Mark Carney is under siege—and he isn't the only expert in the dockby George Magnus / October 31, 2016 / Leave a comment
Economics and economists have been the butt of jokes forever. As a rookie economist at Bank of America in San Francisco once, I heard the then CEO’s quip about economists so often that it made me wince. He’d say, “you know an economist, it’s someone who knows 365 ways to make love but doesn’t know any women.” John Kenneth Galbraith, renowned economic wit and thinker, once said self-deprecatingly that the only function of economic forecasting is to make astrology look respectable. You get the picture: economists sometimes make bad forecasts, and we all know some economists who occasionally sound like they have just landed from Mars.
We don’t claim to be clairvoyants, though, and expect to get things wrong from time to time. Importantly, just as writing prescriptions doesn’t describe adequately what doctors do, so forecasting isn’t even the most important things that economists do.
Economic experts in the dock
What’s new nowadays is criticism, normally by those with a political agenda, of economists that is more about anger than analysis, and sometimes crosses the border to insult or abuse. Last week, for example, Daily Telegraph columnist Allister Heath launched an infantile and rather pointless tirade about economists, seemingly vexed by their largely critical view of Brexit. He insisted that redemption could only come by having a parliamentary inquiry into the failure of forecasting, and curiously lambasted them for the recent legal decision to classify Uber drivers as employees.
Heath and several other commentators and politicians had a hay day attacking economists last week when it was announced that the UK economy had risen by 0.5 per cent in the third quarter of this year. To be fair, “Project Fear,” as it was labelled, clearly has egg on its face as far as the post-referendum economy is concerned. The Treasury and Bank of England forecasts of the immediate implications of a vote to leave the EU have not materialised—and won’t.
As I have argued, though, including on the Prospect website, the immediate economic consequences were never the main issue. The main issue is the slower, gradually destructive effects on the economy’s trend growth and living standards from the disruption to trade, investment and labour supply, unless the government proves able to mitigate the them. To date, we don’t know whether the government has a plan. In any case, just because the short-term forecast was out to lunch doesn’t mean that economic experts are no better than fairground fortune tellers, or fair game for personal attack.
Yet this is precisely what is happening. Michael Gove said during the referendum campaign that people had had enough of experts, and likened pro-EU economic experts to scientists in Nazi Germany, induced to denounce Einstein. Jacob Rees-Mogg called for Mark Carney, Governor of the Bank of England, to be sacked. Both MPs have recently attacked Carney again. Gove recently lectured him on the need for humility, after the Governor had said correctly that (independent) central banks don’t take political instructions on monetary policy, and Rees-Mogg criticised him for persistently talking down the UK, for example by warning that the rise in inflation following the drop in Sterling would hurt those on low incomes. Conservative peer and former Chancellor Nigel Lawson demanded recently that Carney stand down for fuelling Brexit fears, and an assortment of more humdrum MPs and MEPs have joined battle in a sort of vendetta against the Governor. William Hague and even the Prime Minister have also publicly questioned Carney, or the Bank itself, for policies adopted in pursuit of the objectives set by the government.
They aren’t the only ones putting economic experts, and central banks, in the dock, by the way. Donald Trump has publicly told US Federal Reserve Chair Janet Yellen to feel ashamed for keeping interest rates low in the run up to the election, in a not very opaque attack on the independence of the Federal Reserve. In a nutshell, it has become “ok” in the US, here and elsewhere, to demonise economic experts, especially perhaps in central banks, for disappointed economic expectations—when in fact that disappointment is down to the failure of politicians themselves to take responsibility for growth-oriented macroeconomic policies, and inclusive social policies, since the financial crisis. Some of us have warned for a long time that one day forces might arise that would seek to exploit the (obvious) limitations of central banks, and here we are.
The case economists must answer
In fairness, it is only right that economists collectively acknowledge a major mea culpa for having allowed economic thinking to evolve in ways that contributed to myopia before financial crisis. The Queen asked famously on a visit to the London School of Economics in late 2008 why no one had seen the crash coming. The truth is that several economists, including your scribe with all due humility, did. (You can google my work on the Minsky Moment, published in 2006-08).
This was only the start. The economic narrative that unfolded afterwards, comprising a protracted period of human and social welfare dislocations, income stagnation and inequality, and high unemployment and/or weak employment structures took many economists by surprise. But this narrative carried the fingerprints of public policy, shaped and justified by economic thinking that has not only proven to be erroneous but has also been “revisited,” aka changed, by none other than the International Monetary Fund, previously one of the sanctums of economic orthodoxy.
Perhaps this failure in economics was as inevitable as the shock of the financial crisis and its aftermath themselves. Drawn along by the political tide of laissez-faire economics, deregulation, and individualism in the 1980s and 1990s, economics lost the political and ethical veins that dated back to Adam Smith. One of the mandatory papers I sat in my undergraduate degree in economics was “History of Economic Thought,” for which we studied the teaching of and differences between great economic thinkers, from Smith to Keynes, Friedman and Galbraith, the last of whom had, in the 1950s, written acerbically about the causes and consequences of private wealth and public squalor. No one was really taught about money and financial instability, which the economist Hyman Minsky had emphasised in the 1970s and 1980s. Everyone had to develop strong skills in mathematical economics and models. Governments existed to cut taxes, fine-tune cyclical changes and provide welfare and military protection. You couldn’t of course end up in a financial and economic crisis which didn’t self-correct.
Now, in the UK, Europe, the US and elsewhere, all of this is toast. Economists are having to re-learn the mixed economy, the functionality of the state, and industrial policy. Globalisation is certainly on the back foot. While we economists can shout until the cows come home about the prosperity-enhancing properties of openness when it comes to trade, migration and investment, and how living standards will improve over time, large numbers of people aren’t listening. They don’t want to be told that deglobalisation, borders and barriers, and a closed way of thinking are wrong—even though they are.
The challenge for economics and economists is to frame the arguments to address or neutralise the spread of populism, by demonstrating how globalisation can be managed better. They can show how economic systems work and what happens to them if you shock them. They can help make arguments about the allocation of resources reflecting different social and political objectives, and the consequences of doing some specific things as opposed to others. If Brexit actually means Brexit, then the consequences of the government’s or Parliament’s choices need to be spelled out, analysed, and if possible, mitigated. The same goes for other 21st century challenges such as demographic, technological and climate change. This is fertile ground for economic experts, not for those who peddle propaganda from soapboxes. And the outlook is encouraging. Some groups such as the Rethinking Economics movement are now trying to make radical changes to the way we teach economics to students, and are asking employers to be far more discriminating in the skills they’re looking for.