Economists cannot predict the future. Financial Times Report
What Rubin, Orszag and Stiglitz said in a seminar at the Aspen Institute
Economists don't often preach about the virtue of self-doubt; least of all when they are Nobel Prize winners and Washington politicians. This week, however, Robert Rubin (former US Treasury Secretary), Peter Orszag (former Head of the Office of Management and Budget) and Joseph Stiglitz (the Nobel Prize-winning economist) did just that.
More specifically, in an Aspen Institute debate – based on a paper they co-wrote earlier this year – the trio called on economists to embrace "copious amounts of humility" when they envision the future – writes the FT. .
They also urged politicians to respond to this admission of uncertainty by revising their tax processes to embrace the idea of a "semi-autonomous discretionary tax architecture" based on "automatic stabilizers".
This refers to the idea that some fiscal programs should be automatically adjusted when conditions change unexpectedly – that is, when economists' forecasts are wrong. This differs from the current Washington system, where budgets are set every year, following those same projections and endless political haggling.
“If we can automatically adjust the budget to what is really happening in the economy [in real time], we could end up in a better place,” says Orszag. He points out that if automatic stabilizers were used for unemployment insurance, for example, support would be broadened or cut according to tangible patterns of unemployment rather than political bargaining.
Could these proposals ever take flight? Not soon. The Biden administration is currently embroiled in the very kind of controversy semi-autonomous fiscal discretion would face, namely whether its previously agreed package of unemployment benefits is too generous given the current rebound. And the White House is also so focused on getting Biden's infrastructure package through that there is little capacity to start discussing other ideas.
However, it would be a shame to ignore these proposals. It is rare for a centrist like Rubin to team up with a progressive like Stiglitz (as Orszag notes, these are the "polar extremes" of democratic politics).
And there are three reasons why it would be helpful to have more discussions on these ideas.
First, Stiglitz and his colleagues are right to demand more public honesty from politicians about the limits of predictions (never mind that self-doubt wasn't something Rubin himself often showed in the office). In recent years some institutions, including the Bank of England, have tried to provide this by introducing fan charts to represent inflation projections.
But this is not universal. And, as the trio points out, there is one arena where more abuse is especially needed: interest rates. There is a widespread assumption today that we live in a world of permanently low interest rates. And while an FT poll this week showed economists expect two Federal Reserve rate hikes by the end of 2023, any tightening is assumed to be modest.
However, this idea needs to be covered. As Rubin says, "there is profound uncertainty surrounding interest rates". Voters should be informed.
Second, the group is also right to say that governments need to prepare for a world where their models are failing. They suggest that the US Treasury should protect itself from the possibility of sudden rate hikes by selling government bonds with much longer maturities. This is reasonable. They also argue that if politicians had automatic stabilizers in some areas of fiscal policy, they would have more ability to create discretionary policies in other areas to address long-term shocks or problems.
This is probably too optimistic. But talking about uncertainties would crystallize a third point: the need to talk about the explosive levels of the national debt, which has now exceeded 100 percent of GDP.
This has been little discussed recently, as ultra-low rates have cut debt service costs. But if rates rise in the future, these costs will spiral up and could trigger a full-blown crisis. An unexploded bomb within fiscal policy is hidden in plain sight.
There is no sign of a crisis now; 10-year treasury yields are lower today than a few months ago. I suspect this will hold for some time. But as Rubin says: "In the markets, conditions can stay out of sync for a long time and then adjust very suddenly and wildly."
This doesn't mean the government has to cut debt by cutting spending (as some Republicans want). Nor does it rule out the idea of using automatic fiscal stabilizers in the future. But what is needed is a debate on proactive long-term adjustments.
There are historical models for this. The 1983 Greenspan Commission created a plan to increase the age of social security benefits, incrementally over many years. It is currently coming into effect without political struggles (or even a lot of attention) because it is being implemented slowly in a pre-agreed manner.
An "automaticity" tactic, in other words, can sometimes work – when there is intelligent planning. Biden's team should take note; one of the most commendable things they could do today is bequeathing certainty to their successors in some political spheres. Especially in an uncertain world.
(Extract from the foreign review by Epr Comunicazione )
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/gli-economisti-non-possono-prevedere-il-futuro-report-financial-times/ on Sun, 04 Jul 2021 05:44:59 +0000.