I have written about the dangers of making economic policy on the basis of ideology rather than cold, hard economic analysis. Ideologically-based economic policy has laid the groundwork for many of the worst economic disasters of the last 200 years.
- The decision to abandon the first and second central banks in the United States in the early 19th century led to chronic financial instability for much of the next three quarters of a century.
- Britain’s re-establishment of the gold standard in 1925, which encouraged other countries to do likewise, contributed to the spread and intensification of the Great Depression.
- Europe’s decision to adopt the euro, despite the fact that economic theory and history suggested that it was a mistake, contributed to the European sovereign debt crisis.
- President George W. Bush’s decision to cut taxes three times during his first term while embarking on substantial spending connected to the wars in Afghanistan and Iraq, was an important driver of the macroeconomic boom-bust cycle that led to the subprime crisis.
In each of these four cases, a policy was adopted for primarily ideological, rather than economic reasons. In each case, prominent thinkers and policy makers argued forcefully against adoption, but were ignored. In each case, the consequences of the policy were severe.
So how do we avoid excessively ideological economic policy?
One way is by making sure that policy-makers are exposed to a wide range of opinions during their deliberations. This method has been taken on board by a number central banks, where many important officials are either foreign-born or have considerable policy experience outside of their home institution and/or country. Mark Carney, a Canadian who formerly ran that that country’s central bank, is not the first non-British governor of the Bank of England in its 320-year history. Stanley Fischer, who was born in southern Africa and has been governor of the Bank of Israel, is now the vice chairman of the US Federal Reserve. The widely respected governor of the Central Bank of Ireland, Patrick Honohan, spent nearly a decade at the World Bank in Washington, DC. One of Honohan’s deputies is a Swede with experience at the Hong Kong Monetary Authority; the other is a Frenchman.
But isn’t it unreasonable to expect politicians to come to the policy making process without any ideological bent whatsoever? After all, don’t citizens deserve to see a grand contest of ideas between those who propose higher taxes and greater public spending with those who argue for less of both?
In fact, we do expect—and want–our politicians to come to the table with differing views. Nonetheless, politicians often support their arguments with unfounded assertions that their policies will lead to widespread prosperity, while those of their adversaries will lead to doom. The public needs to be able to subject those competing claims to cold, hard economic analysis.
Fortunately, the United States and a growing number of other countries have established institutions that are mandated to provide high quality, professional, non-partisan economic analysis. Typically, these institutions are tasked with forecasting the budgetary effects of legislation, making it difficult for one side or the other to tout the economic benefits of their favorite policies without subjecting them to a reality check by a disinterested party.
In the United States, this job is undertaken by the Congressional Budget Office (CBO) which offers well-regarded forecasts of the budgetary effects of legislation under consideration by Congress. [Disclaimer: The current director of the CBO is a graduate school classmate of mine.]
The CBO is not always the most popular agency in Washington. When the CBO calculates that that the cost of a congressman’s pet project is excessive, that congressman can be counted on to take the agency to task in the most public manner possible.
According to the New York Times, the CBO’s “…analyses of the Clinton-era legislation were so unpopular among Democrats that [then-CBO Director Robert Reischauer] was referred to as the ‘skunk at the garden party.’ It has since become a budget office tradition for the new director to be presented with a stuffed toy skunk.”
For the most part, however, congressional leaders from both sides of the aisle hold the CBO and its work in high regard, as do observers of the economic scene from the government, academia, journalism, and the private sector.
The CBO, founded in 1974, is one of the oldest of such agencies, predated only by the Netherlands Bureau for Economic Policy Analysis (1945) and the Danish Economic Council (1962). More recent additions to the growing ranks of these agencies include Australia’s Parliamentary Budget Office (2012), Canada’s Parliamentary Budget Officer (2006), South Korea’s National Assembly Budget Office (2003), and the UK’s Office for Budget Responsibility (2010).
These organizations each have their own institutional history and slightly different responsibilities. For the most part, however, they are constituted to be non-partisan, independent agencies of the legislative branch of government. We should be grateful for their existence.