Economists cannot predict the future-policies should reflect this


Economists do not often promote the virtue of self-doubt. Especially when they are Nobel Prize winners and Washington policymakers. However, this week, Robert Rubin (former U.S. Secretary of the Treasury), Peter Olsag (former Director of the Office of Management and Budget) and Joseph Stiglitz (Nobel laureate in economics) did just that. at this point.

More specifically, in a Aspen Institute Debate – based on a dissertation They co-authored an article earlier this year in which the trio called on economists to “keep humble” when predicting the future.

They also urged policymakers to embrace the idea of ​​a “semi-autonomous discretionary fiscal structure” based on “automatic stabilizers” by overhauling their fiscal processes to deal with this recognized uncertainty.

This refers to the idea that some fiscal plans should be automatically adjusted when the situation changes unexpectedly—that is, when the economist’s forecast is wrong. This is different from the current Washington system, which has a fixed annual budget, follows the same forecasts and endless political bargaining.

“If we can automatically adjust the budget based on what is actually happening in the economy [in real time] We might end up in a better place,” Orszag said. He pointed out that if automatic stabilizers are used for unemployment insurance, for example, support will be expanded or reduced based on tangible unemployment patterns rather than political transactions.

Could these proposals be successful? soon. The Biden administration is currently embroiled in the type of dispute that semi-autonomous fiscal discretion should resolve, that is, whether its previously agreed unemployment benefit plan is too generous given the current rebound. The White House is also so focused on pushing Biden’s infrastructure package that it is unable to start debating other ideas.

However, it would be a pity to ignore these proposals. Centrists like Rubin rarely cooperate with progressives like Stiglitz (as Olsag pointed out, these are “extreme extremes” of Democratic decision-making.)

It is worthwhile to discuss these ideas more for three reasons.

First, Stiglitz and his colleagues are very right to call for policymakers to be more open about the limitations of predictions (not to mention that self-doubt is not something Rubin himself often displays in his office).In recent years, some institutions, including the Bank of England, have tried to pass Introducing the fan graph To describe inflation forecasts.

But this is not universal. And, as the trio pointed out, there is one area in particular that needs more excuse: interest rates. There is a common assumption today that we live in a world with permanently low interest rates.While at the same time This week, the British “Financial Times” poll It shows that economists expect the Fed to raise interest rates twice before the end of 2023, so it is assumed that any tightening measures will be moderate.

However, this idea needs to be hedged. As Rubin said, “There is a lot of uncertainty in interest rates.” It should be told to voters.

Second, the group is also right to say that the government needs to prepare for a world where the model is wrong. They suggested that the U.S. Treasury Department should protect itself from the possibility of sudden increases in interest rates by selling longer-term government bonds. This is wise. They also argued that if policymakers have automatic stabilizers in certain areas of fiscal policy, they will be better able to formulate discretionary policies in other areas to deal with shocks or long-term problems.

This may be too optimistic.But talking about uncertainty will clarify the third point: one needs to talk about the explosive level of national debt, which Now it exceeds 100% of GDP.

Few people have debated this recently, because ultra-low interest rates reduce debt servicing costs. But if interest rates rise in the future, these costs will spiral upward and may trigger a full-blown crisis. An unexploded bomb in fiscal policy is hidden in the obvious.

There is no sign of crisis now; Today’s 10-year Treasury bond yields are lower Than a few months ago. I suspect this will last for a while. But as Rubin said: “Market conditions may be out of sync for a long time, and then adjust very suddenly and brutally.”

This does not mean that the government needs to cut debt by cutting spending (as some Republicans hope). Nor does it rule out the idea of ​​using automatic financial stabilizers in the future. But what is needed is a debate about proactive long-term adjustments.

This has a historical model. 1983 Greenspan Committee A plan was developed to gradually increase the age of social security benefits. It currently takes effect without any political struggle (or even much attention) because it is slowly being implemented in a pre-agreed manner.

In other words, “automated” strategies sometimes work-when there are smart plans. The Biden team should pay attention; one of the most commendable things they can do today is to leave certainty to their successors in certain policy areas. Especially in an uncertain world.

gillian.tett@ft.com

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