Imagine if you had nine of the most skilled doctors in the country examining a patient, and you had such a range of views that one doctor demanded emergency surgery and an immediate series of organ transplants, and at the other end another doctor insisted that the patient is in such robust health that he must be discharged immediately and return his wheelchair and medicines on the way out. You might not have much faith in the skill of those doctors. Now I’m sure there are disagreements in the medical profession about the best course of treatment for illnesses, but when it comes to economics it’s the norm, rather than the exception. In the UK’s Monetary Policy Committee you have Posen at one extreme, asking for more emergency QE, and at the other end Sentance, wanting rate hikes. Isn’t it incredible that the science of economics (the dismal science) is so, well, useless?
At the same time as we don’t know whether to print money or restrict it, we have no real understanding of whether fiscal stimulus in the face of weak demand is the priority, or whether it is more important to get public and private debt burdens down. If you read Paul Krugman’s excellent blog you’d believe that another massive stimulus package is imperative. Yet George Osborne and many on the right think that austerity is the answer to getting the western economies back to growth in the medium term. Why don’t we know? I think it’s important to acknowledge how limited the data set that economists have to work with actually is. “Modern” capitalism is barely a couple of hundred years old, and a truly globalised free trade economy perhaps less than two decades old. Our data set for QE pretty much only includes Weimar Germany, Japan and Zimbabwe; our understanding of the creation of massive currency unions is almost entirely theoretical; there’s only been one Great Depression – one data point on which to base our models and respond to our current predicament. Let’s be frank and upfront – economics is about forecasting the behaviour of irrational crowds in situations we’ve rarely, or never seen before (yet many neo-classical economic models make rationality a key assumption!). We’re bound to get it wrong.
So for what it’s worth – and given the grief I got for posting the Tea Party’s right wing views on Quantitative Easing earlier this year, here’s the left leaning False Economy website, which argues that government spending cuts are the wrong thing for the UK’s current predicament. In particular this video by Professor Mark Blyth of Brown University is worth a watch – I hadn’t heard of the concept of the Fallacy of Composition before. What might be right and appropriate for an individual economic agent might be terribly wrong for the collection of economic agents. For example it might be right for the UK to try to reduce its debt, but to do so at the same time as every nation is doing so could be disastrous.
And whilst we are on the subject of the left wing – why on earth doesn’t the US have one? It is staggering that the bottom 40% of workers in the US economy have not had a real wage increase since – wait for it – 1979. Yet real US GDP is up by over 125% over that period, and the profits share of GDP is exceptionally high by historical standards. The controlling power of the myth of the American Dream is amazing.
So that’s it for 2010. My guess is that 2011 will see more of the same, with sovereign issues continuing to dominate the headlines (and Spain’s huge Q1/Q2 debt refinancing needs will be the next big test for the Eurozone). We’ll post our thoughts on these and other issues of the day on this website (like – will the loss of output caused by the UK’s Royal Wedding send the economy back into recession?). We might even make it our New Year’s Resolution to learn how to Twitter (tweet?). Happy New Year.