When I do mock interviews for PPE at Oxford, one of my favourite questions to ask is. -
Who should manage the economy – unelected professional economists or politicians who get elected but might not know about economics?
There’s no easy answer. In practise it is an element of both. But, essentially, in a democracy, we would rather have elected politicians making the key economic decisions, especially on issues such as tax and spending. At least, we can vote them out if we don’t agree with their general approach. There is also no guarantee that professional economists will do a particularly good job. The technocrats in the ECB are hardly covering themselves in glory in their management of the Eurozone economy in recent years. However, in recent decades, we have seen moves to make monetary policy managed by an independent Central Bankers. The government nominally retain control over the inflation target, but it has placed significant economic influence in the hands of ‘professional economists’ rather than politicians. The argument is that independent Central Bankers are less likely to be swayed by political pressure to cut interest rates before an election.
The hope is that elected politicians will take advice from impartial economists and make the decisions based on evidence rather than looking for something to justify their political ideology or finding a justification for what they did in the past.
However, there are quite a few times, when the political process causes great frustration. One of the most obvious problems is the difficulty that politicians have in admitting they are wrong and changing their point of view. There is great political capital in sticking to your guns. Mrs Thatcher was lauded for her ‘this lady’s not for turning speech’ But, despite the success of the rhetoric, it’s easy to forget she was sticking to highly deflationary fiscal and monetary policies, which caused UK unemployment to increase to 3 million and stay there for several years. At the time, over 300 economists wrote to the Times to argue for an easing of policy. An easing of policy would have mitigated the worst of the recession, whilst still bringing inflation under control. But, it was better politics to stick to extreme policies and concentrate on blaming the problems on other parties.
For some reason, which is hard to understand, admitting you are wrong is thought to be political suicide. Therefore, rather than responding to events and evidence, politicians will just waste valuable energy in trying to justify their past mistakes and continue with the wrong policies.
Personally, I would happily vote for a politician who said, because things hadn’t worked out, they were going to change tack and try a different approach. I would admire the courage in considering the best interests of the country rather than their mistaken personal pride. Forecasting economic is not easy; it is quite forgivable to make mistakes in forecasting how the economy is going to behave in the future. It is less forgivable to ignore current evidence and vainly try to find facts and arguments to fit with your particular ideology or policies.
Examples of sticking to wrong policies
This post was inspired by a recent speech by David Cameron whose response to the failure of austerity policies is to argue we just need even more. Despite evidence that austerity at the wrong time can be self-defeating and even increase the debt burden, the general response in Europe has been to pursue deeper levels of austerity, which create a self-reinforcing cycle of falling growth and falling tax revenues.
Other examples, could include sticking to an overvalued exchange rate. For example, the persistence in sticking to the ERM in 1992, when keeping the pound required excessively high interest rates to keep the pound at its target level. ( see: a strong currency a good thing?)
Every one is guilty of seeking a reinforcement of their own views. For example, readers of this blog my criticise my generally negative view of austerity. But, the hope is that economists don’t tie themselves to particular ideologies, and are always willing to modify and change their views, i the evidence clearly demonstrates that. It might be annoying to be wrong, but it’s even worse to persist in justifying failed policies.