Rebuilding public trust in economics

Doctoral Student Alessio Terzi says its time to discuss openly about what we don't know. 

“The public has had enough of experts” was the infamous snap of UK pro-leave campaigner Michael Gove when confronted with economists’ forecasts of a poorer post-Brexit Britain. The feeling is that this was not an isolated instance of anti-intellectualism, but rather that the wider public, in the UK, the US, and elsewhere, has lost trust in the economics profession after years of wrong or contrasting predictions. The dated jokes on the topic are telling, starting with John Kenneth Galbraith’s “the only function of economic forecasting is to make astrology look respectable.” And this was before the sub-prime crisis.

However, as noted by French policy advisor and Hertie School Professor Jean Pisani-Ferry, this loss of credibility is no laughing matter as “distrust of experts fuels distrust of democratically elected governments, if not of democracy itself.” Rebuilding confidence in the economics profession is urgent and should start on the expert side by being more open about the things we know we don’t know — the known unknowns. This act of humility is particularly needed on the topic which nowadays is of most interest to the press and the wider public: growth.

Notwithstanding the frequent statements by pundits that country A should implement reforms XYZ in order to accelerate its economic growth, the reality is that there is a lot of uncertainty related to diagnosing a country’s growth problems, particularly when going beyond the short run. “The secret to economic growth [largely] remains a secret,” to quote Harvard professor Ricardo Hausmann. This is not to say that economists have no knowledge to bring to the table. To the contrary, decades of academic research have gone into identifying theoretically and empirically several links between policies and growth. However, these can only provide general guidance in a world of uncertainty.

A useful parallel can be drawn with the medical profession. Scientific research has documented how certain behaviours (smoking, eating junk food, lack of exercise) are associated with diseases and, ultimately, a shorter life expectancy. However, this does not imply that a doctor can provide an individual with an unerring strategy to reach 100+ years of age. In addition, the world is full of counter-examples, with people reaching a venerable age while smoking like a chimney, or conversely ticking all the healthy life boxes and nonetheless dying prematurely. This alone does not dismiss the importance of the medical profession, but just calls for humility and further research.

Bringing it back to economics, if there is one general principle that by now goes widely uncontested in the field, it is that every country is different and that therefore there is no “one size fits all” growth strategy. The Soviet Union in the 50s, South Korea and Taiwan in the 60s, Japan in the 70s and 80s, China in the 90s all experienced sharp growth accelerations while implementing different, often heterodox, policy mixes, which were evidently tailored to local capabilities. As such, policy experts should use a word of caution when recommending reforms to a specific country simply based on international indicators and best practices. We know that there is ample uncertainty as to whether this will work in mechanically spurring growth.

In Europe, where blanket calls for more structural reforms are very frequent nowadays, this problem is particularly acute. Simply looking at a country’s (poor) World Bank Doing Business ranking or OECD Product Market indicator (PMR) and taking that alone as evidence that a move towards best practice would unfailingly lead to a growth acceleration is fallacious. Germany is the worst country in which to start a business in the OECD, and has a worse PMR than stagnating Italy. Nonetheless, this is not preventing its economy from firing on all cylinders. While less red tape is clearly always desirable per se, economists should be careful about presenting it as a growth silver bullet.

Going beyond the selection of country-specific structural reforms, issues of timing, sequencing, and packaging remain largely unresolved in the academic literature. This is even more so the case when political economy considerations are brought into the picture. For example, a strong tenet in the political literature is the so-called “crisis hypothesis”, stating that a crisis opens up the possibility to implement reforms that have been put off for years due to the resistance of vested interests. However, at the same time, IMF economic analysis suggests that in many instances a crisis is the worst moment to implement reforms, for example a labour market liberalisation, as this might reinforce the contraction in the short term. Economic theory alone provides no guidance as to which consideration should prevail.

As discussed by Harvard Kennedy School Professor  Dani Rodrik, economic experts are obviously encouraged to use their deep knowledge of a country, experience, and judgment in determining which growth model is the most relevant to a specific setting at a specific time and, based on this, provide policy advice. However, in doing so, they should be very transparent about the assumptions they are making and about the substantial uncertainty connected to the field. This alone would provide a framework to rationalise dissenting views, without leading to a full dismissal of the discipline as hocus-pocus. On the contrary, a tendency to be opinionated, often in disagreement, and later being disproved by outcomes has led the wider public to lose faith in the profession. Solidly anchoring policy advice in the academic literature, and therefore being clear about what we know, what we assume, and what we don’t know, is a first step to regaining that trust.