How should academic economics cope with ideological bias

This question was prompted by this study by Mohsen Javdani and Ha-Joon Chang, which tries to show two things: mainstream economists are biased against heterodox economists, and also tend to favour statements by those close to their own political viewpoint, particularly on the right. I don’t want to talk here about the first bias, or about the merits or otherwise of this particular study. Instead I will take it as given that ideological bias exists within mainstream academic economists (and hereafter when I just say ‘academic economics’ I’m only talking about the mainstream), as it does with many social sciences. I take this as given simply because of my own experience as an economist.

I also, from my own experience, want to suggest that in their formal discourse (seminars, refereeing etc) academic economists normally pretend that this ideological bias does not exist. I cannot recall anyone in any seminar saying something like ‘you only assume that because of your ideology/politics’. This has one huge advantage. It means that academic analysis is judged (on the surface at least) on its merits, and not on the basis of the ideology of those involved.

The danger of doing the opposite should be obvious. Your view on the theoretical and empirical validity of an academic paper or study may become dependent on the ideology or politics of the author or the political implications of the results rather than its scientific merits. Having said that, there are many people who argue that economics is just a form of politics and economists should stop pretending otherwise. I disagree. Economics can only be called a science because it embraces the scientific method. The moment evidence is routinely ignored by academics because it does not help some political project economics stops being the science it undoubtedly is.

Take, for example, the idea - almost an article of faith in the Republican party - that we are on the part of the Laffer curve where tax cuts raise revenue. The overwhelming majority, perhaps all, of academic economic studies find this to be false. If economics was merely politics in disguise, this would not be the case. This is also what distinguishes academic economics and some of the economics undertaken by certain think tanks, where results always seem to match the political or ideological orientation of the think tank.

There is a danger, however, in pretense going too far. This can be particularly true in subjects where empirical criticism of assumptions or parameterisation is weak. I think this was the basis of Paul Romer’s criticism of growth theory and microfoundations macro for what he calls mathiness, and by Paul Pfleiderer for what he calls ‘chameleon models’ in finance and economics. If authors choose assumptions simply to derive a particular politically convenient result, or stick to simplifications simply because it produces results that conform to some ideological viewpoint, it seems absurd to ignore this.

Romer’s discussion suggests that it is at least possible for ideological bias to send a branch of economics off in the wrong direction for some time. I would argue, for example, that Real Business Cycle theory in business cycle macro, which was briefly dominant around 40 years ago, was in part influenced by a desire among those who championed it to look for models where policy had little role. In addition, it showed up economists tendency to ignore other social sciences, or even common sense, at its worse. [1] It didn’t last because explaining cycles is so much easier when you assume sticky prices, as most macroeconomists now do, but it may be possible that other aspects of mainstream economics may be ideologically driven and persist for a much longer time (Pareto optimality?), and mainstream economists should always be aware of that possibility. One of my first posts was about the influence of ideology on the reaction of some economists to Keynesian fiscal stimulus.

The basic problem arises in part because empirical results are never clear cut and conclusive. For example the debate about whether increases in the minimum wage reduce employment continues, despite plenty of empirical work that suggests it does not, because there is some evidence that points the other way. This opens the way for ideology to have an influence. But the political implications of academic economics will always mean that ideology plays a role, whatever the evidence. Even when evidence is clear, as it is for the continuing importance of gravity (how close two countries are to each other) for trade for example, it is possible for an academic economist to claim gravity no longer matters and gain a huge amount of publicity for their work that assumes this. This is an implication of academic freedom, although in the case of economics, I still think there is a role for an organisation like (in the UK) the Royal Economic Society to point out what the academic consensus is.

Does this mean economics is not a true science? No, because ideological influence does not trump data when the data is very clear, as in the case of the Laffer curve or gravity equations, although ideology and academic freedom may allow the occasional maverick to go against the consensus. That in turn means that it is important for any user of economics to be aware of possible ideological bias, and always establish what the consensus is, if it exists, on an issue. Could ideology influence the direction particular areas of economics take for some time? The evidence cited above suggests yes. So while I have no quarrel with the pretense that ideology is absent from academic economics in formal discourse, academics should always be aware of its existence. In this respect, some of the points that the authors of this study mention in the discussion section of their paper are relevant. 

