Do economists ever get it right?

There is one example when they did . . .

According to popular belief, economists rarely manage to predict correctly the consequences of important policy actions. Nevertheless, the case of the European Economic and Monetary Union (EMU) is one of those instances which economists did get it right.

Indeed, as far back as 1977, the MacDougall Report to the European Commission concluded that because the European Economic Community budget was very small, “… in present circumstances monetary union is impracticable.” Moreover, many economists on both sides of the Atlantic were cautioning against the planned single currency in the absence of a significant fiscal redistribution facility and/or the ability to run countercyclical fiscal policy.

Nevertheless, the political bandwagon prevailed, and the Delors Report threw caution to the wind and assumed that EMU could proceed without significant increases in the size of the EU budget, which was hovering around 1% of GDP (the 1977 Report was deeming it as necessary that the federal budget be as large as 10% of GDP). The only “concession” to economists’ concerns was the Maastricht Treaty rules imposing limits on government debts and deficits — as encapsulated in the Stability and Growth Pact (SGP).

However, the precedence given to moral-hazard considerations (and the defective way they were applied) over countercyclical fiscal policy — due to the fear that profligate governments would be too keen to run large budget deficits in recessions but very reluctant to run offsetting budget surpluses in booms — proved detrimental. Since the main focus of the SGP was on deficit limits, the resulting reduction (due to the euro) in real interest rates and concomitant boom experienced by some of the ‘periphery’ countries of the Eurozone made it very easy for governments to run (or to claim that they do) budget deficits below the 3% (of GDP) limit. Yet, this semblance of fiscal prudence — when in fact governments should be running budget surpluses — undermined their ability to conduct appropriately expansionary fiscal policy, when the boom ended, without running excessively large budget deficits.

To a large extent the semblance of fiscal prudence was aided by the very large current account deficits which some of the periphery countries were allowed to run during the Euro’s first decade. Although this appears to run counter to the well-known “twin deficits hypothesis” (i.e. that a larger budget deficit leads to a larger current account deficit), the experience of the periphery countries suggests that it is possible the direction of causality to be from a larger current account deficit to a smaller budget deficit.

For the periphery countries, EMU participation facilitated international borrowing at lower interest rates, allowing for a huge deterioration in the current account while the budget deficit improved. The reason is that imports, which become possible through international borrowing, need not fully displace spending on domestically produced goods (they may even increase it!). Moreover, they can create a revenue boon for the government. For example, car imports generate immediate tax revenue (VAT, registration taxes, etc.). They also allow for increases in domestic value added (e.g. services related to sales, advertising, and repairs of automobiles), thus allowing for second-round increases in income tax revenue. In the same vein, foreign loans (intermediated through the domestic banking sector) allowed for housing booms and created unsustainable increases in tax revenue.

The upshot of the above is that cynical governments may “achieve” a seemingly strict adherence to the SGP limits on budget deficits (they may even run budget surpluses as Spain and Ireland did), for some years, by running current account deficits; however, once foreign capital dries out the lack of fiscal space for countercyclical fiscal policy becomes evident. With the benefit of hindsight we know that the SGP provided the wrong signals about the exercise of countercyclical fiscal policy. It also failed to provide a replacement for the lack of market discipline. The moral is that the warnings of economists about the ability of the SGP to provide a framework for “monetary and fiscal stability” should have been heeded.

George Economides and Thomas Moutos, Guest Editors of the CESifo Economic Studies Special Issue on ‘EMU: The Way Forward’, are Professors of Economics in the Department of International and European Economic Studies, Athens University of Economics and Business, and CESifo Research Fellows.

CESifo Economic Studies publishes provocative, high-quality papers in economics, with a particular focus on policy issues. Papers by leading academics are written for a wide and global audience, including those in government, business, and academia. The journal combines theory and empirical research in a style accessible to economists across all specialisations.

This article first appeared on blog.oup.com, and is republished here with permission

A statue outside the European Commission. Photo: Getty
George Economides and Thomas Moutos, Guest Editors of the CESifo Economic Studies Special Issue on ‘EMU: The Way Forward’, are Professors of Economics in the Department of International and European Economic Studies, Athens University of Economics and Business, and CESifo Research Fellows.
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No, Jeremy Corbyn did not refuse to condemn the IRA. Please stop saying he did

Guys, seriously.

Okay, I’ll bite. Someone’s gotta say it, so really might as well be me:

No, Jeremy Corbyn did not, this weekend, refuse to condemn the IRA. And no, his choice of words was not just “and all other forms of racism” all over again.

Can’t wait to read my mentions after this one.

Let’s take the two contentions there in order. The claim that Corbyn refused to condem the IRA relates to his appearance on Sky’s Sophy Ridge on Sunday programme yesterday. (For those who haven’t had the pleasure, it’s a weekly political programme, hosted by Sophy Ridge and broadcast on a Sunday. Don’t say I never teach you anything.)

Here’s how Sky’s website reported that interview:

 

The first paragraph of that story reads:

Labour leader Jeremy Corbyn has been criticised after he refused five times to directly condemn the IRA in an interview with Sky News.

The funny thing is, though, that the third paragraph of that story is this:

He said: “I condemn all the bombing by both the loyalists and the IRA.”

Apparently Jeremy Corbyn has been so widely criticised for refusing to condemn the IRA that people didn’t notice the bit where he specifically said that he condemned the IRA.

Hasn’t he done this before, though? Corbyn’s inability to say he that opposed anti-semitism without appending “and all other forms of racism” was widely – and, to my mind, rightly – criticised. These were weasel words, people argued: an attempt to deflect from a narrow subject where the hard left has often been in the wrong, to a broader one where it wasn’t.

Well, that pissed me off too: an inability to say simply “I oppose anti-semitism” made it look like he did not really think anti-semitism was that big a problem, an impression not relieved by, well, take your pick.

But no, to my mind, this....

“I condemn all the bombing by both the loyalists and the IRA.”

...is, despite its obvious structural similarities, not the same thing.

That’s because the “all other forms of racism thing” is an attempt to distract by bringing in something un-related. It implies that you can’t possibly be soft on anti-semitism if you were tough on Islamophobia or apartheid, and experience shows that simply isn’t true.

But loyalist bombing were not unrelated to IRA ones: they’re very related indeed. There really were atrocities committed on both sides of the Troubles, and while the fatalities were not numerically balanced, neither were they orders of magnitude apart.

As a result, specifically condemning both sides as Corbyn did seems like an entirely reasonable position to take. Far creepier, indeed, is to minimise one set of atrocities to score political points about something else entirely.

The point I’m making here isn’t really about Corbyn at all. Historically, his position on Northern Ireland has been pro-Republican, rather than pro-peace, and I’d be lying if I said I was entirely comfortable with that.

No, the point I’m making is about the media, and its bias against Labour. Whatever he may have said in the past, whatever may be written on his heart, yesterday morning Jeremy Corbyn condemned IRA bombings. This was the correct thing to do. His words were nonetheless reported as “Jeremy Corbyn refuses to condemn IRA”.

I mean, I don’t generally hold with blaming the mainstream media for politicians’ failures, but it’s a bit rum isn’t it?

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Daniel Hannan. You can find him on Twitter or Facebook.

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