“A hell of a lot. Whether policymakers take our advice is the real question.”
This year’s WES Presents was kicked off by Professor Jagjit Chadha, director of the National Institute of Economic and Social Research (NIESR). In a time where the role of experts seems to be increasingly distrusted in public discourse, he highlighted the value of rigorous economic analysis rather than reductive political sensationalism in the search for the right answers in policy, forecasting and analysis of the past.
Economists often get blamed for inaccurate forecasting; the most recent case of this being Brexit. As with any event under uncertainty, Chadha highlighted that the outcome of Brexit is likely to be normally distributed. Politicians arguing against Brexit focused on extreme negative and unlikely outcomes located in the tails of the distribution. This choice, he argued, has weakened their hand in pushing for a soft exit after the vote. The UK economy kept growing and defied the inflated expectations of a disaster, thereby tarnishing the credibility of those remainers who pled for a moderate, EEA-style exit.
The cost of this focus on the extreme outcome is also palpable in economic activity. FDI and business investment has been delayed as the excessive uncertainty paralyses potential investors. GDP growth for the past 2 years has remained at 1.5% as opposed to the 2% that Chadha’s NIESR and other institutions predicted had there not been a call to leave.
Instead of listening to what Economists with rigorous models saw as the likely outcomes, the discourse was carried away to the extreme outcomes, hurting political credibility, creating unnecessary uncertainty and swaying the negotiation stance to a hard Brexit.
Chadha reiterated that this would divert the UK’s current path toward a worse economic performance.
Nonetheless, one might get the impression that having extreme stances is the only way to stay relevant and drive policy. A nuanced perspective might sound good, but how does that get anything done? After all, aren’t the beginnings of change found in those who dare propose what is controversial? If Professor Chadha’s talk made one clear impression it was that precisely the opposite is true.
The answers for how to direct policy regarding the future are found in the expert, whose data can help rule out alternatives and isolate causes for problems clearly, thereby implicitly leading to a solution.
During his discussion of fiscal policy, Chadha challenged the notion that running fiscal deficits as part of fiscal stabilization programs is bad. He argued that much effort has been directed in reducing debt in order to regain credibility of foreign investors, but in a way that is not optimum for society. It prioritises a long run interest in price stabilization over current pressing issues in education, health and infrastructure. Letting the chancellor set arbitrary targets has excessively constrained fiscal expenditure to a point that it might well have influenced the referendum result two years ago. Perhaps it is time for the government to listen more to Economists like those at NIESR and recalibrate their policies to what the government’s priority should be: to empower people, improve welfare and address social needs. Otherwise, they will face the consequence of being ousted by voters who turned, as they did, to populists who claim they will alter expenditure habits. Governments must trade their exaggerated paranoia of inflation and debt with a better balance in the budget to tackle demands in infrastructure, healthcare and beyond.
Further still, Chadha argued for the perception of fiscal policy to move away from debt stabilization to risk sharing: “The fundamental problem of fiscal policy is not to stabilize the debt, that’s rubbish. What fiscal policy does is that it allows us to share risks with future generations. Therefore, what fiscal policy has to be able to do is to issue enough debt to share the risk that we’re currently facing with future generations.” This will be “terribly complicated” and requires a comprehensive discussion on a social level about how we split risk across generations.
So, what is the role of economics in policy making? For one, it is much greater than the current political climate gives it credit for. If the answers to the great economic challenges of our generation are to be found, they will come from those who wield rigorous analysis and data to provide an opinion rather than from the simplifications that turn to the tails of the distribution to make a case based on fear. The clearest voices in the room are not the loudest but come from those who are critical in challenging assumptions. Those who avoid becoming the “madmen in authority, who distil their frenzy from some academic scribbler of a few years back”, that Keynes warned us about.
Pablo Fernandez Cras