[1] This reflected the introduction of a microfoundations methodology which soon began to dominate the discipline, and which I have talked about elsewhere (e.g. here and here).

Ann Pettifor on mainstream economics

Ann has a article that talks about the underlying factor behind the Brexit vote. Her thesis, that it represents the discontent of those left behind by globalisation, has been put forward by others. Unlike Brad DeLong, I have few problems with seeing this as a contributing factor to Brexit, because it is backed up by evidence, but like Brad DeLong I doubt it generalises to other countries. Unfortunately her piece is spoilt by a final section that is a tirade against mainstream economists which goes way over the top. Let me just go through the factual errors.

“Economists dictated the terms for austerity that has so harmed the British economy and society over the past ten years.”

The only support she gives for this statement is the 20 economists who signed a letter to the Times on 14th February 2010. She neglects to mention that 58 equally notable economists signed a response in the Financial Times on 18th February arguing the 20 were wrong. Austerity has always been a minority view among academic economists, a minority that has got smaller over time. Of course those that signed the first letter, and in particular Ken Rogoff, turned out to be a more prominent voice in the subsequent debate, but that is because he supported what policymakers were doing. He was mostly useful rather than influential.

“As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternatives.“

In the case of the 20 economists who signed that letter, nearly half did revise their views just two years later. More importantly, for the last few years pretty well every macroeconomist of note, including Ken Rogoff, has advocated a substantial increase in public investment. So this sentence, in so far as it relates to austerity, is almost as wrong as it could be

“[On Brexit} All the heavyweights of the economics profession … were wheeled out to warn the British people of economic facts known, and understood apparently, only to ‘experts’... But the ‘experts’ and the economic stories they tell have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international and in particular European cooperation and coordination are vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets—in money, trade, and labour—must be unfettered, detached from democratic regulatory oversight, and must be left to ‘govern’ whole countries, regions, and continents.”

Where did these heavyweights talk about “economic facts known, and understood apparently, only to experts”? When they were given the chance, they explained the common sense idea that trade would suffer if we left the EU because it is easier to trade with your neighbours, and the easy to understand empirical findings that more trade increases productivity and therefore economic growth. There is no religion involved at all, but rather statistical evidence. If you are looking for religion, you need to focus on the handful of economists supporting Brexit, who really did believe that it could usher in a neoliberal nirvana that would more than offset the costs of Brexit. To the extent that the public ignored the warnings of economists, it was probably because these warnings were ‘balanced’ in the media by this handful.

When Ann talks about the failings of economists related to the financial crisis she has a point, but it is one that she grossly exaggerates. Economists hardly “led the way to the re-regulation and ‘liberalization’ of the finance sector over the past 40 years”. The way was led by the financial sector itself. If more economists had backed up rather than dismissed Rajan’s warnings in 2005, I doubt if anything would have changed. Why do I think this? Because mainstream economists have subsequently argued that the only way to prevent another crisis is to substantially increase the capitalisation of banks, but they have been completely ignored by policymakers. If economists are being ignored after the financial crisis which created untold damage, why should things have been any different before the crisis?

I think the same point applies to globalisation. Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right. It is also true that many of these economists did not admit or stress enough that there would be losers as a result of this process who needed compensating from the increase in aggregate prosperity. But once again I doubt very much that anything would have changed if they had. And if they didn’t think enough about it in the past, they are now: see Paul De Grauwe here for example.

There is a regrettable (but understandable) tendency by heterodox economists on the left to try and pretend that economics and neoliberalism are somehow inextricably entwined. The reality is that neoliberal advocates do use some economic ideas as justification, but they ignore others which go in the opposite direction. As I often point out, many more academic economists spend their time analysing market imperfections than trying to show markets always work on their own. They get Nobel prizes for this work. I find attempts to suggest that economics somehow helped create austerity particularly annoying, as I (and many others) have spent many blog posts showing that economic theory and evidence demonstrates that austerity was a huge mistake.         

Brexit despair

Among everyone and everything I read at the moment there is a mixture of disbelief and despair over the now distinct possibility that the UK will vote for Brexit. Obviously that is partly because I tend to read other economists, and as Chris Giles notes economists are virtually united in believing Brexit will be bad for the economy. (If you cannot access the FT, read Paul Johnson.) But it is also because there is a clear educational divide in support for Brexit, and I suspect most of what I read comes from one side of that divide. The only other event that I can imagine causing an equal degree of unanimous disbelief and despair would be if Trump looked like becoming President.

