Politics and the dismal science

“Economists are failing to express anything resembling consensus on the most basic questions of economic policy. ....

I had thought they would at least agree that raising trade barriers at a time like this must be a bad idea. Then I read Paul Krugman, Nobel laureate, Princeton professor, and New York Times columnist, explain that raising tariffs – though perhaps unwise for other reasons – "can make the world better off". .... What are his readers to make of this? Are all the economists who say otherwise just wrong? ....

Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to "magic". ....

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. ....

Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.”

Clive Crook, "Politics is damaging the credibility of economics", Financial Times (9 February 2009).

http://www.ft.com/cms/s/0/437694de-f602-11dd-a9ed-0000779fd2ac.html

Clive Crook confesses that he is not an impartial observer: "As a lapsed member of the guild – I had a spell as an economist in the British civil service – I have a lingering sentimental attachment."


Clive Crook is a senior editor of The Atlantic Monthly, a columnist for National Journal and a commentator for the Financial Times. He was formerly on the staff of The Economist. A graduate of Oxford and the London School of Economics, he has served as a consultant to the World Bank and worked as an official in the British Treasury.

I think it is worse than Crook says. Here Crook says that two eminent economists are confusing the public and policy makers about economic policy because they insist on jousting in public about the rough edges of what is a professional consensus -- protectionism is bad in trade and a fiscal stimulus is helpful in an economic downturn. The implication is that if either of these economists had the responsibility of designing policy they would follow the professional consensus and forget about the minor exceptions to the consensus that are so close to the hearts of editors of economic journals seeking to publish something new between the covers of their little read periodicals.

More important is the failure of that consensus, modified or not by the luminaries of the profession, to provide any real guidance as to what to do in the present circumstances. I wonder if anyone has noticed that nothing policy makers have done in the name of macroeconomic theory has actually helped one iota.

It is even worse than this. On the monetary side, we have gone through many iterations of the TARP in a concerted attempt to give away $700 billion and, despite the Treasury saying the world as we know it would end if Congress didn’t immediately approve every penny, only half the money has been used and more importantly not one thing in the banking sector has actually improved. Trillions of dollars in additional obligations have been assumed by the Fed and the Treasury and hundreds of billions of dollars have been injected into the system and still banks act as if they are broke and cannot lend. Rumors of the nationalization of banks, closures of banks, creation of new banks, packages of loan guarantees, purchases of stock in financial companies, new kinds of insurance for financial institutions, support for/closing down zombie banks, and now the suggestion of an “aggregator” bank to warehouse toxic assets while they await purchase by gamblers have all be put forward in just a few months. All these suggestions in the name of macroeconomic theory.

On the fiscal side, the stimulus package now being discussed in Congress bears little resemblance to any sensible “timely, targeted, and temporary” program, to use the words of the President’s key economic advisor, that theory suggests should underlie policy at this time. Although Congress appeals to macroeconomic theory for justification of what it is doing, in fact what it is doing has nothing to do with macroeconomics. Yet macroeconomists claim to support the package in the name of theory.

If discussions of macroeconomic policy both confuse policy making and are irrelevant to the actual policy making process, fights among macroeconomists are the least of its troubles. Simply stated, it has utterly lost its justification for even being part of the policy making process.

Thanks to Larry Willmore for the Tdj.