A call to collect better data in order to predict economic crises

Economist Robert Shiller says that we would be better able to predict economic crises if we only had better data:

Eventually, these advances led to quantitative macroeconomic models with substantial predictive power — and to a better understanding of the economy’s instabilities. It is likely that the “great moderation,” the relative stability of the economy in the years before the recent crisis, owes something to better public policy informed by that data.

Since then, however, there hasn’t been a major revolution in data collection. Notably, the Flow of Funds Accounts have become less valuable. Over the last few decades, financial institutions have taken on systemic risks, using leverage and derivative instruments that don’t show up in these reports.

Some financial economists have begun to suggest the kinds of measurements of leverage and liquidity that should be collected. We need another measurement revolution like that of G.D.P. or flow-of-funds accounting. For example, Markus Brunnermeier of Princeton, Gary Gorton of Yale and Arvind Krishnamurthy of Northwestern are developing what they call “risk topography.” They explain how modern financial theory can guide the collection of new data to provide revealing views of potentially big economic problems.

Even if more data was collected, it would still require interpretation. If we had the right data before the ongoing current economic crisis, I wonder how confident Shiller would be that we would have made the right predictions (50%? 70% 95%?). From the public narrative that has developed, it looks like there was enough evidence that the mortgage industry was doing some interesting things but few people were looking at the data or putting the story together.

And for the future, do we even know what data we might need to be looking at in order to figure out what might go wrong next?

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