There is disbelief because it makes no sense. Of course there is a minority who hate the idea of sharing sovereignty, and another minority that really hate immigrants. But these two groups combined would not be enough to win a referendum. Instead we have a much larger group that are concerned about immigration, but their concern appears to be not worth very much to them. This was something I noted some time ago, but it seems to be a robust result: in a recent ComRes poll 68% say they would not be happy to lose any income to secure less immigration (perhaps because they believe less immigration will raise their income).

It makes no sense because economists are as sure as they ever are that people will on average be worse off with Brexit. But a large section of the population have either not got the memo or have ignored it. This will be an important point when it comes to what happens after Brexit: for many Brexit will have been a vote to control immigration, but only because a lot of those same people think that immigration can be controlled without making them worse off. In other words it will not be a clear mandate for voting against a Norway/Switzerland option, because anything else will make people worse off (as most MPs know).

There is despair because economists and others who think Brexit will make people worse off have no way of getting their message across to those that really need that information. I know Gove has said he is fed up with experts, but I’m not convinced most people are (for reasons given here and reiterated here). But writing articles in the Guardian or letters to the Times will not get through to those we need to hear the message (see final chart here). It is why I wrote this. For academic economists I think it is part of a general problem that the media are losing interest in what we think, which is why I wrote this for the Royal Economic Society newsletter.

Whether we do or do not leave the EU, I hope one result of this referendum will be that otherwise sensible people will stop saying that our tabloid press is not that much of a problem. It might not be if our broadcast media were brave enough to report facts, but instead it is obsessed with balance, as well as being heavily influenced by what some tabloids say. How else can you account for 58% of people thinking that Turkey is likely to join the EU within ten years, which in reality is close to a zero probability event. Democracy can become dangerous when a few people have so much control over the means of information.

What do macroeconomists know anyway?

In an article in the Independent today I argue that what goes for a ‘credible’ economic policy among politicians and the media is often very different from what an academic economist might describe as credible. Which invites the obvious response: who cares, what do academic economists know anyway? So I look at what I regard as the three major macroeconomic policy disasters in the UK over the last 35 years, and one success.

The success was the decision not to join the Euro in 2003. It is pretty clear that this was the right decision, and it was made after what may have been the most extensive academic consultation ever undertaken by the Treasury, coupled with substantial macro analysis. (I talk more about this here.) The Prime Minister Tony Blair was initially in favour of joining, but the analysis helped persuade him otherwise.

The first failure was Mrs. Thatcher’s monetarism, which was famously opposed by 364 economists. Those on the right have tried to spin this as a failure by the economists, but the actual policy framework of money supply targets was a complete disaster and was quickly abandoned, never to be tried again. (Here is a discussion, and here is an account from one of the two movers behind the letter.)

Current austerity we all know about: if not, read this.

The third disaster was the UK’s entry into the European Exchange Rate Mechanism (ERM) in 1990 at an overvalued exchange rate, and the subsequent recession and forced exit in 1992. My argument that this went against macroeconomic analysis needs some justification. At the time I was in charge of macroeconomic research at the National Institute (NIESR) in London, and I undertook with colleagues what was easily the most extensive analysis of the consequence of entry into the ERM at different exchange rates. This was subsequently published in 1991, but all the material was first presented before we entered the ERM.

We concluded that the UK’s actual entry rate was 10-15% above the equilibrium rate. The implication was unavoidable: either we would be forced out, or trying to stay would lead to a recession as part of an ‘internal devaluation’. I remember Sam Brittan, one of the main writers at the FT at the time, saying that he thought we had won the intellectual argument, but that his instinct was still that we should enter at a high rate.

After entry into the ERM the UK entered a recession, and we were then forced out just two years later. Our analysis was vindicated. It is true that the whole system eventually collapsed as a consequence of the tight monetary policy that followed German unification, but it is no accident that the UK was the first to go (Black Wednesday). On leaving the ERM sterling depreciated by 10%, and the UK recovered quickly from recession.

