Jean Pisani-Ferry, a professor at the Hertie School of Governance in Berlin, has written a very interesting post about the need for trusted experts in a democracy. He addresses the criticisms that economic experts have received as a result of the Brexit vote. Quoting from the post:
"Representative democracy is based not only on universal suffrage, but also on reason. Ideally, deliberations and votes result in rational decisions that use the current state of knowledge to deliver policies that advance citizens’ wellbeing."
Very well said. He also mentions the lack of influence of economic experts is not that different from that of other experts (as illustrated by the debates on climate science, GMOs, etc.). I share this view and my guess is that the mistrust of economic experts is simply more visible because of their influence (or lack of) in the political debates that tend to be a lot more present in the media than the debates on scientific issues.
Opinions beat facts
How to enhance the trust in experts? It’s not obvious, according to Pisani-Ferry. What is needed is a combination of discipline among the community of experts, an education system that equips citizens with the tools to distinguish between fact and fiction and the development of better venues for dialogue and informed debate.
Good luck! Unfortunately we are very far from this ideal scenario. Education has reached more citizens than ever before, more so in advanced economies, but we see little impact on reasoned discourse. It might be that the complexity of the issues under debate is at a level which does not allow an informed discussion based on facts and not on ideology. Opinions that are expressed using either the wrong facts or no facts at all are accessible to the public and have an influence that is as large as those who present the facts. And the media does not serve as an adequate filter, maybe because controversy sells or because there is a need to present a 'balanced' view of a debate or simply out of self-interest.
Here is my example of the day that illustrates this point: the Financial Times published two articles on the same day on the merits of quantitative easing. One argued for more QE under the logic that is working and we just need to increase the dosage. The second article presented the view that QE, as well as expansionary fiscal policy, are the wrong tools to use to generate a recovery and that they are likely to lead to a very unhappy ending.
If you read the second article you will notice the use of dubious “facts” and an economic logic that anyone who has ever taken any economics course should realise is badly flawed.
Let me pick one example. The article starts with the figure of 300 percent of GDP for global debt and then it argues that:
"If the average interest rate is 2 percent, then a 300 percent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 percent to cover interest."
This is just wrong on so many counts:
- The increase in debt in the world is matched by an increase in assets.
- The interest rate paid by borrowers goes to lenders. So the world (or a given country) does not need to find income to pay for this interest, this is a transfer from borrowers to lenders.
- Borrowers need to pay interest but if debt is coming from a mortgage to buy a house, rent is no longer paid. Looking at interest payments alone (or at liabilities without taking into account assets) is just wrong.
- The 300 percent number cannot be associated to a country or a government, most debt is internal. No country has an external debt that is anywhere close to that level. Same is true for governments (with the exception of Japan which is not far off, but, once again, most of this debt is internal – so the interest that the government of Japan has to pay goes to the Japanese citizens who happen to be the taxpayers).
- Even if you had a government that had 300 percent of debt, the calculation above is simply wrong. If interest rates are 2 percent, you need to grow at 2 percent (not 6 percent) to ensure that the debt-to-GDP ratio stays constant (as long as your additional borrowing or saving is zero, of course). This is something that is taught in a principles of economics course. The authors are confusing the value of interest payments and the required growth to make that level of debt sustainable.
The rest of the article contains many other mistakes. It is embarrassing that the Financial Times is willing to publish such a low quality article.
Will this article influence anyone's view on the debate on monetary policy? I do not know but what I know is that the pessimistic view presented in the article on the role that monetary and fiscal policy is popular enough that is still influencing both the debate around and also the outcome of current economic policies.
We are very far from having informed and factual debates about the economic (and scientific) issues that shape economic and social outcomes. As an economist, I continue to do my best by sharing my views and analysis with a wide audience through blog posts like this one but it is depressing to see how those that rely on flawed analysis often manage to reach the public through the validation of the most respected media.
Antonio Fatas is a Professor of Economics at INSEAD. He is also the Portuguese Council Chaired Professor of European Studies and the Chair of the Economics and Political Science Area at INSEAD.
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