Quantitative easing over. It is a good occasion to consider what we know about central bank intervention, when it is appropriate and when it isn’t. We have a century of broad and deep central bank history and data upon which to make our assessment.
Yet we seem to ignore much of what has been learned in favor of unproven beliefs and disproven zombie ideas.
Are we doomed to repeat the same errors? When it comes to economic policy, it certainly appears that way. Despite a century of historical experience, inflationistas and deficit scolds on both sides of the Atlantic recommend the same wrongheaded policies over and over.
A bit of background: In 2010, a group including Michael J. Boskin, Niall Ferguson, James Grant, Douglas Holtz-Eakin and others, published an open letter to the Federal Reserve Chairman Ben Bernanke. It was a critique of QE, and warned the program of bond-buying would debase the dollar and lead to higher inflation.
At the time, I found the letter full of the sorts of pompous predictions and arrogant self-assurance that is often the subject of criticism in these columns. Whenever that happens, I make a note to myself to revisit the issue a few years hence.
Which is why in November 2013, I republished that letter. My goal was to keep its author’s honest, and revisit the errors contained within those forecasts. Of the full list of signatories, only Arthur Laffer has admitted error, saying there has been no inflation and he was wrong in predicting it. Bloomberg News tracked down many of the rest of the signatories to that letter to see if they were willing to acknowledge that with inflation low and the dollar at four-year highs, their expectations were a tad off. Other than Laffer, none issued a mea culpa.
They were in the words of one perennially wrong pundit, just early.
Two issues stand out from this episode. The first is that making wild claims about the impact of government actions has a long and undistinguished history. As we were reminded earlier this week, in 1933, a group of Columbia economists had opposed even the modest central bank action during the Great Depression. They too feared the dangers of monetary policy. In a letter to the New York Times, they warned of imminent inflation, despite persistent deflation. They advocated a return to the gold standard, which would have exacerbated deflation.
Does any of this sound familiar? Haven’t we heard the same fears, the same concerns, the same errors, the same warnings? Humans seem to constantly fear the wrong things. Economists and policy wonks are especially prone to this failure.
Which leads us to the second issue: The penalty for being wildly wrong about very important policy issue seems to be nil.
Not so in finance. If your belief system is wildly wrong, you tend to suffer the consequences. Clients fire you; assets decline; your income and reputation often fall. Thus you pay the price for making a bad bet that went against you. (It is more accurate to say the bet went against your clients, but let’s save that issue for another column.) It is no surprise that money managers try to “fail conventionally.”
Yet no such penalty seems to befall economists and other pundits. Public policy suffers for this failing, as we have seen on both sides of the Atlantic.
John Maynard Keynes correctly observed in 1937 that “The boom, not the slump, is the right time for austerity at the Treasury.” Europe has failed to learn this basic lesson, and its error has caused a self-inflicted wound. In its Teutonic paroxysm of austerity, the continent has failed to generate economic growth, throttled as it was by misplaced and mistimed concerns about deficits and spending.
Must economics, to paraphrase Max Plank, advance one funeral at a time?
The answer seems to be yes.