There is no doubt that had the Treasury taken our advice and entered at a lower rate, less jobs would have been needlessly lost. I have often wondered if I could have done things differently to make a more persuasive case. But honestly I doubt it: the almost macho appeal of entering at a ‘strong’ rate was too great, together with the idea that the market knew best. As I say in The Independent, macroeconomists are far from perfect, but the UK evidence suggests that you ignore their advice at your peril.

The academic consensus on the impact of austerity

In discussing the forthcoming UK budget, Robert Peston writes:

“And before I am savaged (as I always am) by the Krugman crew of Keynesian economists for even allowing George Osborne's argument an airing, I am not saying that the net negative impact on our national income and living standards of cutting the deficit faster is less than their alternative route of slower so-called fiscal consolidation.

I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they've won this match - and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).”

I do not want to disappoint, and as I was about to write something on the macroeconomic consensus on austerity anyway, let me oblige - not in savaging (I leave that to my American colleague in arms!), but in justifying why I think there is such a consensus in the places that count. By consensus I do not mean that everyone agrees - of course not - but that a very large majority do, which probably counts as consensus in economics.

Unfortunately we do not have a great deal of information on what academic economists as a whole think about austerity, but we do have two important survey results which are pretty conclusive. In the US, there is the IFM Forum, which regularly asks a group of distinguished economists - including many macroeconomists - their views on key policy issues. The last poll I have seen suggests that 82% of that panel thought the 2009 Obama stimulus had reduced unemployment, while only 2% disagreed. In the UK, the CFM survey asked a similar question to a smaller group of academic economists, most of whom are macroeconomists. Only 15% agreed that the austerity policies of the coalition government have had a positive effect on aggregate economic activity, while 66% disagreed. That consensus is not universal - it would not apply in Germany for example - but I doubt if anyone would disagree when I say that US economists call the shots as far as academic macroeconomics is concerned. 

This is why economists the world over continue to teach Keynesian macro to undergraduates, and normally not as one ‘school of thought’ but rather as an initial approximation of how the economy actually works. As Amartya Sen so forcefully reminds us, the experience of the last hundred years has earned Keynesian theory this central role.

However we have another, more indirect, source of evidence. If you asked whether there was a standard model for analysing the business cycle among economists in academia and in policy making institutions, the answer would have to be the New Keynesian model. I want to include economists in central banks in particular because they have to put theories of the business cycle into practice on a regular basis. The key macromodels that central banks use to forecast and to analyse policy are Keynesian, and many are New Keynesian. Having worked a great deal with New Keynesian models myself, I also know what they imply about temporary changes in government spending in a liquidity trap (see this paper by Mike Woodford, for example). It may be possible to adapt these models to give you expansionary austerity, but no such adaptations command general or even partial support.

The models used by pretty well all central banks would therefore imply that temporary cuts in government spending were contractionary, absent any monetary policy offset. The governors of the central banks of the UK and US say this publicly. European central bank governors do not tend to say this, and instead continue to advocate austerity despite deflation. The reason why they might do this despite what their models tell them will be the subject of a later post, but I suspect it has little to do with conventional macroeconomics (but see also the point about German academic views above, and Sen’s article). If temporary cuts in government spending are contractionary in a liquidity trap, it follows that it is much better to delay this form of austerity.

I could add repeated arguments from economists at the IMF (e.g. here and most recently here), and now also the OECD (FT here, or ungated here). Of course there are some academic economists who continue to argue that the impact of austerity is expansionary or at least minor - I suspect there always will be, as long as this remains an intense political debate. They would be joined by many City economists, but they are neither unbiased nor the source of any particular expertise on this issue.

This is why, among economists with expertise, there is a clear majority view that fiscal austerity is significantly contractionary in a liquidity trap. That does not automatically mean that the 2010 policy switch was wrong, or that it had a big impact on the UK in 2010-2012: there are additional issues here which I have discussed many times. How damaging to the macroeconomy any additional austerity from Osborne will be also depends on whether we are or will be in a liquidity trap. But the fact that we might well be means that additional austerity now is a big mistake, and on this I believe the great majority of academic macroeconomists and those macroeconomists working in policy making institutions would agree.

