As a science, economics leaves much to be desired, as evidenced by a recent bout between heavyweights of the discipline over a key question that affects all our lives.
At the kind invitation of TheStreet, I attended a recent debate run by Intelligence Squared U.S., with two sides arguing the motion, "Can central bank's print prosperity?" It was a fun debate with some high caliber competitors: Simon Johnson (MIT professor and ex-IMF chief economist, for the motion); Roger Bootle of London-based Capital Economics (for); Edward Conard (of the American Enterprise Institute and ex-Bain Capital, against); and Andrew Huszar from Rutgers University (against).
It was a well managed event, amusing and engaging. But most in my mind afterwards was not the debate itself or its results. Upper most in my mind was why the tabled motion is so intractable, why we can never really figure out the correct extent of government in our economies.
The crux of the dispute focused on the use of quantitative easing in the U.S. over the last six years since the credit crisis. Now no one really disputed that in times of acute systemic failure the banking system should not be re-liquified via central banks (that was the whole point of the original Federal Reserve Act). Although, of course there are libertarian economic thinkers who would dispute even that. The core of it was whether later bouts of quantitative easing were required (so called QE2, QE3), after 2010 and once the banking system had stabilized. More importantly, did those later bouts of QE bring prosperity or other forms of further support to the U.S. economy?
This latter issue is really about the bridge between mere monetary intervention (that is, management of the money supply and interest rates, basically what the Federal Reserve has been doing since the Great Recession) and real Keynesian/fiscal intervention (involving more pro-active investment by government in our economy via, for example, works projects to generate jobs and new demand).
To believe that long term acts of QE (post a banking crisis) can increase GDP, you are effectively supporting one of Keynes' key concepts -- namely the "multiplier" effect; the idea that for every $1 that the Government puts into the economy, it will have more than $1 of increased effect on demand. This is a fairly fundamental issue and the crux of where Milton Friedman, as the founder of monetarism, really diverged away from Keynes. (Even Friedman would have supported monetary intervention at the time of an acute systemic banking crisis.) However, the Keynesian multiplier was hardly mentioned by the debaters, which was odd.
There was also insufficient perspective on the legacy of Ben Bernanke. Bernanke is currently held in high esteem for his management of the credit crisis -- and was invoked multiple times by both teams. Certainly his policies seemed to help the U.S. come out of recession pretty rapidly after the crisis (by end 2009), and we have seen ongoing, if not stellar, growth since then. The U.S. banking system has also been cleaned up very effectively with only 14 banks failing in 2014 out of over 6,000. This has certainly been a far better track record than in Europe. Europe actually suffered multiple bouts of repeated recessions and the banking system remains filled with bad assets -- many banks are still in government ownership having been nationalized during the crisis.
That said, Bernanke's track record will hugely depend on the normalization of interest rates and monetary policy generally before the next U.S. recession. If this has not happened, his reputation will likely go the way that former head of the Federal Reserve Alan Greenspan's did once the Internet bubble burst -- Bernanke will also be accused of holding rates too low for too long. And time might indeed be running out as the equity markets have been increasingly jittery over the last few months and the IPO market is near to closing down entirely. But these perspectives, too, seemed missing from the debate.
Part of the problem was the debate involved little hard data. For example, the camp arguing that QE can create prosperity could not produce much data showing how it had done so in the period after about 2011. And that was a key reason why it lost the debate.
But here's the thing: As a part time visiting researcher at one of the New York business schools, I also hear similar debates which are filled with data and quantification. And that's where the real puzzle begins -- for even after immense amount of data-gathering, number-crunching, regression analyses, adjustments for selection biases, exclusion of exogenous factors, etc. the results are still totally inconclusive.
The results are inconclusive about the exact impact of government intervention in our economies and indeed about nearly every other economic or financial issue tabled in our universities. The lengthy sampling done in serious economic academic papers has we might say the likeness of the scientific method, and yet is not in fact science in the way of math and physics.
This is ultimately linked to the normative elements embedded in economic debate; the inability to make prediction across millions of moving parts (individuals); and the fact that, as behavioral economist have increasingly demonstrated, these individuals are not rational actors after all.
Still the extent of the "dismalness" of the "dismal science" remains curious and I think it at least behooves economic debaters to be more balanced in the expression of their views. A good debating contest may be fun, but the reality is many economists should stand up and say: "my view is x, but it is only my view, and in truth I can no more be confident in this issue than if you asked me ... well, how may angels can really dance on a pin head."
Jeremy Josse is the author of Dinosaur Derivatives and Other Trades, an alternative take on financial philosophy and theory (published by Wiley & Co). He is also a Managing Director and Head of the Financial Institutions Group at Sterne Agee CRT in New York.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of CRT Capital Group LLC, its affiliates, or its employees. Josse has TK position in the stocks mentioned in this article.