It is time for economists to admit that they are stumped. Four years after being blindsided by Lehman Brothers’ collapse, the profession is still stumbling in the dark. Policymakers and pundits still make confident pronouncements, but the conclusions are radically different. The expert disagreements give away the truth: ignorance reigns.
Here are six crucial questions which professionals should stop pretending they can answer:
1) What creates retail inflation?
If, as some economists think, ample supplies of money push up prices, then the current inflation rates of around 2 percent are inexplicably low. After all, monetary and fiscal policies have never been as generous. If, as other professionals believe, prices fall when there is excess supply of goods and labour, then inflation rates are inexplicably high. Production is still well below trend levels and unemployment rates have rarely been as high.
2) How do financial asset prices affect the real economy?
Before the credit bubble burst, most economists believed high prices in financial markets were a sign and a cause of a strong economy. Now bull markets seem more dangerous. But then again, low or falling asset prices seem to discourage economic activity, and they are presumably more dangerous when leverage levels are high.
3) Do big fiscal deficits damage the economy?
Austerity fans are persuaded that deficits are harmful, stimulus fans are equally certain they are not. The evidence, from Japan, Europe and the United States, is inconclusive. The largest government budget shortfalls ever in peacetime have neither clearly held back nor obviously increased either GDP growth or employment. The situation might have been much worse with smaller deficits, or the current high deficits may actually be storing up terrible trouble of some sort for later. No one really knows.