Robert Shiller has an interesting discussion of how Alan Greenspan and almost the whole economics profession managed to overlook the $8 trillion housing bubble. Shiller attributed the failure in large part to "groupthink," the fact that no one wants to be standing out from the consensus within the group. According to Shiller, this sort of social pressure forced many of those who had concerns about the dangers of a bubble to tone down their concerns or to just keep them to themselves. While there is undoubtedly some truth to this assessment, it only presents part of the picture. Challenging the consensus by raising concerns about the housing bubble would have posed serious risks to the careers of those within institutions like the Fed or in the economics profession more generally. On the other hand, completely missing the largest housing bubble in the history of the world carries no consequences for those whose job it was to recognize such risks to the economy. In other words, the problem is that the personal risks were entirely asymmetric. Raising concerns about the bubble could jeopardize one's career, while ignoring the bubble carried no such risk. Under such circumstances, economists would expect that economists would opt to ignore the bubble. The remedy that economists would recommend for other workers is to fire those who failed at their job. This would make the risks more symmetric. That way, in the future economists would have incentive to seriously consider arguments about financial bubbles and other dangers to the economy and not just unquestioningly accept the views of their bosses. Unfortunately, it is unlikely that any economists in government, business, or academia will suffer any serious career consequences for failing to have done their job and warned of the bubble. Economists have enough political power so that they are not held accountable for their performance in the same way as dishwashers or custodians.
--Dean Baker
