Economists on the skids

By Emanuel Derman
May 2, 2012

Economists keep battling it out.

Martin Wolf in the latest FT comes across with heartfelt empathy for the difficult life of a central banker, someone whose limitless narrow power over the economy doesn’t extend to troubled individual consumers. Wolfe is against austerity but recognizes the political difficulties.

Gideon Rachman says there’s no alternative to austerity.

Paul Krugman sniffs, a little scornfully, still recommending more lending as a cure for too much.

When so many smart people disagree, how do they expect anyone to be convinced?

I am reminded of the equally counterintuitive advice I was given, as a teenager learning to drive, by my Juan Manuel Fangio-loving friend in Cape Town. No radial tires in those days, and cars skidded on De Waal Drive at 30 mph in rainy weather. I once braked slightly on the way to Varsity and had my car turn through 90 degrees and slide sideways towards some policemen at the side of another car that did the same. Luckily I didn’t hit them and they forgave me.

“Turn into a skid,” my Fangio-loving friend told me later.

It sounds like the wrong thing to do, but it’s right: if you turn into the skid, your wheels can start rotating forwards again and grip the ground, and then you can gain control and slowly steer out of it. Once someone explains it to you, you see the point, and you can put it to the test. That’s not so easily done with the economic arguments.

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Yes, that’s it exactly: almost no one has reliable intuition about macroeconomic policy, so we can’t even tell who has the right ideas.

My favorite version of your skidding intuition analogy is the response to a stall when flying: put the nose down to increase airspeed and lift, which will help regain control. Not just counter-intuitive, but scary-sounding advice. (What? I’m falling out of the sky, and your brilliant Idea is to steer *down*?). I think of that every time I hear the “you can’t solve a debt problem with more debt” argument. Sure sounds logical, but austerity reduces “lift” more (to first order) than it decreases the debt (a more second order effect).

To paraphrase Will Rogers (possibly about Hoover?): it’s not the things people don’t know about macro that worry me, it’s the things they know for sure that just ain’t so.

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