Discussing ERA on the FOMC

Finally, Bush appoints a person with the qualifications I find most important.

In nominating Ben S. Bernanke to succeed Alan Greenspan as Fed chairman, President Bush selected an economist with stellar credentials and a good reputation in Congress and on Wall Street who has won widespread plaudits since being named on Monday….

Mr. Bernanke is fond of using clear metaphors – like helicopters dropping cash from the sky – rather than Mr. Greenspan’s often abstruse prose. And as a Fed governor from 2002 until this past summer, he pushed his colleagues to give investors, businesses and households a better feel for where policy was headed.

This transparency could help him if he does halt the rate increases at his first meeting. Already, the markets seem to expect such a move. “It’s still the institution making these decisions,” Mr. Mishkin, the Columbia professor, said.

Perhaps the best way to establish transparency, Mr. Bernanke has written, is to set up an easily understandable process. It is in many ways the opposite of the image that Mr. Greenspan has helped cultivate, that of an oracle.

“He will probably work toward depersonalizing monetary policy,” Mr. Gertler said.

A useful analogy is to Bill James, the baseball writer whose books Mr. Bernanke has discussed with fellow economists. Mr. James’s work, which often argues for statistical analysis over intuition, “was always a topic of conversation,” Mr. Gertler said.

He remembers Mr. Bernanke’s being especially interested in finding statistics that forecast future performance. In the same vein, he has argued that central bankers should rely as much as possible on the enormous amounts of economic data now available and less on hunches.

“The hope eventually is to come up with a statistical formula that processes this information and gets the best forecast,” said Jean Boivin, a Columbia economist who has done research with Mr. Bernanke. “Once you do that, the question is how much is left over for judgment.”

It’s always good to have stat-head in charge. And David Leonhardt (who contributed to the above are article as well) notes, he’s concerned about those important questions.

Bernanke and Dwight M. Jaffee, a Princeton colleague, had a regular squash game, and they spent their walks to the campus gym talking about monetary policy and baseball, Jaffee said. Bernanke was particularly bothered by E.R.A., the main yardstick of pitching. If one pitcher leaves runners on base and another pitcher allows them to score, the runs are charged to the first pitcher.

Pitchers unlucky enough to be followed by ineffective relievers, as the Yankees’ Randy Johnson was in 2005, have unfairly high E.R.A.’s. Pitchers who are bailed out by their bullpen, as Roy Oswalt of the Astros often was this season, end up with artificially low E.R.A.’s.

A better system would divide blame, depending on the base the runners were on when a pitcher departed and the number of outs, Bernanke argued.

“He was always saying, ‘We ought to come up with a solution for this,’ ” Jaffee said.

Seriously, Brenanke is a very good choice, and I’m glad Bush got this one right. And I’m not surprised to hear Bernanke is a Bill James fan. The economic way of thinking and sabermetrics have a lot in common.

3 Responses “Discussing ERA on the FOMC”

  1. Peter says:

    It’s no coincidence that Michael Lewis, the ballyhooed author of Moneyball, has written several books on business/Wall Street.

    It’s odd that many baseball fans instinctively grasp statistical theory when it comes to baseball (park adjusted statistics, OPS, etc) but shy away from economics or the politics behind economics.

    I’m guilty of it myself. You wonder why people can apply their brains to a game but not to real life.

  2. Chris says:

    The trouble with this is that economists are invariably right only in hindsight. They are terrible at making accurate predictions about future economic events. The reason for this is that the economy is unimaginably complex. What usually happens is that some disaster or suprisingly positive event occurs and then after the fact the economists explain it. Let us hope that sabermetricians have better predictive capacity than the economists–although few would have predicted the White Sox would win it at the beginning of the year.

  3. JC says:

    The trouble with this is that economists are invariably right only in hindsight.

    You do realize that I am an economist, right? That’s quite a stick of dynamite you just dropped. I hope it was unintentional, because you didn’t make much of an argument to back it up. I believe you are mistaken about the discipline, working off a common misconception of what economists do and economic methods.

    That statement is false, particularly when the word “only” is included. Certainly, economists do sometimes make predictions that are false. And the macroeconomy is complex and difficult to predict. However, if the government decides to cut the money supply in half tomorrow, I think I can predict pretty accurately that nothing good will come of this.

    Economists are certainly not false more than any other human making predictions. And I have confidence in the predictions we do make more than in any other social science, which is why I was attracted to the discipline. Economists judge theory based on the accuracy of predictions (at least positivist economists do), which is why they often advance the development of predicting techniques as well as economic knowledge. If it were not for the empirical rigor and the scientific method pushed by economics, many fields outside traditional economics (such as political science and law) would remain in a stagnant pool of intellectual goo.