As far as the media is concerned, I cannot believe that Robert Peston would disagree that a large section are ‘malign’, given how political this issue is. When I have talked to journalists who have some freedom to report the facts rather than what their editors want them to report, the argument I most often hear is that because this issue is political, they have to report it as a ‘debate’ come what may. I have never had the pleasure of talking to Robert Peston (he is welcome to email at any time), and I would be very interested in how he would respond to the evidence I have laid out. As for the public, the word sheep is his not mine. Would he really argue that the public are independently well informed on these matters, or unaffected by the media’s presentation of this and similar issues? Which is why I will continue to - as he might say - bang on about this, even though my audience is tiny in comparison to most journalists.

Bond market fairy tales part 2

In part 1 I contrasted the way I think about how different speeds of deficit reduction in the UK or US today will influence interest rates on government debt with how at least some people in those markets say they think about the same issue. That was a particular example of a more general phenomenon. The macroeconomics coming from economists attached to financial institutions often seems to be rather different to the macroeconomics of academic economists. When it comes to an issue involving financial markets, then it seems obvious who mediamacro should believe. Those close to the markets surely must know more about how those markets work than some unworldly academic. This post will suggest a more nuanced view.

As is often the case in macroeconomics, it all depends on the time horizon. Are we talking about what may happen over the next few days or weeks, or are we talking about what will happen over the next few years?

In terms of very short term prediction, financial market economists beat academic economists hands down. The only thing most academic economists can usefully tell you is that it is unlikely you will outsmart market opinion. If you really want to try then you need lots of short term information and a good nose for how that short term information is interconnected. Most academics (there are exceptions) just do not have time to do that work. I always remember the reply an academic member of the Bank of England’s Monetary Policy Committee gave to some MP who asked him about the implications of some latest data. I must have been doing some marking (grading) at the time that came out, was the reply.

Perhaps more surprisingly, those working in the markets are not as concerned about the longer term (what might happen in three or five years time) as you might expect. That is because money is made in predicting short term movements, and knowledge of where things are going over the next few years is a relatively weak guide to what might happen over the next few days. When I first started doing work on ‘equilibrium exchange rates’, I got a lot of queries from those in the markets, but the interest largely disappeared when I told them that ‘equilibrium’ meant where rates might be in about five years time.

This may surprise you because economists attached to financial market institutions often tell longer term stories, and sometimes they even produce detailed numerical forecasts of the type produced by central banks or governments. (See the list that the UK Treasury compiles for example.) But as I have often said, macroeconomic forecasts are only slightly better than guesswork. So it is only really worth putting any significant resources into producing a macro forecast if you are taking or seriously influencing decisions - like setting interest rates - where the costs of getting things wrong are extremely large. My suspicion is that financial sector macro forecasts are mainly there to give the impression of expertise to the institution’s clients.

I also suspect that economists working for financial institutions spend rather more time talking to their institution’s clients than to market traders. They earn their money by telling stories that interest and impress their clients. To do that it helps if they have the same worldview as their clients. Getting things right over the longer term seems less important, as Paul Krugman keeps complaining about in the context of those who have been predicting rapid inflation as a result of Quantitative Easing. 

It is also useful if they leave their clients with the impression that they have some unique insight into how the markets work. So instead of suggesting - as an academic would - that markets are governed by basic principles, it is better to suggest that the market is like some capricious god, and they are one of a few high priests who can detect its mood. Now in the short term the market really can behave in volatile, unexpected and sometimes mysterious ways, but over the longer term there are some basic rules that markets obey.

The incentive system for academics is very different. They are judged by their peers. If they present stories to the media that differ greatly from conventional wisdom about theory or the empirical evidence, they will be given a hard time by their colleagues. They need to have an idea about how markets work to do good macroeconomics. They want to be more like scientists than high priests. (This has an unfortunate by-product. Most academics would rather not lose precious research time talking to journalists, particularly if the quotes they give may fail to contain the caveats normally demanded in academic work. In contrast talking to the media is part of a city economist’s job description.)   

So who should journalists trust on the economy? If you want to know about the latest retail sales numbers or where the economy might be heading over the next few months, with a few exceptions financial economists are better bets than academic economists. If you have a more long term question, like how alternative speeds of deficit reduction will influence interest rates, then perhaps surprisingly you may tend to get a more reliable answer from academics. Like most things in economics, this is a tendency: there are some seasoned city economists who I would trust over many academics.

