Tuesday, May 18, 2010

Econ PhDs Are About As Qualified To Talk About The Future Of The Euro

...as astrologers.

FLG is sick and tired of people looking to economists to explains the issues surrounding the euro. The euro is a political tool. Greece's problems are, at root, political in nature. Sure, they're facing severe economic constraints, but those were precipitated by decades of poor fiscal management by Greek politicians.

This New Yorker piece spells it out pretty plainly:
The European Union did eventually come through with a rescue package for Greece and other beleaguered members, like Portugal, but the markets didn’t calm down, rallying on Monday only to nosedive again at the end of the week. The fact is, this kind of volatility isn’t going away, because we now live in an environment dominated by what economists call “political risk”—the uncertainty that businesses face as a result of government actions. Of course, government actions always affect the economy, but usually in an undramatic way: an interest-rate cut here, a new regulation there. The economic downturn and the debt crisis have given us instead a world where governments are among the most important players in markets—injecting money into economies on a colossal scale and routinely propping up, or even nationalizing, troubled companies.

[...]

Political risk is hard to manage because so much comes down to the personal choices of policymakers, whether prime ministers or heads of central banks. And those choices aren’t always going to be economically rational...

Listen, FLG has a degree in international economics. So, he understands and appreciates what the discipline has to offer. But big-time economists seem to have bought into their own hype. Case in point, Greg Mankiw has listed what a bunch of notable economists think about the euro. Frankly, FLG, as he implied above, thinks they are almost entirely unqualified to talk about the future of the euro. It's entirely political.

In fairness, Barry Eichengreen, one of the links Mankiw provided, does acknowledge this point:
Those forecasting the demise of the euro were wrong because they misunderstood the politics. The euro is the symbol of the European project. Jacques Delors, one of its architects, once called the single currency “the jewel in Europe’s crown.” Abandoning it would be tantamount to declaring the entire European integration project a failure.

Now, it does appear that the elites in Europe are prepared to doubledown. And maybe economists can point out the economic constraints that politicians must make their decisions within. But ultimately the decision is a political one and economists would be mere technicians in help to identify how to move forward. Right now, the economists should largely shut up and let's here from the political scientists and politicians.

Being a big-time, smart economist doesn't make you qualified to talk about everything that even tangentially relates to economics. FLG, are you saying that the euro is only tangentially related to economics? Yes, especially right now.

Wait a second! FLG, what qualifies you to talk about the future of the euro? Absolutely nothing, but FLG doesn't get published in the WSJ as some sort of expert on the topic. This is political right now, and we should be looking to the political scientists and political analysts.

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