Tuesday, 22 January 2013

More Power to Economists!

With sound economic policy out of favour, there may be an argument for giving economists more control in government.

Good economics is a hard sell.  Economists have tried their hardest to convince people that relative free movement of goods will benefit the economy as a whole but businesses battling against imports from overseas win out against typically tepid support for free trade.  The United States and Britain are cutting back on immigration and restricting the entry of even highly-skilled workers despite such individuals paying significantly more in taxes than they receive in government payouts.  Considering that some areas of government such as monetary policy have already been handed over to economists, is there an argument for more policy to be handled over to such unelected experts?

The independence of central banks in monetary policy is sacrosanct in many countries.  Politicians who already determine fiscal policy (government spending and taxation) are seen as being too unreliable to also have the power over the tools of monetary policy such as the ability to set interest rates.  For example, a government may be tempted to lower interest rates in the period before an election which would boost the economy as well as their chances of staying in power.  Politicians have instead handed over the control of monetary policy to their country’s central bank whose officials are seem as better at long-term economic policy due to not having to worry about reelection.  But politicians still get to stipulate the goals of monetary policy such as low inflation (or full employment in the case of the Federal Reserve in the United States).  

The handing over of monetary policy has been made possible by worries about the adverse effects of inflation.  Rising prices eat away at the value of savings and households and businesses may hold back on spending if prices jump around a lot.  The relative level of consensus over the need to rein in inflation has made monetary policy less controversial and enabled its outsourcing to central banks.  In comparison, fiscal policy involves more numerous components such as the level of taxation and spending along with what should be taxed and where money should be spent.  As such, there will always be winners and losers in fiscal policy as, for example, spending by the government will benefit some and exclude others depending on what is targeted.  To ensure that the majority of people are happy with the way in which the government goes about its business, politician parties have to outline their spending and taxation plans to voters in a democracy in order to get elected.

However, democracy does not mean that voters will choose the party with the best economic policies to govern with other issues also swaying the minds of voters.  There is a theory which espouses that voters have biases in the ways in which they vote such as a dislike of foreigners which leads to parties attracting voters with policies with lower trade and less immigration than would be optimal for the economy.  Other examples of biases could include an anti-tax bias where people dislike being taxed and a jobs bias where the number of jobs is seen as more important than the amount of overall production .  Yet, it would require a considerable investment for voters to acquire the knowledge to decipher which policy options would be best so it is easier to fall back on their inherent biases. 

The debt crisis in Europe has thrown up one example of a country giving up on politicians and handing over the government to an economist – Italy.  Mario Monti was appointed as the head of a government of technocrats in November 2011 after years of mismanagement had left Italy as the most indebted country in Europe and in threat of economic collapse amid the turmoil in Europe.  Italians initially welcomed Monti but his popularity faded quickly as the austerity policies his government introduced proved too much for Italians to bear.  Now, in a bizarre twist of fate, Italians have a choice in elections at the end of February between parties headed by Monti and Silvio Berlusconi who was the previous Prime Minister before he lost his majority in parliament and who is responsible for many of Italy’s problems (more background on Berlusconi’s follies at Bigger than Berlusconi).  

However, economists are not always prescribing austerity.  The IMF which is an international body stacked full of economists made a case for austerity measures in Europe to be eased if growth continues to remain weak (for a further explanation, refer to Time for Plan B?).  On the other hand, Angela Merkel, the German Chancellor, has been the toughest advocate for spending cuts in Europe as German taxpayers are unwilling to bail out the spendthrift countries in Europe.  Germany’s voters distrust of their fellow Europeans has resulted in the Eurozone crisis dragging on for much longer than it needed to (see Conspiracy Theory for your Greek Holiday for more) which has also been painful for the Germans themselves.  But Europe would have not gotten into this mess in the first place if government spending had been kept in check during the boom times preceding the crisis.  Your Neighbourhood Economist would not be as bold (or stupid) to argue that economists are without fault in the Eurozone crisis but having economists overseeing government spending levels could have helped stop government finances following the boom and bust of the economy.  The current debt crises in Europe and the United States may not be enough to facilitate such a role for economists but that does not mean it is not an idea worth considering.

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