When 101 economists give advice to policy makers

 

Between 1998 and 2003 there were several hundred reform proposals for the Stability and Growth Pact. Why so many? Did the proposals influence the political outcome of the SGP reform in 2003?  These are some of the pertinent questions addressed by Jonas Fischer, Lars Jonung and Martin Larch of the European Commission in a recent Economic paper.

 

This is the first systematic analysis of over 100 reform proposals from professional academics and non-academic economists.  It covered reform proposals that have been published in the English language from the start of Stability and Growth Pact (SGP) throughout the crisis in November 2003 that led to the suspension of the pact and its subsequent reform in March 2005.

 

Why were there so many proposals? The answers provided by the authors are derived from their cluster analysis and can be summarized as follows: (1) the crisis of the SGP induced economists to enter the public arena; (2) the deterioration in euro area’s macroeconomic performance shifted the emphasis for a common objective from debt stabilisation to growth and employment promotion; (3) fundamental disagreement exists among professional economists about goals, instruments, institutional settings and economic effects of fiscal policy. This lack of consensus over fiscal policy stands in sharp contrast to economists’ attitudes towards monetary policy.

 

The centerpiece to these results is their quantitative analysis of how disperse the views among economists have been with respect to the SGP. The authors classified the proposals according to seven policy objectives and five reform categories together with some information about the background of the authors and the timing of the proposal to derive four clusters they call ‘school of thoughts’:

(i)  the disenchanted reformers, who held a very critical view of the utility or effectiveness of the SGP (31 proposals)

(ii) defenders of fiscal discipline, who consider a common framework necessary and useful focusing predominantly on procedural and institutional changes (19 proposals)

(iii) advocates of economic growth, who argue that short term stabilisation was not  sufficiently conducive to economic growth (32 proposals)

(iv) supporters of long-term sustainability, who prioritise the sustainability of public finances in the long run as target (19 proposals).

 

This classification puts the Stability and Growth Pact at the centre and asks what SGP reforms economists suggested in their proposals. It is no guidance to the intention of the writers, since many articles did not to provide a concrete reform proposal of the Pact but an evaluation of trade-offs for certain aspects of the Pact. In a second step the scheme is used to assess the impact on the political reform outcome in 2005 and whether there is a reasonable degree of agreement among these school of thoughts that would justify a strong voice in the political arena.

 

While the work is an impressive effort to bring a systematic approach to a highly politicised subject, there are some issues of concern, none of which is fatal. To the reader it is hard to follow every step of the cluster analysis and naturally there remains a certain amount of judgment involved. The authors acknowledge that the frontiers between these 4 “school of thoughts” are fluid and, reading some of their examples, can only but confirm this.  Just to pick out two. Calmfors (2003) was considered a “disenchanted reformer” when he suggested that the old SGP hamper the working of automatic stabilizers in the downturn; has no provisions for public finance in good times and that there are insufficient provisions for idiosyncratic shocks or large common shocks where monetary policy needs to be complemented by fiscal policy. By contrast Calmfors and Corsetti (2004) [subscribers only] achieved a place among the “supporters of long run sustainability” when they proposed to make the deficit ceiling conditional on the debt level and to depoliticise the enforcement of the fiscal rules. The suggestion that Calmfors has changed the camp from a disenchanted reformer to an ardent supporter of a reformed pact within a year is misleading, at least from an economic point of view. While the first paper considered short term stabilization per se, the latter just added a long-term perspective as conditionality. Both still aim to increase flexibility in the short run and both papers seek to depolitise the enforcement process. They are not mutually exclusive. The second example is the paper by Mathieu and Sterdyniak (2003), who argue against the desirability of a supra-national coordination of economic policy as a whole and that national policy should have the prerogative of managing the production-inflation trade-off. The role for the EU is only justified if spillovers effectively endanger the inflation target of the euro area as a whole. Their proposal is classified under “advocates of economic growth” thereby implicitly assuming that there are no welfare gains to be expected from coordination.

 

It is perhaps only the wording “school of thoughts” that is misplaced here, since it is not referring to an economic framework in which the economist operates but his take on the reform proposal. Of course, one solution could simply be to rename the classification. Alternatively, one could test the sensitivity of this classification with another scheme. A more straightforward classification distinguishes between the main reform purpose rather than relying on the vague notion of the “aim of fiscal policy coordination”  applied in the paper  The proposals could for example be classified according to whether they want  (1) more flexibility in the deficit target across countries and circumstances  or (2) increased credibility of enforcement or (3) another target altogether or (4) no common coordination framework. Under this classification, the two Calmfors papers would feature under the same header “more flexibility” while the Mathieu and Sterdyniak would rightly join the “no coordination” camp. It would then be interesting to see whether the dispersion of disagreement under each of the purposes is as pronounced as under the current scheme.

 

Do economists influence political outcomes and if so is the influence eclectic or sectarian?  Under the alternative scheme the authors conclusions would be easier to reconcile directly with the purpose of the reform proposal. Their reading is that the reformed SGP takes ‘account of the criticism that a one-size fits-all rule would not sufficiently account for differences across countries’ relates directly to the “more flexibility” category. The second point that enforcement is only marginally reflected in the reformed pact has also a direct counterpart under the purpose classification.  

 

It would also have been useful to know more explicitly which of the proposals actually referred to the overall fiscal stance at the aggregate level of the euro area. Agreeing on a common framework implicitly relies on the assumption that that common rules or procedures are the best to assure a common fiscal stance. But this is not an agreed position among economists either.

 

Would the political reform outcome be different if this study had been available beforehand? As the authors noted, it is a privilege for policy makers to make up their own mind and that their decisions do not have to be a faithful mirror of the discussion among economic experts. Perhaps policy makers are less one-armed and one-eyed, as the authors accuse most economists to be. But then again, there is no sign that policy makers welcomed any proposal that suggested stronger enforcement rules, even if they had come from the European Commission itself.

 
 mundschenk(at)eurointelligence.com

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