There is an important implication about political bias as well. Academic economists are no saints on this, but I do not think there is a clear average bias among academic macroeconomists towards the left or right. However partly because financial economists need to be good at telling stories that their clients find sympathetic, their worldview tends to be one where a smaller state is good for the economy, higher taxes on top incomes are a bad idea, markets are generally efficient and regulation is harmful.

If you think this is just self-serving conjecture, look at this evidence. The question of whether, in the UK, the 2013 recovery vindicated 2010 austerity was a no-brainer. Anyone who thinks about the logic for a moment will realise the answer is no, even if they think austerity was a good idea. To suggest otherwise would be to argue that it was a good idea to close half the economy down for a year, because growth in the following year would be fantastic. To answer yes to this question probably indicates political bias rather than lack of thought. When the Financial Times asked this question, only two out of twelve academics gave the answer yes. About half the city economists who were asked said yes. 

Anti-intellectualism

The question in the title of this post - What Are Academics Good For? - was meant to be rhetorical. I took it for granted that as a collective academic economists did know rather more about economic policy than business leaders or city economists, and the point of my post was to ask why this often appeared not to be recognised by some journalists or some politicians. I included some quotes from a journalist suggesting otherwise because I found them rather shocking.

It serves me right of course. What I got almost universally in comments was a discussion of all things wrong with academic economists. Even the estimable Chris Dillow joined in. So what I should have done first is establish what academic economists are good for, and then complained about those who do not recognise this. But better to do things in the wrong order than not at all.

First a point on scope that I did make but is worth repeating. When it comes to short term macro forecasting, you are no better off asking academic economists. In fact you may be worse off, because most academics spend very little time looking at the latest indicators. The best macro forecasts, whoever makes them, are only marginally better than intelligent guesswork - this is a well established fact.

One area where academics typically have expertise relative to other people is on issues involving economic policy - for macroeconomics, for example, on issues involving monetary and fiscal policy. Issues like whether austerity is expansionary or contractionary. I took this for granted because academics spend a large amount of their time doing research on these issues. Much of this research involves assessing evidence. They do this in a highly competitive environment, constantly subject to peer review. In addition, they often compete for research grants, where the opinions of end users (like the Bank of England) can matter a lot.

Of course there are things that could be improved within academia, and as Chris notes I have not been shy of giving some of my own opinions about where this might be. But since economics first started being studied, we have accumulated a substantial body of knowledge which policymakers have found useful. Policymakers should never take advice uncritically, but they should and do treat academic advice as a bit more than just another opinion.

What evidence do I have for this claim? First, a lot of the time politicians and their civil servants do seek out and make use of this knowledge. Indeed I ventured that the previous UK government might have represented a high point in the influence of academic economics generally, including macro. I described the evaluation of the 5 tests over whether the UK should join the Euro as an exemplar of how the interaction between academics and policymakers should work.

You could also look at central banks. When it comes to issues of how best to conduct monetary policy, central banks predominantly look to academics (mainstream rather than heterodox) for ideas and analysis, rather than city economists or business leaders. The analysis they use in house is often based on techniques initially established by academics, and they hire new PhDs to undertake that analysis.

If you are not convinced by any of that, have a look at the simple test I described in that recent post. The assertion that the 2013 UK recovery validates 2010 austerity is not a complex issue or a matter of judgement – it’s a simple mistake. Most academics understood that, but only half of city economists did.

So that is why I found those quotes from a well known journalist shocking. As I suggested in that post, I think it reflects an anti-intellectual theme that affects other subjects as well. You will find this kind of thing on both sides of the political spectrum, although for whatever reason it seems to be more influential on the right than the left right now. I got sent today some correspondence about austerity involving an MP, where the MP said this. “You may come at this from an academic viewpoint - I come at it from a real world viewpoint and as someone who has worked in a sector where you have to earn money before you can spend it.” That statement is so wrong for many reasons, but it also illustrates a damaging contempt for academic knowledge.

What are academics good for?

A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise, led to this cri de coeur from Paul Krugman. What is the point in having academic research if it is ignored, he asked? At the same time I was involved in a conversation on twitter, where the person I was tweeting with asked

“What I have never understood is what is so great about academic economists? Certainly not more objective.”

They also wrote

“Surely, rather a dangerous assumption to think that an academic whose subject is X > a non academic whose subject is X”

In other words, why should we take any more notice of what academic economists say about economics than, well, City economists or economic journalists?

