Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 3 March 2012

Fiscal policy heroes

                Have you ever wondered why anyone becomes a football (soccer) referee? You are almost certain to be hated by one team and its fans because of the decisions you make. Any mistakes you make will be subject to detailed media scrutiny. Your financial rewards are dwarfed by those earned by the people you attempt to control, and to thank you for that they regularly abuse your attempts to do your job.
                One final thought from my trip to Paris is that we can ask the same question of those who run national fiscal councils. There is no glory and little power to their positions. At some time or other, they will almost certainly incur the wrath of some senior politician, who will publicly assert that the head of the fiscal council is either incompetent or politically motivated. They will have committed the sin of questioning the financial logic behind the minister’s pet project, or the assertion that certain tax breaks or spending projects can be afforded on a sustainable basis. While sections of the media can be the fiscal council’s friend, because they recognise unbiased analysis when they see it often enough, other – more partisan – sections of the media will have no scruples in doing the politician’s dirty work by slandering the fiscal council and its head.
                Who are the people who run fiscal councils, and why do they take on this thankless role? They are people like Alice Rivlin, the first director of the Congressional Budget Office in the US, who would not go along with Reagan’s optimism about self financing tax cuts. Or like Lars Calmfors, the first director of the Swedish Fiscal Council, about which the finance minister said “I have established the earned income tax credit and the Fiscal Policy Council. I am convinced that at least one of the two is very useful. I am very doubtful of the other” (Calmfors and Wren-Lewis, 2011). Like George Kopits, director of the Hungarian Fiscal Council which was abolished after only two years existence. Like Kevin Page, head of Canada’s Parliamentary Budget Office, whom the Finance Minister recently called “unbelievable, unreliable, incredible” after he questioned the rationale for pension reform.
                Having talked to them all, I can suggest one common motivation: a belief that economic decisions should be based on sound analysis rather than political calculation or whim.  A view that not only should a proper analysis be done, but that the public has a right to know about it.
                As I have suggested, this role can be thankless at the time. The silver lining is that in the longer term it may be more appreciated. It has been said that Alice Rivlin is now one of the most respected figures in Washington. Like the public finances themselves, short term unpopularity may be appreciated in the longer term. 


  1. part of a trend . . .

    Simon, I really enjoy you blog, agreeing with many of your perspectives.

    However, I don't agree that the closing of fiscal counsels are part of a trend.

    They reflect, to me, a far deeper problem with economics which is that it is not about economics at all, it is about ideology, about which you have written (and written well). For example, in January you wrote:

    I have argued elsewhere that the problem too many macroeconomists have with fiscal stimulus lies not in opposing schools of thought, or the validity of particular theories, or the size of particular parameters, but instead with the fact that it represents intervention by the state designed to improve the working of the market economy. They have an ideological problem with countercyclical fiscal policy. But the central bank is part of the state, and it intervenes to improve how the economy works, so this ideological view would also mean that you played down the role of monetary policy in macroeconomics. So ideology may also help explain a lack of familiarity with the models central banks use to think about monetary policy. In short, an ideological view that distorts economic thinking can lead to mistakes.

    My two cents is that, and this is a very long term project, economics needs to throw out all the ideologues. Now the purge will be large of the right (Taylor, Cochrane, Lucas, Greenspan, Minkaw, and all Hayekian and Austrians come to mind) but there are candidates on the left as well (Summers and Romer as disqualified due to interest and bias).

    IOW, economics needs to regroup with a small central core of economists who believe there is a very large role for governments and start anew.

    Otherwise, it has no chance of advancing and 80 years this is where the science will be (from Economics of Contempt):

    After reading John Taylor and John Cochrane's analyses Lehman's failure, I'm beginning to understand how it's possible for economists to say that "we're still arguing about the causes of the Great Depression." It's generally hard to come to an agreement when one side simply lies, or refuses to acknowledge undeniable facts.

    1. People Aren't Smart Enough for Democracy to Flourish, Scientists Say

      Dunning told Life's Little Mysteries.

      He and colleague Justin Kruger, formerly of Cornell and now of New York University, have demonstrated again and again that people are self-delusional when it comes to their own intellectual skills. Whether the researchers are testing people's ability to rate the funniness of jokes, the correctness of grammar, or even their own performance in a game of chess, the duo has found that people always assess their own performance as "above average" — even people who, when tested, actually perform at the very bottom of the pile. [Incompetent People Too Ignorant to Know It]

      We're just as undiscerning about the skills of others as about ourselves. "To the extent that you are incompetent, you are a worse judge of incompetence in other people," Dunning said. In one study, the researchers asked students to grade quizzes that tested for grammar skill. "We found that students who had done worse on the test itself gave more inaccurate grades to other students." Essentially, they didn't recognize the correct answer even when they saw it.

      The reason for this disconnect is simple: "If you have gaps in your knowledge in a given area, then you’re not in a position to assess your own gaps or the gaps of others," Dunning said. Strangely though, in these experiments, people tend to readily and accurately agree on who the worst performers are, while failing to recognize the best performers.

      Economics has been overrun by incompetence, which you see as an ideological problem, but it is more than that

  2. I agree. I took high school calculus with Allen Rivlin ( or as he liked to spell it Alllen Rivlin) son of Alice. My other contact with her was I refereed a manuscrpt trying to assess the possible benefits of competition between public agencies, and in particular the CBO and the OMB. The authors noted that once the only US fiscal council was the OMB at the White House whose director serves at the pleasure of the President and which was systematically over optimistic. Then congress set up the CBO controlled by Congress. The authors noted that OMB forecasts improved and had recently become more accurate than CBO forecasts.

    I had to note that they may have only discovered that Alice Rivlin is immune to politica
    Pressure as she was the first head of the CBO and had, in the years just prior to submission of the manuscrpt, been head of the OMB. The paper was published in The Journal of Public Economics.


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