The world’s most powerful central bankers traveled to Portugal this week for the ECB’s annual forum in Sintra, where Jerome Powell, Christine Lagarde and Andrew Bailey availed themselves of another opportunity to explain how wrong they were about inflation, and why.
As usual, my Sintra invitation was lost in the mail, so I can’t offer anything like a comprehensive assessment of what was or wasn’t discussed aloud, let alone what subjects were broached during whispered dinner conversations. But I’m reasonably confident no one in attendance demanded we relegate the “science” of economics to the dustbin of history or, at the least, strip it of the elevated status it’s enjoyed over the past six decades.
You’d like to think there’s a threshold beyond which failure to accurately predict real world outcomes renders forecasting frameworks irredeemable, but the fact that economists not only still have jobs, but actually occupy the most important positions on the planet, suggests otherwise. Never in human history has an endeavor with a track record as poor as that associated with economics survived as an enterprise worth pursuing. Although I doubt this is a testable hypothesis, it’s not a stretch to suggest astrology has a better track record than economics.
I’m frequently reminded of Steve Martin’s Neal Page who, in one of the most beloved films in all of American cinema, tells John Candy’s Del Griffith, “You’re a miracle! Your stories aren’t even amusing accidentally.” I can see myself venting to a teary-eyed economist: “You’re a miracle! Your forecasts aren’t even right accidentally.”
On Wednesday, Powell who, to his credit, actually isn’t an economist, but seems to have contracted their affliction after associating too closely with them for too long, mused about the imperfections of models. “One way to say it would be that I think we now understand better how little we understand about inflation,” he said, to nervous laughter (video below).
“That’s not very reassuring,” Bloomberg’s Francine Lacqua joked.
But it’s not a joke. And one reason the laughter from Lagarde, Bailey and Agustín Carstens sounded so belabored is precisely because Powell’s “plain English” (as he describes his communications style) isn’t necessarily welcome at such a delicate juncture. Economics is in the process of failing the public for what, if there was any justice in the world, would be the final time.
Powell continued: “Really everyone had the same model, which was the Phillips Curve, and it just was not capable of producing high inflation.” He then attempted to explain “what it was missing.” To the extent such explanations can be, Powell’s remarks were convincing.
The problem, though, is that these sorts of shortcomings are only forgivable in the context of soft (or “pseudo-,” if you’re feeling less generous in your adjective selection) sciences. We forgive assumptions that turn out to be wrong in the soft sciences because generally speaking, we don’t elevate those disciplines such that mistaken assumptions are immediately ruinous.
When it comes to people’s lives, we don’t usually rely on soft sciences. When we build planes, for example, we rely on any number of assumptions associated with hard sciences to ensure that once we launch 150 people 30,000 feet into the sky, those people are safe. When something (anything, really) goes wrong with planes, we demand answers. In aerodynamics (like bowling), there are rules. Physicists may debate the finer points, but we long ago established enough in the way of consensus to allow people to fly around the world safely. When planes crash, and it’s not the result of bad weather or terrorism, we can be reasonably sure that human error (either on the part of the pilots or the manufacturer) was responsible. If aerodynamics is at fault, it’s only because we (humans) failed to understand something about it. Aerodynamics itself can’t be “wrong.”
Contrast that with economics. There’s no consensus in economics about anything, and when there is, it isn’t absolute. Economists can’t be sure about things in the same way real scientists can be. That’s because there are no rules around which to form a real consensus. Economics is just a collection of observations about the way humans tend to transact with one another. The problem isn’t necessarily the method. The problem is that whereas the human element is only present on one side of the equation in the hard sciences, it’s present on both sides in the soft sciences. In economics, humans are observing humans. The presence of the human element on both sides rules out rules. We’re an erratic species prone to bouts of mania, depression, greed, despair and irrationality, especially as it relates to money. And money itself isn’t an objective reality. We made it up. That makes the situation even more indeterminate and even less amenable to scientific codification and axiomatic treatment.
This charade needs to stop. And unlike the army of tongue-in-cheek critics who spend their days deriding economists and central bankers because it’s fashionable or conducive to web traffic, I’m quite serious. Economics should be demoted to its proper place in academia, where it should sit alongside sociology, anthropology, political science and philosophy, from which it was born.
There’s a place for technocrats in policymaking, but inherent in the idea of the technocrat is the notion of precision and skill in something that’s at least a modicum of scientific. You can be clever or persuasive — innovative even — in economics, but you can’t properly be skilled or precise. Because economics isn’t real. Not in any scientific sense, anyway. In some cases, you can make something more scientific by mathematizing it. But no amount of mathematizing can turn a soft science into a hard science. Econometrics is just the economics lie taken to its illogical extreme.
“Is there a point at which inflation expectations get de-anchored?” Bloomberg’s Lacqua wondered, during the same Wednesday panel discussion in Sintra. “You never really know. There’s no way to know in real time,” Powell said. “But there’s a clock running here. We have high inflation running now for more than a year,” he added, quickly. “No one should assume — it would be bad risk management to just assume that those longer-term expectations will remain anchored indefinitely.”
He’s correct, but unwilling to connect the final dots. There’s no way to know if inflation expectations are becoming de-anchored in real time because inflation expectations are subjective. They’re the sole purview of the people who harbor them. They don’t exist “out there” in a way that’s amenable to “risk management.” And, arguably, they were only low in the first place due to structural factors that kept inflation low and had nothing whatsoever to do with central banks.
Inflation expectations are subdued when inflation is, and vice versa. That’s a tautology, it’s not science. You don’t need a PhD to predict that when the price of food is rising, people will become more concerned about the future cost of food. But we award PhDs for those kinds of revelations. Then we hand our newly christened “doctors” the keys to the universe.