Thursday, August 02, 2012

Which economists are (and are not) worth listening to about the current crisis? (Jonathan Portes)

Below is a valuable guide by Jonathan Portes, Director of the National Institute of Economic and Social Research in Britain and chief economist at the UK Cabinet Office from 2008-2011, who has a blog called Not the Treasury View.  For those of you who don't read Keynes, "The Treasury View" was an exasperated shorthand phrase that Keynes used to refer, as Portes explains, "to the position taken by Treasury officials during the Great Depression that fiscal policy has no effect on the total amount of economic activity." Thus, according to then-prevailing economic orthodoxy, deficit spending by governments in response to an economic crash couldn't possibly stimulate the economy and reduce unemployment. Sounds quaint, doesn't it?  Alas, not quite.

Up until 2009, I would have guessed that Keynes's basic insights on these matters—not all of his views in every detail, but his basic insights and their most crucial implications, including the need for counter-cyclical fiscal policy in response to a severe economic downturn—had been largely recognized and accepted by serious analysts and policy-makers. Apparently not. But everything that has happened since the beginnings of the economic crash in 2007-2008 has confirmed that, on those basic questions of how one should and shouldn't respond to a severe recession, Keynes was right, and those who adhered to recycled versions of pre-Keynesian economic dogmas (or who came to similar conclusions on the basis of simple economic illiteracy or pure partisan demagoguery) have been proved wrong.  (For some elaboration, see here & here & here.) Not everyone realizes this, and many people try to pretend otherwise, so this point is worth emphasizing.

Of course, that still leaves a lot of questions open regarding precisely how we should understand and explain the current economic crisis and what we can and should do about it.  And the answers to the practical questions will be have to be different for different countries—the US, for example, has considerably more room for maneuver than, say, Greece or Spain or Ireland.  But in order to have intelligent and constructive debates about these questions, a useful first step is to sort out those analysts and perspectives that deserve to be taken seriously from those that don't. Or, to put the matter a little less categorically, the record has confirmed that some analysts, arguments, and analytical perspectives ought to be taken more seriously than others.  Which ones?

In a recent post (below), Portes tries to provide a guide for the perplexed, especially those among the perplexed who are not professional economists.
That is,  when economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?

This question was prompted by a recent exchange I had with Ed Vaizey and Simon Hughes on the BBC's Daily Politics: I pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite".

This is a fair question.
Before naming specific names, Portes does readers the favor of spelling out his criteria.
My answer to it is that policymakers and the public should listen to economists who fulfill two criteria: first, they have made empirically testable predictions (conditional or unconditional - see Krugman here) that have proved, by and large, to be broadly consistent with the data; and second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive.  In other words, getting it right alone is not enough; it should be possible to show your workings - to explain why you got it right. Otherwise, your predictions may be interesting, but they tell you little about how to formulate policy.
What follows is a very useful guide.  Among those who make Portes's A-list, I suspect that non-economists, especially Americans, are most likely to recognize the names of Paul Krugman, Brad DeLong, and Martin Wolf.  (And all three write clear, vigorous, and intellectually substantial arguments addressed to a general educated public, so if you don't read them regularly and consider those arguments carefully, why not?)  On the other hand, when it comes to the positions and perspectives that Portes thinks have failed most thoroughly and harmfully, he is too polite to name names, but anyone who has been following the public debates since 2008 can fill in at least some of the blanks.  Otherwise, I'm more familiar with some of the economists discussed by Portes than others (and I'm not qualified to judge whether or not the analytical reservations that Portes expresses about Nouriel Roubini and Kenneth Rogoff are entirely appropriate).  But overall, Portes's assessments strike me as well grounded and persuasive.

And as Portes emphasizes, taking better or worse advice on how to respond to the ongoing economic crisis has serious consequences.
Most of those mentioned above were on the list of economists I read and, whenever possible, consulted when I was still a civil servant involved in policy advice on these issues (2008-11).    [....]  I don't think there's any doubt that if policymakers, both in the UK and elsewhere (especially in the eurozone) had, during the intervening period, listened to these people rather than their own economic advisers, the state of the UK and world economies would be significantly better than it is now.
Sounds plausible to me. But the crisis is far from over, and many of the policies being followed on both sides of the Atlantic are still making things worse rather than better, so this remains a timely and useful guide.

