Balanced-budget fundamentalism

Europeans, and particularly the European elite, find popular attitudes to science among many across the Atlantic both amusing and distressing. In Europe we do not have regular attempts to replace evolution with ‘intelligent design’ on school curriculums. Climate change denial is not mainstream politics in Europe as it is in the US (with the possible exception of the UK). Yet Europe, and particularly its governing elite, seems gripped by a belief that is as unscientific and more immediately dangerous. It is a belief that fiscal policy should be tightened in a liquidity trap.

In the UK economic growth is currently strong, but that cannot disguise the fact that this has been the slowest recovery from a recession for centuries. Austerity may not be the main cause of that, but it certainly played its part. Yet the government that undertook this austerity, instead of trying to distract attention from its mistake, is planning to do it all over again. Either this is a serious intention, or a ruse to help win an election, but either way it suggests events have not dulled its faith in this doctrine.

Europe suffered a second recession thanks to a combination of austerity and poor monetary policy. Yet its monetary policymakers, rather than take serious steps to address the fact that Eurozone GDP is stagnant and inflation is barely positive, choose to largely sit on their hands and instead to continue to extol the virtues of austerity. (Dear ECB. You seem very keen on structural reform. Given your performance, maybe you should try some yourself.) In major economies like France and the Netherlands, the absence of growth leads to deficit targets being missed, and the medieval fiscal rules of the Eurozone imply further austerity is required. As Wolfgang Munchau points out (August 15), German newspapers seem more concerned with the French budget deficit than with the prospect of deflation.

There is now almost universal agreement among economists that tightening fiscal policy tends to significantly reduce output and increase unemployment when interest rates are at their lower bound: the debate is by how much. A few argue that monetary policy could still rescue the situation even though interest rates are at their lower bound, but the chance of the ECB following their advice is zero. 

Paul De Grauwe puts it eloquently. 

“European policymakers are doing everything they can to stop recovery taking off, so they should not be surprised if there is in fact no take-off. It is balanced-budget fundamentalism, and it has become religious.”

They still teach Keynesian economics in Europe, so it is not as if the science is not taught. Nor do I find much difference between the views of junior and middle-ranking macroeconomists working for the ECB or Commission compared to, for example, those working for the IMF, apart from a natural recognition of political realities. Instead I think the problem is much the same as that encountered in the US, but just different in degree.

The mistake academics can often make is to believe that what they regard as received wisdom among themselves will be reflected in the policy debate, when these issues have a strong ideological element or where significant sectional financial interests are involved. In reality there is a policy advice community that lies between the expert and the politician, and while some in this community are genuinely interested in evidence, others are more attuned to a particular ideology, or the interests of money, or what ‘plays well’ with sections of the public. Some in this community might even be economists, but economists who - if they ever had macroeconomic expertise - seem happy to leave it behind.

So why does ‘balanced-budget fundamentalism’ appear to be more dominant in Europe than the US. I do not think you will find the answer in any difference between the macro taught in the two continents. Some might point to the dominance of ordoliberalism in Germany, but this is not so very different to the dominance of neoliberalism within the policy advice community in the US. Perhaps there is something in the greater ability of academics in the US (and one in particular) to bypass the policy advice community through both conventional and more modern forms of media. However I suspect a big factor is just recent experience.

The US never had a debt funding crisis. The ‘bond vigilantes’ never turned up. In the Eurozone they did, and that had a scarring effect on European policymakers that large sections of the policy advice community can play to, and which leaves those who might oppose austerity powerless. That is not meant to excuse the motives of those that foster a belief in balanced budget fundamentalism, but simply to note that it makes it more difficult for science and evidence to get a look in. The difference between fundamentalism that denies the concept of evolution and fundamentalism that denies the principles of macroeconomics is that the latter is doing people immediate harm.  

Economic standards

I have used the following analogy before, but it remains pertinent. Imagine you are an academic scientist who is genuinely sceptical about climate change. I have met them so I know they exist. You are asked by a journalist whether the current spell of cold weather disproves man made global warming. Perhaps you are tempted to say yes, or ‘yes, although’, because it would encourage scepticism. But I’m almost certain you would instead say ‘of course not’. You would then give the journalist a little lecture about probabilities, averages, trends and so forth. It is exactly the same answer that a scientist who believes in climate change would give. You do not give the wrong answer just because it is convenient to your overall argument, because you are an academic and a scientist. You have standards.

Now imagine (maybe you do not need to) that you are an economist and you are asked by a journalist “Has George Osborne’s “plan A” [fiscal austerity] been vindicated by the recovery in 2013?” There is only one correct answer to this question - no. It is the correct answer, even if you believe plan A is the right policy. I rather like the analogy that Chris Dillow recently used: “To give Osborne credit for the recovery is like praising a taxi-driver for getting us home when he has taken us on a two-hour detour.” Chris says that the mistake of saying yes is an example of outcome bias. For some maybe, but for a trained economist it is no excuse. I think, like Paul Krugman, that it is just political opportunism.

It is important to understand that this has nothing to do with whether Plan A was a good or bad policy. What a supporter of Plan A should reply is  “No, but I still believe Plan A is the right policy for the following reasons”. If they are being generous they might even say “the fact that the recovery has been so delayed could be evidence against Plan A”. But for an economist, a recovery four years after the recession is never going to be evidence that supports Plan A.

I’m afraid this is an example of something we have seen before. When some economists enter a political arena (using political in its widest sense), there is a danger that they leave their scientific standards behind. Thankfully only two academics answered yes on this occasion, but many more city economists did so. So I should have been braver in my earlier post about the differences between academic and city economists - an explanation I should have added is that some city economists have lower scientific standards.