Here is a very good example of why. The statement that the 2013 recovery vindicates 2010 austerity has a superficial plausibility because of the dates (one is before the other) and both involve macroeconomics. However just a little knowledge, or reflection, shows that the statement is nonsense. It is like saying taking regular cold showers is good for curing colds, because everyone who takes them eventually gets better. But the thing is George Osborne says the statement is true, so this is a test of objectivity as well as expertise.

In the Christmas 2013 FT survey of various economists, one question was “Has George Osborne’s “plan A” been vindicated by the recovery?”. Among the academic economists asked, ten said No, and two said Yes. So two gave the wrong answer, but if you knew who they were you would not be surprised. Among City economists surveyed, the split was about 50/50, with at least a dozen giving the wrong answer. Worth remembering that the next time someone says these guys must know what they are talking about because people pay for their advice. (Some do, some do not.)

And journalists? Well, there are some very good ones, particularly those working for newspapers like the Financial Times. Which is why I found the FT leader with the headline “Osborne wins the battle on austerity” so outrageous. If I also tell you the tweets above came from a well known economic journalist, you can see why I found them revealing.

This goes back to the question Paul asked. If we don’t think that academic economists’ opinions about economics are worth anymore than other peoples’ opinions, why do we bother to have academics in the first place? Now of course for some questions an academic economist’s opinions are indeed worth little more than those of anyone else: questions like what will economic growth be in two years time, for example. In fact academic research using models tells us that answering questions like that is almost all guesswork. (Some people find that puzzling, but can a doctor tell you the date on which you will have a heart attack? But if you have a heart attack, you would want a doctor nearby.) And if you want to know what is wrong with your car, you ask a car mechanic not an economist.

And yes of course academic economists cannot all be trusted, and we do make mistakes. (Not all car mechanics can be trusted, and they also make mistakes. But would anyone tweet what is so great about car mechanics when it comes to cars?) But as Paul Krugman quite rightly keeps reminding us, academic macroeconomists have also got some important things right recently: inflation did not take off following Quantitative Easing, interest rates have stayed low despite bigger deficits, and our models said that Eurozone austerity could cause a second recession.

This post so far has seemed far too self serving, but I think this devaluing of academic expertise is not just confined to economics. The obvious comparison is the science of climate change, where the media often appears to give as much weight to paid up apologists for the carbon extraction industry as they do to scientists. When a UK MP and a member of the House of Commons Health Committee and the Science and Technology Committee has “spent 20 years studying astrology and healthcare and was convinced it could work”, it is maybe time to get seriously worried. What is so great about doctors anyway? 

Policy errors like 2010 austerity – what can academics do?

                In this post I claimed that 2010 should be counted as one of the major errors of UK macroeconomic policy. In fact the claim is much more general, because 2010 was the year that the consensus among policymakers in the OECD area shifted from enacting stimulus to pursuing austerity, with damaging consequences in many countries. A number of comments and a couple of blogs added to my speculation on why this error might have occurred. Here I want to consider more generally what role academics and economists can play in preventing policy errors, and why this may depend on the reasons for those errors.

                Before coming to that, let me address one common objection to my view that 2010 was a major policy error at the time, and not just in hindsight. The objection is that the slowdown in 2011 was due to factors other than austerity that could not have been foreseen. There are two problems with this argument. First, the projected speed of recovery even before these adverse shocks occurred was pitifully slow. What the IMF described in late 2010 as ‘solid UK growth’ was actually 2.5% per annum into the medium term, which on their own admission only gradually closed the output gap. The OBR’s June 2010 post-budget forecast also had GDP growth of 1.2% in 2010, 2.3% in 2011, and never above 3% thereafter. Considering GDP was estimated to have fallen by 5% in 2009, this was a tepid recovery.

The second, and more important, flaw in this argument is that it ignores the fact that good policy should allow for risks. As I elaborated here, because of the zero bound for interest rates there was no insurance policy if bad shocks did occur (as they did). In contrast, if positive shocks had led to a recovery that was too rapid, monetary policy could have been used to cool it down. To put it more simply, austerity was a huge and unnecessary gamble, and the gamble did not pay off. Much the same could be said for many other countries.

