“We find that forecasters significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation.”
Dienstag, 8. Januar 2013
Economists should be personally liable for their advice
In an important new study, Olivier Blanchard, the Chief Economist at the International Monetary Fund (IMF), has just admitted that their having respected and accepted the advice of conservative economists has turned out to be a blunder. Growth Forecast Errors and Fiscal Multipliers by Olivier Blanchard and Daniel Leigh, IMF Working Paper, 3 January, 2013. P. 5:
An institution with a staffing of about 1100 professional economists (most of whom have PhDs) and an overall personnel budget of about $800 million– failed to make that correct call. Instead, the IMF now admits that it ‘significantly underestimated’ the impact of public spending cuts on employment and investment.
Getting macroeconomic forecasts and policies wrong has consequences: in the low income countries in the 80s and 90s the consequences of the IMF’s failed policies were bankruptcy and impoverishment for many nations.
Millions of people lost a future – and the opportunity to thrive.
Today, in Greece, Portugal, Spain and Italy – the economic, social and political consequences are not just degrading for the people of those countries; they have cost the world’s advanced economies dearly, and must be reversed if the world is to avoid an economic tailspin.
The basic debate among economists has been over Keynes’s “multiplier” – the size of the stimulus to the economy that’s generated by increasing government spending during flat or declining economic times. In other words: this debate is over whether or not adding government spending during a downturn helps an economy turn up again into growth and surpluses, or whether it instead mainly just adds to the government debt that (according to conservative economists) was the result of too much spending, and that (also according to conservative economists) largely caused the existing "recession". Keynes said that the “multiplier” effect of increased government spending is sufficiently large to more-than-counteract the negative economic effect of adding to the government’s debt during an economic downturn. Conservative economists assume instead that the multiplier is too small to counteract that negative effect.
First, the Blanchard and Leigh paper defines the multiplier as: “the short-term effects of government spending cuts or tax hikes on economic activity.”
But that is not a correct definition of the multiplier. It’s perversely the very reverse: economists craning their necks backwards and trying to calculate the impact of their unwise advice to governments to cut public spending at the height of a banking crisis, and thereby start private debt deflation and slump.
Explaining poor advice from orthodox economists in terms of the multiplier is wrong, if not disingenuous. Masking this poor advice and his institutional mea culpa in what the Washington Post calls “a deep pool of calculus and regression analysis” does not make things right. All it does is provide evidence of what Keynes called a “failure in the immaterial devices of the mind” to fully address and solve an economic problem.
Keynes showed – and a centuries-worth of macroeconomic evidence proved – that to spend borrowed money in a slump to invest in economic activity, i.e. employment, would multiply the income generated by the investment, and that the investment would pay for the borrowing.
Of course Blanchard and Leigh are right to argue, as Keynes did, that “there is no single multiplier for all times and all countries. Multipliers can be higher or lower across time and across economies.” But it is also true that in a slump, at a time of economic failure, the impact of borrowed money on investment and employment is higher than at times of macroeconomic stability. Much higher.
Knowledge and experience of the multiplier and its efficacy are well known to economists. But thanks to “immaterial devices of the mind” this knowledge has been buried. IMF economists do not challenge the ideologues who buried the multiplier. They are not even willing to admit publicly to the ‘implicit multipliers’ in their forecasts. IMF economists do not have the courage to dig up the work of Keynes and others on the multiplier, and to acknowledge and apply its wisdom.
Medical practitioners are legally liable for their professional outcomes and can be prevented from practicing if they are deemed to be unfit as a result of poor judgment etc. Many other certified professionals are equally liable for the quality of their work.
I think it is time that professional economists are certified to practice and are then held responsible for the outcomes that arise from their work. Given that unemployment leads to higher suicide rates and other sources of elevated risk of death – I see that profession as no different from medical practitioners in relation to responsibility for human well-being.
I would have very large fines and jail terms for economists who provide forecasts and produce policy advice that turns out to be wrong. This should be one of the reforms governments pursue as they try to return the economy to a more stable footing.