You could say I am naive to expect anything else. As a great deal of politics is about economics, then economics is also bound to be political, and cannot hope to have the same integrity as a science. There is a weak form of this proposition with which I agree: economic ideas are influenced by ideology, and it is foolish to pretend otherwise. But our reaction should be to expose these influences and try and reduce them, rather than shrugging our shoulders. What I refuse to accept is that economics cannot be an evidence based discipline.

So, if the hypothesis is “Plan A is the appropriate policy” and the evidence is “the economy recovered in 2013”, any economist can only give one response: the evidence does not support the hypothesis. Just because the question is political does not justify saying otherwise. In fact, being in a political arena means it is all the more important to maintain scientific standards. That is why we call economics a discipline.

Coda

I wrote this while listening to a Christmas present, a CD of this (Mercury nominated) album by Jon Hopkins (thanks again Sam). I think it is excellent music to blog by. But if you think I’ve gone too far in this post, do say so in comments, as it would allow me to respond that I was entitled to let my normal standards slip because I was under the influence of the music! 

When policy ignores evidence: badgers and austerity

In the wood next to our house live at least one fox and maybe some badgers. We have seen badgers around, but it was only this summer that we first saw a badger walking (or more accurately sniffing) its way through our garden. It caused great excitement. On a walk from our house is someone who keeps on their smallholding a small number of alpacas. Except the last time we passed two were missing. They had been put down, because they had tested positive for TB. The risk that the others, and nearby cattle, might get the disease was too great. Tragically, autopsies found no trace of TB: the initial tests are not 100% accurate.

Badgers get, and spread, TB. As a result, the UK government is about to begin a large scale cull of badgers in Gloucestershire and Somerset. No one likes the idea of killing badgers. But cattle (or occasionally alpacas) dying from TB is no fun either. So the badger cull is just one of those necessary bad things that have to be done to prevent something even worse happening. Environmentalists are up in arms, but that is just because badgers look cute and cattle do not.

Except that is not what the evidence suggests. Following various small scale randomised badger culling trials, the UK government set up an independent group of scientists (the ISG) to evaluate the evidence. In 2007 the government published the report (pdf). It concluded as follows:

“The ISG’s work – most of which has already been published in peer-reviewed scientific journals – has reached two key conclusions. First, while badgers are clearly a source of cattle TB, careful evaluation of our own and others’ data indicates that badger culling can make no meaningful contribution to cattle TB control in Britain. Indeed, some policies under consideration are likely to make matters worse rather than better. Second, weaknesses in cattle testing regimes mean that cattle themselves contribute significantly to the persistence and spread of disease in all areas where TB occurs, and in some parts of Britain are likely to be the main source of infection. Scientific findings indicate that the rising incidence of disease can be reversed, and geographical spread contained, by the rigid application of cattle-based control measures alone.”

On Sunday 30 eminent UK and US scientists published a letter in the Observer. They write: “As scientists with expertise in managing wildlife and wildlife diseases, we believe the complexities of TB transmission mean that licensed culling risks increasing cattle TB rather than reducing it.” One of the signatories described the government’s policy as crazy, and suggested vaccination and biosecurity was a better solution. The Guardian reports the chair of the ISG as saying “I just don't know anyone who is really informed who thinks this is a good idea." The current government chief scientist said: "I continue to engage with Defra [the relevant government ministry] on the evidence base concerning the development of bovine TB policy. I am content that the evidence base, including uncertainties and evidence gaps, has been communicated effectively to ministers." In other words, ministers know what scientists are saying and have decided to ignore them.

So what is going on? One of the strongest pressure groups in the UK is the National Farmers Union (NFU), and many of their members naturally care a great deal about the health of cattle. To say that the NFU has a strong influence on policy at Defra is a bit like saying that the position of the sun has a strong influence on whether it is night or day. The NFU are convinced that culling badgers will reduce the incidence of TB in cattle, and government policy is following that belief, rather than the scientific advice it commissioned. (For more details, see George Monbiot here.) The BBC reports Defra Minister David Heath as saying "No-one wants to kill badgers but the science is clear that we will not get on top of this disease without tackling it in both wildlife and cattle." Dare I say weasel words.

I would not be the first to draw a link between research and evidence in epidemiology and macroeconomics. (Here is Peter Dorman on bees.) Neither is a science where experiments can be easily devised to definitively prove ideas right or wrong.  In both fields evidence can be messy. With austerity we did not have randomised trials: we had one almost globalised trial, starting in 2010, and one eighty years earlier. The evidence this time round is becoming clear: the harmful effects are much greater than many had assumed.

As I know about macroeconomics rather than epidemiology, I’m tempted to think the policy on badgers is the greater political sin. I’m all too aware of the conflicting messages the academic community have been giving policymakers. Although TB in cattle is an emotionally charged issue, I doubt that it attracts the ideological baggage that seems to infect macro. However, perhaps the two cases are not so different. The problem with austerity is that too many people of influence just know that high government debt is always and everywhere a bad thing. Too many think it is just obvious that when a country has difficulties in selling debt that must imply cutting it back as quickly as possible, in the same way that it is obvious that killing badgers must reduce the spread of TB. And perhaps too many people see badger culls as part of a battle between farmers and environmentalists, just as austerity is a weapon in a battle over the size of the state. 

Maybe we are just naive in thinking that as the evidence against austerity accumulates, and as those that were once for it change their mind, the policy will change. As Wolfgang Munchau writes (FT): “As hordes of frustrated European economists know only too well, macroeconomic analysis in general does not play a role in eurozone policy making.” So the policy goes on, in both the UK and the Eurozone, and I do not like to think about what might happen in the US if Romney wins. While I would never advocate a totally uncritical acceptance of the views of scientists, we are an awfully long way from that position, as unfortunately many badgers are about to find out.