                One class of explanation for this kind of policy error focuses on hidden agendas. The most obvious in the case of austerity is a desire to reduce the size of the state, as Chris Dillow suggested. As Mark Thoma put it: “The notion of "expansionary austerity" was the cover, but so long as government shrinks as a result of the policy, the expansionary part is secondary.” Chris has recently suggested even darker motives. I put forward another, more mundane, explanation that is specific to the UK: get the cuts out of the way well before an election, and hope the electorate have short memories. Perhaps an explanation specific to the US might be that it suited those opposed to the President that the economy failed.

                If this type of explanation is correct, is there anything that can be done to prevent or expose this kind of subterfuge? In this post, I was rather pessimistic. I suggested that it required near unanimity amongst academics before the media would begin to question the cover stories. Without unanimity, the cover story would just be described as controversial.

Brad DeLong has persistently railed against ‘opinions on shape of the Earth differ’ type reporting. All too often journalists appear to have only two categories - either something is objectively true or it is controversial. Anything controversial requires evenly balanced reporting. A tragic example from the UK would be the debate over the MMR vaccine. As Lewis and Spears document, a single paper in the Lancet suggesting a link with autism was hyped by the media, despite widespread scepticism among health experts and overwhelming scientific evidence that the vaccine was safe. As a consequence, take up of the vaccine declined and outbreaks of measles increased. (Here is a good account of this episode from a US perspective.)

Even with academic unanimity, there is the possibility that moneyed interests could manufacture controversy through think tanks, as has happened with aspects of climate change debate. [Update 20/2/12 - on this see George Monbiot.] Of course the debate is still worth having, but it is unlikely to change things very much or very quickly.

                This pessimism may be a little overdone, however, in the case of austerity. Politicians, above all, want to be re-elected. For that reason the cover story view does require a belief that the harmful impact of (early) austerity will not last long enough for it to matter at the next election. If that is not the case, academics might be able to convince politicians that it may not be in their own interests to undertake the policy.

                Which brings me to another class of explanation, which is policymakers fooling themselves. The hidden agenda may still be there, but the difference is that politicians convince themselves that the cover story is also true. In the case of austerity, there are a number of stories politicians can tell themselves. They can believe in expansionary austerity, of course. They could believe that Quantitative Easing will be enough, although I would hope any central banker would tell them that they had no idea what impact QE might have. They might have believed that the recovery was well under way, so any damage done by austerity would not be noticeable.

                Does this case also require near unanimity amongst academics to convince the policymaker they are fooling themselves? There are at least two reasons to suggest it might. First, (macro)economics is not held in the same regard as other sciences, for good reason. I would not go quite as far as one comment which said scientists proclaim facts while economists give out opinions – I think we are somewhere in between these two, but still. Second, the two way link between ideologies and economics makes it too easy for the politician to dismiss views they do not like by believing they are politically motivated, and it also makes it too easy for the politician to find academics who will tell them the stories they would like to hear.

                A third class of explanation for policy mistakes is that they are genuine mistakes. Events may arise which come as a surprise to most academics as well as policymakers, so there is genuine uncertainty. In terms of 2010, I think the probability of Greek default with possible Eurozone contagion was important at changing attitudes among those who might otherwise have been sympathetic to more fiscal stimulus/less austerity. In the case of the UK, it may have been crucial in persuading Nick Clegg and the LibDems to support greater austerity as part of the coalition. As I wrote here: “What finance minister can sleep easy when there is a chance that they too might be forced down the road being travelled by Greece, Ireland, Spain, Portugal and Italy?” Now I go on to argue, following Paul De Grauwe, that this crisis was a crisis of the Eurozone, and not the precursor to a generalised government debt panic. Although that view is gaining increasing acceptance as interest rates on government debt elsewhere continue to fall, at the time this proposition was neither obvious (governments with their own currencies default through inflation and depreciation, and lenders will fear that) nor widely argued.

In situations of this type, academics can in principle have much more influence. Furthermore, the blogosphere allows for an immediacy that might just be able to influence opinions before mistakes are made, and positions become entrenched. In the case of 2010 and austerity, I do not think it would have been enough. The political forces pushing for austerity, the hidden agendas, were too strong, and the panic induced by events in the Eurozone too great. But academics should never become so pessimistic about their potential influence that they give up trying.