Economics for politicians
President Barack Obama was happy enough to host a summit on job creation on Thursday. Economists were in attendance, among others. But few political leaders feel comfortable with the dismal science in all its glory. A painful course in economics might be a good idea for them, but elections are always looming. So here is a quick politicians’ post-crisis guide to economics.
Current and future leaders shouldn’t feel embarrassed about finding the subject daunting or depressing. It is both. Professional economists are so in love with equations that their suggestions and explanations are often mind-numbingly technical. And worthy advice is often unwelcome: along the lines of “spend less”.
But even for a politician paying attention, it’s hard to know which advice is worthwhile. Reality has all too often mugged many mainstream economists. Most recently, few economists feared that the 20-year long Great Moderation — a period of steady growth and low inflation — would turn into the Great Recession of 2008-2009. The argument about what went wrong has just begun, but the debate about what caused and cured the Great Depression is still lively after nearly 80 years.
Politicians can learn from professional economists’ weaknesses. The first rule of political economics is that consensus views should not be accepted blindly. It’s good to consider minority views.
If President George W. Bush had been a little more curious, perhaps he would have placed less faith in the no-worry approach to regulation and bubbles expounded by Alan Greenspan, then chairman of the Federal Reserve. He might, for example, have learned from the followers of Hyman Minsky, an economist whose theories about financial instability now look prescient.
Few politicians seem to learn this lesson. Obama’s economics team is made up almost entirely of professional insiders. Such choices make it easy for critics to say the administration has borrowed a narrow economic worldview from Wall Street. And the established figures are likely to close the door on the next John Maynard Keynes, who was a professor but pretty much an outsider when he came to prominence in the 1930s.
Nicolas Sarkozy has done better. The French president appointed two respected iconoclasts, Joseph Stiglitz and Amartya Sen, to think about measurements of economic success. Their advice was interesting: in short, don’t look for a single index. Compared to the current fixation on GDP growth, that sounds like a promising approach.
The thought provides a neat segue into the second rule: unemployment can matter more than growth. The recession has brought output down to 2006 levels in most rich countries. That’s not good, but it needn’t be a huge problem. There’s still an awful lot of production and consumption going on by the standards of any year in history other than the last two or three.
Only a culture obsessed with always having more stuff and services could be seriously troubled by so modest a decline. If modern economies do suffer from such an obsession, the best response is probably for a group rethink of aspirations.
Unemployment is a much greater evil. Human dignity is lost when workers who want jobs cannot find them. Chronic unemployment is also bad for future economic growth, as idle workers lose skills and motivation. In comparison, a few days less holiday or few more months delay before buying a new car look trivial.
The recession has pushed up unemployment rates significantly in the U.S., and somewhat less in European countries with stronger job protection laws. The conventional economic toolbox is not designed primarily to help the jobless find their way back into employment. Government programs help a little, but perhaps there are some bright iconoclast economists around with better ideas.
Finally, rule three: incurring debt is risky. The credit bubble and bust is a perfect example of an old but often forgotten economic truth: contracts to pay in the future can easily become promises that cannot be kept. Credit is an invaluable lubricant in modern economies, but too much credit creates hazardous oil slicks.
That principle is not too hard to explain, but it is an inconvenient political truth. It leads to unpopular policies that involve spending cuts and difficult choices. As Obama and his economic team contemplate the huge U.S. government deficit and their other economic problems, they could do worse than start every meeting with a ritual haiku: “Make jobs, not just growth; hear the minority view; and don’t run up debt.”