Six core beliefs that are too often passed off as fact
The realities behind the myths
Whether the euro’s design flaws prove terminal or merely chronic remains to be seen.
Economic policy is a variant on the old game of truth and consequences. Of course, an immediate problem is created by the use of the word “truth”: economics as a scientific discipline is undermined, some would say fatally, by different people clinging to very different versions of the truth.
Sometimes this is an honest intellectual debate, but it is also driven by ideology. Versions of the truth are defended by the protagonists in a manner not unfamiliar to observers of religious wars. Connections to data and facts are not terribly relevant to either type of dispute.
Believing in six impossible things before breakfast is not confined to the novels of Lewis Carroll. Here are six contemporary beliefs about the truth that Alice might have applauded.
1. The euro is a resounding success.
It is striking that the only people who believe this are all in receipt of a salary from an EU institution. It is equally striking that virtually all serious economists not employed in Brussels and Frankfurt think the euro has serious structural design flaws that are nowhere near to being addressed.
The resumption of modest economic growth in the euro area has seen business as usual restored to economic policymaking: nothing is happening.
Whether the euro’s design flaws prove terminal or merely chronic remains to be seen. And we may see the political consequences of all of this quite soon, with the May European elections. But the consequences of not fixing the euro are all negative; the only real debate is about their size.
2. If the economic risks all lie to the downside, as the European Central Bank clearly believes, it makes perfect sense to leave the stance of monetary policy unchanged.
Some observers remain somewhat puzzled about the internal logic of this belief. In fact, some of us suspect that Mario Draghi would, in a heartbeat, emulate his counterparts at the Federal Reserve and Bank of England. For reasons that escape most people, the Germans won’t let him. We suspect an ideology of one kind or another might be a factor but we can’t work out which one.
3. Quantitative easing, as practised by the Fed and the Bank of England, involves buying government bonds that will one day be sold back to the market.
By contrast, the truth is that these bonds will, effectively, be held by the respective central banks forever. It would have been simpler, if too honest, to have simply cancelled them. This is proper monetary financing of government.
The contrast, again, with ECB policies couldn’t be starker. Ditto for the consequences.
4. The only thing that can boost economic growth is something called structural reform.
By contrast, every known fact about the reform process, as usually practised, is that it is deflationary in the short term. If there are positive growth effects, they only arrive after a period of pain, sometimes one that is very prolonged. In addition, austerity is not the same as structural reform.
Power over unemployment
5. Governments can do nothing about unemployment.
Actually, the modern expression of this view is more one-sided: governments can only make things worse. While it is perfectly true that policy can turn drama into crisis, there is abundant evidence that appropriate government actions can help.
There are reasons why unemployment in the US and the UK is way below corresponding levels in Europe. An analogous belief about the efficacy of policy is the widely held view that the US fiscal stimulus in the wake of the financial crisis was an abject failure. The facts, by contrast, are stark: it simply wasn’t big enough.
6. House prices can only go up from here – at least in Dublin.
Where do we start with this one? Is this a form of collective amnesia? Or just madness? Surely we know, with certainty, that nobody knows where house prices will be this time next year?
An ancillary belief is that rising property prices are always and everywhere a good thing. The truth is they are not. Some people benefit, particularly those in negative equity – this is currently such an acute problem it is understandable why we cheer house prices up.
But, under normal circumstances, taking all interests into account, the best thing that could happen to house prices is that they stay stable, at least in real terms.