between being both “knowledgeable” and an “outsider,” which is key to making decisions under wicked and complex circumstances.
A few months back, she wrote an article in the Atlantic on how she believes that public health messaging in the USA has often backfired:
The past 12 months were incredibly challenging for almost everyone. Public-health officials were fighting a devastating pandemic and, at least in this country, an administration hell-bent on undermining them...Despite all these good intentions, much of the public-health messaging has been profoundly counterproductive. In five specific ways, the assumptions made by public officials, the choices made by traditional media, the way our digital public sphere operates, and communication patterns between academic communities and the public proved flawed.
I highly recommend reading the whole article for yourself. But Tufekci does a great job of identifying predictable patterns by which public health experts have, even while getting many things right, made repeated errors in specific directions:
They have too often focused on social distancing and restrictions as the one tool as a silver bullet to help slow the spread of the pandemic. Of course, social distancing is critical and does seem to be effective! But there are other effective harm reduction strategies: including masks, ventilation, and moving activities outsides. This has been especially true with vaccines, which have proved to be enormously effective at stopping transmission. Still, it took far too long to disseminate this message to the general public for fear of undermining messaging around social distancing.
Being too hesitant to constantly explain NEW and Better guidelines to the general public new guidelines as science improves. We have known for a long time that hand-washing, while still a generally good thing to do, has almost no importance for fighting COVID. There are virtually no documented cases of anyone getting COVID from a surface. But we are still sanitizing like it will save lives and telling the general public to wash their hands. Meanwhile, almost NO messaging has gone into the importance of ventilation and filtration, even though studies have increasingly shown that it is one of the most effective ways to make indoor gatherings safer (since the virus is prone to aerosolizing indoors in poorly ventilated rooms)
Public health messaging has often sharply moralized public health guidelines, shaming and scolding those who do not comp. This usually comes with a partisan political message rather than a more productive dialog. There are many reasons to think it would have been better to try to persuade people into compliance gently from the beginning before people calcified in opposition.
To be clear, public health experts are somehow “corrupted” or “useless” because they made mistakes, any more so than economists are because of mistakes made around the 2008 financial crisis. They are doing a demanding job and doing it (I believe) to the best of their ability! But like economists in 2008, we should not expect experts to be 100% right about everything amid a crisis. But there has to be some humility in recognizing the failures. While many experts have embraced a learning posture, others have resorted to criticism with gatekeeping and defensiveness (Trust the experts! Stay in your lane!).
This principle is maybe best illustrated by the fact that many epidemiological models, including ones lavishly funded by Bill Gates, tended to be very bad at predicting how COVID cases and deaths would grow over time. In the end, the best COVID modeler proved to be a 27-year-old data scientist named Youyang Gu, who proved so accurate that his model became the most trusted for most of 2020. The Bloomberg article on Gu quotes one data scientists who minced no words with regards to the performance of other models:
“His model was the only one that seemed sane,” says Jeremy Howard, a renowned data expert and research scientist at the University of San Francisco. “The other models were shown to be nonsense time and again, and yet there was no introspection from the people publishing the forecasts or the journalists reporting on them. Peoples’ lives were depending on these things, and Youyang was the one person actually looking at the data and doing it properly.”
But just making mistakes is not the full extent of the problem. As economists in the wake of 2008, I think there is a deeper problem here of experts who are not upfront with the foundational beliefs that undergird their domain. Many public health officials do not see their job primarily as merely analyzing and explaining the risks and trade-offs of various responses to the pandemic for the general public. Instead, many see their job as advocating for people to be as safe as possible. As Matt Yglesias points out, the CDC recommends that women forgo alcohol in pregnancy, not because there are good studies on how moderate amounts of alcohol can affect the health of babies, but because we know that:
1) Heavy drinking during pregnancy is bad for babies cognitive development
2) Alcohol is also bad for public health in general
Rather than tell women the more nuanced and truthful “one drink a month should be fine,” it is much simpler (a kind of “shortcut”) to tell people to drink less. Yes, telling women this is not exactly 100% accurate and inconveniences women during a stressful time in their life, but stretching the science does help achieve public health goals! Likewise, the CDC recommends that all people consume meat cooked “medium to well done” and never eat runny eggs since both of these create more risk for food poisoning. Yes, the risk is low, and this does eliminate some tasty meals, but again, it helps us achieve public health goals.
As I have written about before, in COVID times, there are good reasons to advocate for people to be as safe as possible. You do not bear all of the risks of your choices during a pandemic: what may be a low-risk activity for you may be a high-risk activity for your neighbor. Thus you externalize some of your risks onto society. Therefore it is essential to create incentives and messages for people to be less risk-taking, even if they will not face the consequences.
But this fails the “show your work” rule. Instead of allowing outsiders to see clearly what is clear-eyed cost-benefit analysis and what is simply a desire for fewer health risks, you fail to treat people like adults. People hate being manipulated and patronized. Amid a global pandemic, when your profession is in the news every day, these kinds of manipulations and simplifications are harder to sustain. People want experts to be straight with them: tell me where the significant risks are, what the more moderate risks are, and let me (or the public officials who represent me) decide how to balance risk with the necessity of other priorities in life. Yes, experts can and should layer on top of that messaging about how taking risks creates danger for all society, but you need to be very explicit and careful with this tact!
Growing up, I knew many overly sheltered children who made terrible life decisions when they finally leave their parent’s home because, after a while, they grew to resent their parent’s strict rules. Likewise, a significant amount of the population has tired of public health advocacy for an overly rigid approach to public health. It has instead tuned out all public health advice with disastrous consequences. Some public health officials have noticed this in real-time, like Scott Gotlieb, former head of the FDA:
But the same mistake appears to happen over and over. There is currently much fretting about what specific activities people who are vaccinated can and cannot do once they are fully vaccinated. For a long time, the public health guidelines have been quite cautious regarding what vaccinated people could do. There was fear that vaccines would not stop transmission, even though data from Israel showed a massive drop in virus spread as vaccines ramped up in early 2021. Data out of Gibraltar showed precipitous declines as vaccines were rolled out by early February:
There was also fear that variants were escaping the vaccine, even though there has been almost no hard evidence of variant escape on a large scale. In the last month and a half, the CDC has started to loosen up its guidelines but incrementally and slowly giving the impression to the vast majority of people that life after vaccination may not mean life back to normal.
This messaging has helped create a clear relationship between vaccine hesitancy and deciding not to follow other public health guidelines:
People who are not taking COVID seriously have thrown caution to the wind and have come to see vaccines as just another public health measure that is unnecessary and will not really help them return to normal life anyway. Meanwhile, people who have been vaccinated are worried about getting too bold and risk-taking, probably because they want to stay within the guidelines of the cautious public health experts.
This is a huge problem. Yes, COVID rates are declining rapidly through most of the countries with high vaccination rates:
This is good news! But we also have every reason to think that COVID will not be eradicated but will stay in our world at a low level for some time. The advocacy of the public health community towards safety has failed to effectively “sell” the vaccine as the miracle that it is (and, as I will talk about next week, even undermined the vaccine). But even worse, it has also contributed to a whole large swath of the county which seems to revel in doing precisely the opposite of the public health guidelines. This situation creates the risk in the future that not only will COVID continue to kill, but it will continue to mutate and keep alive the potential for a variant to escape our vaccines. This will not stay an overblown fear forever!
I hope this does not happen; just as I hope, the public health community changes course and changes its messaging to be more reasonable. But I worry that we are already too late.