—Jeff Weintraub

==============================  
Jonathan Portes (Not the Treasury View)
 Monday, July 30, 2012
Which (macro)-economists are worth listening to?

This post relates to the ongoing blog debate on "the state of macroeconomics", which I contributed to here, and which has drawn in a whole host of economics bloggers who know far more about modern macroeconomic theory than I do.  However, here I want to address a related, more mundane question, but one which is perhaps more relevant to most non-economists' concerns.   That is,  when economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?

This question was prompted by a recent exchange I had with Ed Vaizey and Simon Hughes on the BBC's Daily Politics: I pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite".

This is a fair question.  My answer to it is that policymakers and the public should listen to economists who fulfill two criteria: first, they have made empirically testable predictions (conditional or unconditional - see Krugman here) that have proved, by and large, to be broadly consistent with the data; and second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive.  In other words, getting it right alone is not enough; it should be possible to show your workings - to explain why you got it right. Otherwise, your predictions may be interesting, but they tell you little about how to formulate policy.

My shortlist (apologies in advance to those I've omitted) of economists commenting on macroeconomic policy who I think qualify is something like the following:
  • Krugman, DeLong, and Wren-Lewis on fiscal policy when interest rates are at the zero lower bound;
  • Adam Posen on monetary policy when interest rates are at the zero lower bound;
  • Martin Wolf on private sector savings and public sector deficits (the financial balance approach);
  • Richard Koo on the implications of a "balance sheet recession"
Not all of these economists agree with each other on everything, nor do I necessarily agree with them about everything; for example, Krugman and Wren-Lewis have recently been debating the usefulness of microfoundations in macroeconomic models.  But they each have clear analytic frameworks for thinking about the economy, and have used them to make empirically testable claims; and have largely been vindicated.

In each case I've provided links to typical examples of what each was saying a couple of years ago; in each case the analysis stands up well in retrospect.  You understand what they are arguing and why, and events since have been consistent with their arguments.

This in turn generates an obvious list of economists or those commenting on economic issues who got it completely wrong, usually because they were using analytic frameworks that were incoherent or lacked empirical evidence.  I won't name individuals here, so I leave that to readers, but a short list of influential bodies that should have known better includes those responsible for writing editorials at the Financial Times, macroeconomic forecasters at the OECD, the European Department at the IMF (up until recently - their recent stuff on both UK and eurozone has been pretty good) , the senior leadership at the Bank of England and the Treasury, and probably worst of all senior economic policymakers at the ECB and European Commission.  Oh, and the credit ratings agencies, but that goes without saying.

 [JW: In the US, of course, anyone looking for a consistently reliable source of bad judgment, failed predictions, misleading propaganda, tendentious disinformation, and ideological bunk on questions of economic policy can just go to the editorial page of the Wall Street Journal—not to be equated with the rest of the paper, which still delivers serious reporting and analysis.]

It is worth mentioning two economists who I respect, admire and find interesting but do not in my view qualify for inclusion on my shortlist. They are Nouriel Roubini and Ken Rogoff. In both cases, I - and maybe this is partly my fault - don't understand what, if any, analytic framework they are using, so I find it difficult to impossible to evaluate their advice. Nouriel's predictions, while often accurate, seem to be based largely on instinct and a sense of which data matters and which doesn't. That's fine - and having an instinct for the data is invaluable - but I just don't know how to evaluate the plausibility of articles like this.

With Ken, I am even more confused; one of the finest theoretical macroeconomists of the last two decades has staked much of his reputation on a hypothesis - that there is something magic about a 90% debt to GDP ratio - which as far as I can see has no analytical or theoretical basis.  If Ken has an explanation, his paper doesn't let us in on it.  I don't see why we should regard this arbitrary number, based on a relatively small number of country examples in varying economic circumstances, as having any useful predictive power for individual countries in the future.

Finally, let me just point out that this is not  hindsight on my part.  Most of those mentioned above were on the list of economists I read and, whenever possible, consulted when I was still a civil servant involved in policy advice on these issues (2008-11).  And I put this specific list together more than a year ago now in preparation for a talk I gave to a group of government economists.   And this matters.  I don't think there's any doubt that if policymakers, both in the UK and elsewhere (especially in the eurozone) had, during the intervening period, listened to these people rather than their own economic advisers, the state of the UK and world economies would be significantly better than it is now.

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