Blame the Messenger

Robert Sierra - 18 January 2017

As Peter Warburton commented last week, Andy Haldane has triggered a backlash from economists for wearing a metaphorical hair shirt on behalf of the economics profession. Economics has not failed, any more than meteorology or astro-physics. Despite being chief economist of the Bank of England, Haldane has strayed well outside his remit in offering this public apology. He seems to blame the whole profession for failing to anticipate significant events such as the global financial crisis, when many commentators – including Raghuram Rajan, William White and Nouriel Roubini – were prominent, timely and vociferous in their warnings.

Haldane compared the failure of the economics profession to foresee the financial crisis to BBC weatherman Michael Fish’s failure to predict the 1987 hurricane. But not all meteorologists missed the warnings. The French weather service, in fact, predicted it as did the phone caller who raised the alarm with the BBC: Anita Hart, who wanted to go on a caravanning holiday to Wales, was told by her amateur meteorologist son to postpone the trip since a hurricane was on the way. In short, economics did not fail just as meteorology also did not fail. That part of the economics toolkit which facilitates assessments of sustainability has been working just fine. The problem lies with those who don’t like the results because they rock the boat of academic and institutional respectability.

What Haldane describes is the collective failure of the economics establishment to embrace challenges to its cherished nostrums. In the mid-1990s, Brooksley Born, as head of the Commodity Futures Trading Commission (CFTC) conducted a financial analysis which led her to anticipate a serious financial crisis, derived from the explosive growth of trade in unregulated derivatives. Born’s persistent calls for the regulation of financial derivatives, however, were opposed at the time by both the Federal Reserve and the US Treasury. No-one in a position of authority in the central banks was prepared to take this threat seriously.

On Brexit, economics also stands accused. Before the vote, a “consensus” grew around the view that Brexit would be an economic disaster for the UK. Facts and rational analysis were not needed to validate that position, it seemed. It was enough that the Bank of England, H M Treasury, Institute for Fiscal Studies, CBI and other experts said so and they constructed a detailed economic forecast based on this arguably unfounded expectation. Not everyone in the profession shared that gloomy view.

The public’s gripe with economics lies with the arrogance of the mainstream forecasters, as they mis-represent the likely accuracy of their forecasts. As David Miles, ex-BoE MPC member notes, any criticism of “economics” that rests on its failure to predict the crisis is no more plausible than the idea that statistical theory needs to be rewritten because mathematicians have a poor record at predicting winning lottery ticket numbers. In short, the fault lies not with economics but perhaps with (some) economists.

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