The issue: Economists unable to predict crisis
Text: Thessa Lageman / Photography: Ronald van den Heerik
The recession is behind us for the time being according to Philip Hans Franses, dean of the Erasmus School of Economics. Nevertheless, he says, a crisis could emerge again at any time. However, exactly when this would occur is impossible to predict ahead of time. |
Why did economists not see the recession coming? “It is not realistic to expect economists to be able to predict the exact timing of a crisis. The precise timing of an economic crisis has yet to be predicted ahead of time. What we are able to detect at any point in time is that there are signals showing that things are going awry. However, nobody said: a bank is going to fail in six months. Everything seems predictable after the fact. But if someone had predicted it at the time he would not have been believed anyway. You do not expect everything to go wrong at the same time, as was the case here. What I am able to say is that China will go through a crisis within ten years, because this is a frequent occurrence in suddenly strongly emerging economies. But exactly when this will happen is difficult to say. Even renowned meteorologists are unable to predict the temperature one year from now.”
What is it you do then? “We primarily develop scenarios. Suppose this or that is going to happen, what will happen next? And what are the recommended best measures in that case? What is important is that economic policy be shaped such that we are resistant to a next hit.”
Did economists learn something from the crisis, however? “I would hope so. We are constantly learning in any event. But during information sessions, I often tell students: economics is simply a very difficult field of study. It all seems very simple, but it is the combined action of billions of people. Everything is constantly changing. Economics is human behaviour, and consequently not perfectly predictable. Researchers with the Netherlands Bureau for Economic Policy Analysis (CPB), the De Nederlandsche Bank and at universities are doing a tremendous amount of research. We review how the recession can be interpreted and how we should proceed from here. For example, how is it possible that this crisis added so few unemployed individuals, in contrast to the eighties. We still do not have the definite answer to this question.”
Have the economic sciences and econometrics acquired any new insights since the recession? “We have noticed that the impact of bankrupt banks is bigger than originally thought and that this has a great deal of influence on national economies. The importance of communication is also evident. When Coen Teulings (Director of the Netherlands Bureau for Economic Policy Analysis (CPB), ed.) in February of last year, jointly with Prime Minister Jan Peter Balkenende said that the economy in 2009 would shrink by 4.5%, people said: well in that case I’ll simply stay home during the Easter holidays for once. In short, consumer spending declined.
Behavioural economics is a field that is undergoing major development. Many economic models assume that people make decisions in a rational way, but all too often that is not the case. If you took the time to properly read the DSB Bank’s product descriptions, you would come to the conclusion that buying these products would not be a wise thing to do, yet it happened. There is always someone who says: ‘you’re not participating in this, how stupid!’ Take World Online in 1999. There was as yet no product whatsoever, it was simply vapourware. But you were crazy not to sign up; you’d pass up too much return. Or Legiolease, with its tripling of profits that people bought at the time. In hindsight you could say: we allowed ourselves to be led down the garden path, but that’s unavoidable. It is an ageless phenomenon.”
Did the banks learn anything from the economic crisis? “More careful thought is now being given to the reasons for awarding someone a bonus. These directors in hindsight also turned out to be ordinary people who make mistakes. Seeing what we can learn from mistakes is of course a good thing, but searching for the guilty is not something that I consider justifiable. How would you conclude that Nout Wellink of the De Nederlandsche Bank made a mistake, while no one at the time suggested that he should not take the decisions he took. I think all of us together made mistakes. I am not talking about the offer of defective products here. Of course the DSB’s profiteering policies were outrageous. I believe that this was known in the banking world, however. But to institute a parliamentary inquiry to find a scapegoat, suggests that people purposely made mistakes. This is not what Wellink or former Minister of Finance Zalm are aiming for. For that matter, I think that even Dirk Scheringa, founder and former chairman of the DSB bank, down deep still believes that he did good things.”
How do you view the current economic situation? “We have left the crisis behind us at this point. Many people are still thinking about a double dip, but that seems improbable to me. The economy is once again exhibiting modest growth. We will close the year with a growth rate of around 2 percent and I think we can expect the same thing over the next few years. This is the way things usually go after a crisis. It is a repeating pattern. The big question people are now asking is, will this growth persist? That we don’t know. It is possible that there will be another recession in five years. People perhaps think that this will never happen again, but there is always a chance of a new recession.”
What is the responsibility of economists as advisors to politicians? “Providing advice is one of our tasks. We sketch out the scenarios and identify potential measures. However, politicians must take the ultimate decisions. The response to the recession is currently somewhat panicked; everyone will now have to work until they are 67 years of age. I am not opposed to that, but I think that politicians should give more thought sooner to what can go wrong and how that can be resolved. They should have an entire palette of possibilities readily available.”
Are economists in the EUR more or less in agreement with each other? “Fortunately there are always different opinions. There will consequently never be a consensus. A debate is always raging among economists. That is part of science. Some colleagues, for example, support a greater role for government, while others are arguing for increased free market dynamics. Is it government’s responsibility to provide for your pension or is that something you must do yourself? “This is split almost fifty-fifty here are the university.”
Is economic growth really needed for that matter? Do we not have sufficient prosperity here in the Netherlands? “Growth is necessary to be able to invest and innovate. If in ten years time we want to have the same level of prosperity as we do now, we will have to grow. As dean, I pay salaries. If I would have no money left over whatsoever, there would also not be any money for innovative research, for example. Philips too uses a share of its profits to conceive new products. Without growth you end up in a standstill. Material prosperity is not all that important to me personally, but everyone is certainly welcome to it as far as I am concerned. I still have my three-year old Nokia. But prosperity is also having a job, for example. A hundred thousand unemployed workers means one hundred thousand families that are experiencing difficulties. In terms of prosperity, I also think of security, the ability of children to participate in sports, good schools and medical care. Beautiful cars and mobile telephones are nice, but we could do without just like that.”
Wednesday, Oktober 6th 2010 (week 40).
The issue is a section in Erasmus Magazine, the opinion and information magazine of Erasmus University Rotterdam, in which an EUR-academic responds to a current-social issue.
