An old joke goes, "If you laid all the economists in the world end to end, they still wouldn't reach a conclusion." That may no longer be the case.
Some of the world's top macro-economists convened in a conference titled "Rethinking Macro Policy II" by the International Monetary Fund in April of this year generally agreed on one thing. They concluded that the existing macro-economic models did not do a good job in predicting or preventing the financial crisis of 2008-2009 nor in stimulating recovery since then. The economists did not reach any consensus, however, about what should be done now to revive the sluggish and flagging world economy.
As Eduardo Porter observed in The New York Times the week after the conference, "...there is still much uncertainty about what policies are needed to prevent another financial shock from tipping the world economy into an abyss again a few years down the road." In The Washington Post, at about the same time, Robert Samuelson was much harsher in his critique declaring, "The trust in macro-economic magic has shattered...We have moved into an era of less economic understanding and control."
Nonetheless, some economists and others continue to advance policy proposals to deal with the current financial predicament. In the main, these advocates divide into two groups: those proposing an austerity agenda and those proposing a stimulus agenda.
The fundamental question that arises is whether the debate about how to proceed at this juncture is an economic or a philosophical one. In our opinion, it is both.
We believe this to be true because, in spite of the increasing use of rigorous sophisticated statistical methods, macro-economics remains as much an art as a science. More importantly, these competing economic analytical perspectives are not "value" neutral.
That's the point that Charles Lane makes in his May 20 op-ed piece for The Washington Post. Lane compares and contrasts the positions of three Nobel Prize winners ("austerian" James Buchanan and fiscal stimulus supporters, Paul Krugman and Joseph Stiglitz) and concludes, "Their differences reflect not so much economic principles as deep-seated beliefs about how society should, and does, operate."
Given all of this, it appears that when it comes to the current economic conditions, we are sailing in uncharted waters without a completely trustworthy compass. The question is how to navigate them successfully. We are certain there is no single easy answer to this but believe that there are a series of principles that can be employed to avoid running aground on the economic shoals now and in the future.
1. Put the emphasis on pragmatic problem-solving rather than on absolutist policy positions. In 1959, Charles Lindblom, a professor of political science and economics at Yale, wrote a classic article for the Public Administration Review titled "The Science of Muddling Through." In his article, Lindblom advised an "incremental" approach to public policy and decision-making as opposed to relying strictly on "scientific methods."
It seems to us that muddling through is the appropriate course for moving forward today as opposed to embracing an all or nothing at all economic strategy. Muddling through would consist of an incremental and integrated approach to problem-solving. Muddling through would be about compromise and in the province of practitioners.
Charles Lane suggests this type of approach in his column when he writes, "It is also essentially about value judgments and trade offs. Nobelists may be better qualified to describe the issues than the average voter, but they are no better qualified to decide them." Fareed Zakaria called for a blended approach as well in a column titled "Economy Needs Both Reform and Investment".
2. Refine the economic models based upon the lessons learned. The one thing that we should have learned from the financial crisis of the Great Recession and its aftermath is that our current macro-economic models are insufficient to the task at hand. Monetary policy and low interest rates are financial tools but not growth levers. Hearkening back to lessons that John Maynard Keynes drew from the 1930's, David Ignatius explains that "Then and now, monetary policy could not persuade frightened people to spend and invest. As a result, the Western economies remain stuck at high unemployment and low output levels."
The refined economic models need to be more robust and to have greater predictive and explanatory value. We are not experts but it would seem to us that economists could build such models by taking behavioral, psychological, social and political variables into consideration in their design and development.
3. Establish an independent panel and search for agreement across a broad spectrum of economists to secure input for shaping future policy. The Initiative on Global Markets at the University of Chicago's Booth School of Business has assembled an expert panel of more than forty economists to weigh in on important issues. According to Steven D. Levitt, U of C Professor and author of the best-selling Freakonomics, these economists have been in universal agreement on many of the questions presented to them and there was only one question on "which fewer than 80 percent of the economists are on the same side of the issue." Members of the panel also stated that the "archive of panel answers may help identify authors and topics for opinion pieces that are driven by evidence rather than ideology."
A panel similar to this one would be useful as a sounding board for "debunking" political policy arguments and disagreements. That's not to say that decisions should be made based upon the economists' shared perspective but that it would be helpful to have as a frame of reference for culling out the ideologically driven or outlier economic positions
Surprisingly, it appears that economists may agree with one another much more frequently than is thought. We would be remiss if we did not point out that this is not necessarily a good thing for two reasons.
First, a recent study comparing the responses of the Booth School's Economic Experts Panel to those of a representative sample of US households on 19 questions disclosed that "when economists strongly agree on issues, the general public usually disagrees with them." There was an average gap of 35 points between the opinions of the economists and the public. For example, only 11 percent of the economists thought a Buy America policy would be good for manufacturing employment as opposed to almost 75 percent of the general public.
Second, the experts can be wrong. This is attested to by the fact that in December of 2007, BusinessWeek published a forecast in which all of the 54 economists surveyed predicted that the U.S. economy would not "sink into a recession."
In sum, this convinces us of the necessity for "muddling through" economics. That may not sound and it is not elegant. But, it is what is essential when there is faulty agreement or no agreement among the experts. It is what is required when the problem is complex, multifaceted and persistent and there is no single bore solution for resolving it.
This is where we find ourselves. It's time to muddle through.