Economics is Easy; Comedy is Hard

About two weeks ago, Kartik Athreya, a researcher for the Federal Reserve Bank of Richmond, posted a diatribe about the difficulties in performing macroeconomic research and policy. Titled “Economics is Hard. Don’t Let Bloggers Tell You Otherwise,” it was an odd sort of academic rant.

Stung by myriad criticisms of the Fed, Athreya attempted to defend the priesthood of economics. “Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy,” he wrote.

Predictably, it provoked a firestorm of criticism from the blogosphere.

But Athreya’s circle the wagon’s defense raises a valid point — economics is too important to leave to just anyone.

Especially economists.

Towards that end, and to further illuminate the discussion our Federal Reserve researcher began, I suggest the following questions be used for all economic PhD candidates as part of their qualifying exams:

• True or False: Humans act to obtain the highest possible well-being for themselves given available information about opportunities and other constraints, both natural and institutional, on their ability to achieve predetermined goals.
-Explain your answer in real world practice, rather than theoretical, terms.

• Starting in 2001, the FOMC started a monetary accommodation that took rates to the lowest levels in over 40 years, and then kept them there for 3 years. Discuss the economic and market impact of these rates. Include commodities, residential real estate, and financial derivatives in your answer.

• Almost the entirety of the economics profession missed the 2008 recession, the worst in many decades, in advance. Why?

• Nobel Laureate Joseph Stiglitz wrote: “The Chicago School [of economics] bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing.” Discuss the intellectual errors of The Chicago School, from Milton Friedman forwards.
– For Booth School of Business PhD candidates ONLY: Why is the rest of the world wrong, and your belief system correct?

• Federal Reserve economists prefer to focus on “core inflation,” excluding food and energy. What is the basis of this exclusion? What impact does it have on Fed polciy? What might it mean for policymakers?

• Joan Robinson of Cambridge University: “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” What did she mean by this?

• Please identify the 3 non-science fields in the following list:

-Nonlinear Wave Dynamics
-Wimmins studies
-Quantum Physics
-Bioinformatics and Proteomics
-Economics
-General Relativity
-Design and Fabrication of Microelectromechanical Devices
-18th Century English Poetry
-String Theory

• In 2007, the Fed Chairman stated that subprime mortgages were contained. What was the analytical basis of this statement? Why was it wrong? What impact did it have?

• John Kenneth Galbraith: “We have 2 classes of forecasters: Those who don’t know… and those who don’t know they don’t know.” Please explain what Galbraith’s statement means in the context of Wall Street economists.

• In 1997, the Boskin Commission claimed that inflation was overstated by 1.1%. Changes to how CPI was calculated (Substitution, Hedonics) were made. How did these changes affect subsequent Federal Reserve Policy? What was their impact on actual — not BLS measured — inflation?

• A Federal Reserve researcher recently wrote: “I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.” How would you explain the Dunning–Kruger effect to this person? What does Dunning-Kruger mean in practical terms to the work of economists?

• Statistician George Box said, “Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful.” Discuss.

Final question:

• Why do you want a PhD in economics? What do you plan on doing for a living?

Please put your written answers here, including all relevant citations and sources.