TheMarketForIdeas

The concept of economic crisis encompasses quite different situations (from either a causal perspective or a consequentialist one), from a conjunctural transient state all the way to a real blockage of the economic system. For this article, we shall presume that the phrase ‘economic crisis’ is used correctly, by indicating a dysfunctionality, either of structural or functional nature, in the economic process or system concerned (for example, the national economy of Romania). Economists throw the phrase left and right with a grave face, which does not bode well for ignorant people.

Exhausting the (fully justified) irony, let us now examine the standard proposals periodically restated by Romanian economists, from whom many are high officials handling important economic levers and policies. The ones whose main task lies in piloting the nominal economy consider it to be the “economy in economy”, to paraphrase a famous expression related to the concept of state. Being preoccupied with the nominal economy, these economists are strongly sensitive to the risks of increasing the volatility of nominal variables (for example, inflation or interest rate). As an aside, the volatility itself has no significance, only the unpredictable volatility, but this matters less for our discussion. (As a second aside, the volatility continues to be measured through either the statistical variance or standard deviation, which is at least disputable from theoretical point of view.) When the specter of economic crisis appears on those economists’ horizon, their hobbyhorse automatically becomes the public budget deficit (of course, together with the public debt burden with which it is causally associated). I seriously doubt that those economists have ever critically and scientifically examined the fiscal-budgetary criteria proposed in the Maastricht Treaty (moved wholesale into the Fiscal Compact), to see the conceptual, methodological, and empirical bases on which these criteria have been established. They are extracted from an algebraic condition of stationary public debt rate over GDP – stationarity, not sustainability. We inevitably come to the reason on which those economists base their positions – in my opinion, it is the non-boomerang effect of adopting the mentioned positions. If the “prediction” is confirmed and the alarm was rightly triggered, the economist will publicize the fact. If not, then silence descends over all. Of course, in time, the unconfirmed/issued predictions or alarms are forgotten, while the confirmed are memorialized. By the hub effect (a species of positive feed-back), are born new “Roubini”s, after the economist who gained global fame by predicting the 2008 crisis every year for the better part of the decade. Inevitably, he was proven right. 

A short digression 

The non-conformist thinker Nassim Taleb (whose concepts of black swan and, especially, antifragility are both of theoretical and of economic policy interest, perhaps at least of the same importance as Thaler’s Nobel Prize awarded concept of nudge) provided a psychological (and sociological) explanation for such types of “solutions” – they are solutions which do not involve the proposer, either directly (for example, inside the targeted phenomenon) or indirectly (for example, by engaging his responsibility or accountability). This issue, which Taleb dubbed “skin in the game” – any proposer for a solution, regardless its nature, should be affected by that solution or should derive consequences from it – is, of course, of a greater importance and relevance than what is discussed here. For example, in the field of normative action, the legitimacy of the norm enacted is verified if and only if the normer (e.g., the Parliament member) is himself/ subjected to that norm action. In fact, the praxeological definition of the law is precisely its generality, which excludes such exceptions. In layman’s terms, the “peanut gallery” is engaged in trivial talk and is never responsible for what it says or recommends. 

Back to our discussion 

According to those economists, the public deficit issue (under the orthodox financial programming models of the IMF or of other international or European organizations of the same kind) must be kept inside a greenhouse, for instance inside the ceiling established by the Maastricht Treaty. Such aseptic concepts about the public deficit seem, prima facie, to be in accordance with the libertarian economic (and political) philosophy – the state must refrain from intervening in the economic process, because any such an intervention is disturbing. I would argue against this. Firstly, any agent’s intervention in the economic process (e.g., in economic markets) disturbs that process, whether that agent is rational or irrational (see behaviorism or the more elaborate theory called adaptive markets hypothesis). In other words, in first instance, any economic action, regardless its agent, begins with a “J” curve. Secondly, state intervention, unlike that of a private (individual) agent, is (in theory) always based on a model of rationality. In other words, a state intervention is, at least theoretically, less liable to disturb the economic logic. Thirdly, state intervention could be inevitable and, often, the single (or last) instance to solve some troubles in the economic system. One such case is that of a non-economic, external, and unpredictable shock, such as the COVID-19 pandemic. Based on its profit-based behavior (which is legitimate and worthy of defense), the private sector generally does not intervene in order to solve the economic system’s dysfunctions. In such a behavioral context, the social contract requires state intervention. Of course, that intervention implies a public (more precise, structural) deficit increase, which, of course, implies in turn a public debt increase, which is a responsibly incurred debt. Do we have alternatives? A lack of action is, usually, worse than a (possibly) bad action, especially when the action must be timely. There are enough examples of long and subtle discussions being preferred to immediately decision-making and implementation. The temptation to apply a universal solvent – throwing public money at a problem – is always there, but a responsible use of the public budget should not be excluded because of this possibility. In fact, I would briefly posit:

- exceptional situations require exceptional measures;

- delaying an inevitable measure (that is, without alternatives) is twice more damaging than a possible wrong measure;

- when the economic situation is generated by a factor, or occurs inside a context when the economic system cannot self-test and self-adjust in a reasonable timeframe, and with reasonable outcomes, the state intervention becomes mandatory as a responsibility grounded by the social contract;

- any advice is good, but better is the advice which involves the adviser himself in implementing the advice concerned or in sharing the consequences of implementation. 

Conclusion 

Responsibility is more important than competence (if we are asked to deliver such a hierarchy). If the state intervention is based on a very strong specific context (that is, a context without alternatives from the private sector), then the intervention must be performed responsibly and without delay. The judgments valid for the normal cruising mode of society must be adjusted in case of exceptional situations, otherwise we are guilty of dereliction of duty from passivity. 

Photo by Mathias P.R. Reding from Pexels.