27 March 2012

Stein Ringen: Time for economists to eat humble pie ... again

Economists are no more likely always to agree than any other experts but there was a remarkable unanimity as the crisis unfolded: Europe was on the edge of the abyss; bold and rapid action was needed from strong governments.

Against this storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available. She has been proved right. Steady work and steely brinkmanship have carved out for Greece the biggest ever writedown of government debt, in a sophisticated and complex deal.

Had the balance of opinion among economists prevailed, private bondholders, who had lent recklessly, would have been let off scot-free at European taxpayers’ expense. Why were so many commentators so careless? I have no problem with the “chief economists”, whose job is to protect the banking sector, but what about the independent academic economists?

First, they neglected careful description of the problem. There never was a sovereign debt crisis. There were two separate problems. Second, they neglected the need for precise language. “Firewalls”, “firepower” and “bazookas” are not terms of analysis. Contagion? What does that mean? And third, they indulged in predictions, the economist’s ultimate vanity, but their models are no more than equations with countless unknowns.

There may be more unmanageable government debt ahead. There is a remaining political deficit in the EU. The medicine so far has been harsh. Governments have been bullied and Greece in particular humiliated. Ms Merkel has protected German interests ruthlessly.

So what we have seen was not pretty. But it has been political craftsmanship of the highest order. Government borrowing has not been discredited but chronic borrowing to fund consumption is hopefully on its way to becoming history.

Europe’s leading politicians have performed admirably. They have done their job by staying level-headed and trusting themselves. One lesson is clear: beware the experts who come bearing advice and in particular economic experts.

Full article (FT subscription required)

© Financial Times