Economic Data and the Bathtub

Recently, the weekly Magazine published by the New York Times (August 17th) featured a story titled "Dr. Doom." The article, by Stephen Mihm, focuses on the work of one of the most interesting - but until recently obscure - living economists: Nouriel Roubini.

Roubini is credited with foreseeing the, then-upcoming and now-current, economic crisis back in September 2006. The reaction to his inauspicious presentation from an audience of IMF economists was somewhat cold and incredulous. Mihm reports that as Roubini stepped down from the lectern after his talk, the moderator of the event gibed, "I think perhaps we will need a stiff drink after that."

Despite the initial take, Roubini proved to be right in his interpretation of the available economic data.

In 2006, the same data was accessible to the economic and financial community. So what was the more favorable condition or position that allowed Roubini to reach a different understanding and interpretation of the same texts?

It seems that his ability to marry rigorous mathematical models with the interpretation of historical political and economic institutions made indeed the difference. Mihm notices that Roubini's work was distinguished "not only by his conclusions but [in fact] also by his approach." By making extensive use of transnational comparisons and historical analogies, he employs a "subjective, nontechnical" paradigm.

Such paradigms allows him not to be trapped into modern economic theories and econometric models. These models typically rely, Mihm points out, "on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy."

Roubini compares his approach to that of Alan Greenspan, who once said to "pore over vaset quantities of technical economic data while sitting in the bathtuh, looking to sniffout where the economy was headed."