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 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.
Related
- The biggest lie in British politics?
- Monetary policy and politics – why independent monetary policy
- Why is austerity politically popular?
We have the same problem on the other side of the pond. Our central bank is left to keep the monetary floodgates open because the political power-struggle between left and right in government keeps fiscal policy tight-fisted when it needs to be expansionary.
The question at the start of the above article has a very simple answer, as follows. Have the electorate and politicians make strictly political decisions, like what proportion of GDP is allocated to public spending, and what types of public spending that money is allocated to (defence, education, etc).
In contrast, have a committee of economists take decisions on what stimulus (or damping down) the economy needs. Indeed we already have a system of roughly the above sort in that the Bank of England Monetary Policy Committee can for example nullify (via interest rate hikes) any excessive stimulus the economy gets from fiscal measures.
What we need to do is make the above division of responsibility explicit, and indeed such an explicit division of labour is advocated by Positive Money and the New Economics Foundation. See:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Having said that, politicians obviously have the final choice: e.g. they can bash down the front door of the Bank of England and sack the governor (more or less what recently happened in Argentina). But at least it’s clear to the electorate in the latter scenario that politicians are blatantly ignoring the advice of professional economists.
The question at the start of the above article has a very simple answer, as follows. Have the electorate and politicians make strictly political decisions, like what proportion of GDP is allocated to public spending, and what types of public spending that money is allocated to (defence, education, etc).
In contrast, have a committee of economists take decisions on what stimulus (or damping down) the economy needs. Indeed we already have a system of roughly the above sort in that the Bank of England Monetary Policy Committee can for example nullify (via interest rate hikes) any excessive stimulus the economy gets from fiscal measures.
What we need to do is make the above division of labour explicit, and indeed such an explicit division of labour is advocated by Positive Money and the New Economics Foundation. See:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Indeed, the current system under which both the Chancellor of the Exchequer and the Bank of England have a say on stimulus is a nonsense: it’s like having two people with their hands on the steering wheel of a car.
Having said that, politicians obviously have the final choice: e.g. they can bash down the front door of the Bank of England and sack the governor (more or less what recently happened in Argentina). But at least it’s clear to the electorate in the latter scenario that politicians are blatantly ignoring the advice of professional economists.