Efficient Market Hypothesis and Economic Punditry

OVER the past few weeks, I've been reflecting on my field, and asking myself the question that every economically literate person tortures themselves with:
But is it efficient?
For those of you who have no background in Economics ,let me briefly explain what I am talking about. According to the “efficient market hypothesis” (EMH), financial markets incorporate and reflect information quickly enough that investors cannot consistently outperform the market (unless they have information not known to the market, which may raise different issues under insider trading laws). Numerous academic studies support this conclusion, particularly showing that actively managed mutual funds do not outperform the market (after accounting for expenses) in any consistent way. Accordingly, a corollary of EMH is that investors are generally better off investing in vehicles that try to replicate a broad market (such as index funds) rather than trying to use individual judgment in trying to outperform the market.

Now,a similar approach may be advisable in the field of economic punditry. Let’s presuppose that the two main goals of any aspiring economic pundit are to be (a) correct and (b) quoted. (I will leave it as an excercise for the reader to guess which one is the primary goal, which one the secondary.) It seems that a pundit who changes his or her opinions as reactions to economic events runs the same risk as an investor trying to keep up with the market: unlikely to “outperform” the market of economic pundits. The best way to ensure being correct at least some of the time may be to simply always follow a consistent approach in economic commentary. Given that the business cycle has not yet been repealed, either consistent optimism or pessimism will be correct at least some of the time. Once the commentary matches up with the business cycle, the pundit’s reputation should be made – at least enough to ensure a permanent placement on journalists’ lists of people to call for a quote to support or balance a story.
While this method should equally apply to consistent optimistic or pessimistic commentary, the competition is probably fiercer on the optimistic side (cf. the mass of stock-pushers on CNBC at any given time). A strategy of consistent pessimism is thus probably the most efficient way to achieve success in the field of economic punditry.* (But do not assess the value of this strategy based on the dismal economic news of recent weeks.)


*The best example of this strategy is probably Henry Kaufman, former senior economist at Salomon Brothers whose consistent pessimism throughout the 1970s was regularly borne out by events, thus earning him the nickname “Dr. Doom” (together with his equally pessimistic counterpart at First Boston, Albert Wojnilower, who was dubbed “Dr. Gloom”) and a permanent designation as a source of pessimistic quotes whenever one was needed to balance out a story, notwithstanding the fact that Mr. Kaufman’s pessimism was rarely borne out by events for almost two decades thereafter. More recently, Stephen Roach of Morgan Stanley rarely had a good word to say about the economy throughout the expansion of the late 1990s and the inflation of the technology bubble, and he generally has not become more optimistic since the bursting of that bubble. The heir to Messrs. Kaufman and Roach for this economic cycle may be Nouriel Roubini, whose commentary seems carefully calibrated to avoid any hint that economic disaster may be avoidable.