Popper in Brussels

The European Commission’s Directorate General for Economic and Financial Affairs (ECFIN) has recently released an Economic Brief  by Marco Buti and Nicolas Carnot whose aim is to assess the so-called “austerity policy” enforced by the Commission, and to dispel the main allegations of its critics.

The allegations tackled by the authors are five. 1) Unnecessarily harsh consolidation has been induced by irrational panic in the sovereign bond market. 2) The adjustment is too front loaded. 3) The Commission follows an inflexible approach. 4) Fiscal consolidation is not politically and socially sustainable. 5) The Commission’s approach puts all the burden of adjustment on debtor countries.

The counterarguments put forward by the authors on each single point follow a common scheme: a) the allegation has some grain of truth, but b) the Commission approach is sensible and flexible enough, c) the strategy adopted was the best possible ex ante, and  d) there was (is) no better alternative. In summary,

we argue that the current EU fiscal strategy is essentially in line with the approach favoured by other international organisations. The EU fiscal recommendations are not an ideological call for austerity at all costs. In general, the flexibility embodied in the rules is being used within a ‘steady structural’ strategy” (p. 1).

Overall, the document sounds like a rather poor rhetorical defence of the Commission. It enhances, rather than dispelling, the suspect that the austerity strategy is a “must” without alternatives essentially for extra-economic reasons. It could be used as a discussion paper in a class on the methodology of science according to Popper.

Standard economists – those who also have some training in methodology – think they are Popperian scientists because they have no ideological prejudices, and their theories are falsifiable but corroborated by empirical tests (mostly in econometric fashion). As highlighted by major Popper’s pupils, however, falsificationism is not common practice in the ordinary conduct of scientists, neither in hard sciences nor, to a greater extent, in social sciences. Cognitive studies have also discovered that, indeed, we all seek for confirmation of our ideas, and that we protect them from unpleasant facts  by means of more or less conscious selective strategies. This ECFIN document is an example.

 

First, the most important allegation against the austerity policy has been erased. To put it in the form of a “scientific question”: is it working? Addressing allegation 1), the authors answer in the affirmative because “on average the euro area structural balance has been cut from 4.5% to 1.25% between 2009-13 (…) There has also been visible progress in improving external and relative competitiveness positions”. Leaving a detailed analysis of this statements aside, this is not evidence of the success of the austerity strategy. That strong fiscal adjustments coupled with domestic deflation produce the aforementioned results is unquestionable. The key test of the austerity strategy is that such results should come at low or negligible real and welfare costs followed by fast recovery, since front-loaded fiscal consolidation produces an immediate fall in interest rates and a rise in confidence that foster long-term private expenditure. The key allegation against austerity is that this prediction, or promise, has not materialized. Spreads have remained high until the ECB has stepped in, recessionary effects are much longer and deeper than expected, political and social costs are impressive. True or false, this allegation is addressed nowhere in the document.

 

Second, the document instead puts forward a number of side arguments that methodologists call “protective belt”. This sort of arguments usually exploits the fact that articulated theories, or policy prescriptions in our case, do depend on a number of side conditions. Hence, if some facts do not fit the theory, the core is preserved, while the problem is shifted onto the side conditions. Here one concerns the composition of fiscal adjustments: too much taxes instead of expenditure cuts (section 4). Another is structural reforms of labour and goods markets, which, of course, do not proceed hand in hand with fiscal consolidation (section 4). But, beneficial as they may be, structural reforms are a different policy prescription in themselves, some scholars question that they can successfully be implemented during austerity, and in any case they are not essential part of the prediction of the austerity policy.

Finally, the hallmark of protective rhetoric is that the core propositions are not falsifiable simply because there is no “control protocol” to do that. For instance, the government programme of Mario Monti promised “rigour, growth and equity” in line with the predictions of the austerity policy outlined above. Before leaving his office with negative growth and negligible equity, Monti argued that it was foolish to expect that fiscal consolidation would not bring recession in the short run, while fruits would have come in the long run. Beside being an ex-post retreatment, this style of argumentation is purely rhetorical since there is no a clear ex-ante commitment stating  1) how much recession is compatible with the given policy, 2) how long is the long run. “In the long run we are all dead. Economists set themselves too easy, too useless a task if in a tempestuous season they can only tell us that when the storm is long past the ocean is flat again” (J. M. Keynes, A Tract on Monetary Reform, 1923).

Until proponents of the austerity policy do not give us their control protocol, such a policy will in fact remain unfalsifiable, and the key question – is it working? – will remain unanswered.

5 Responses to "Popper in Brussels"

  1. Ed Dolan
    EdDolan   March 25, 2013 at 11:28 pm

    Nice.

  2. EzioP1   March 27, 2013 at 3:05 am

    The only thing we can see right now is that the austerity program didn’t work as expected. But worst than anything is the fact that nobody in the EU ‘empire’ did anything to change the wrong direction. Question is how useful is the all EU gigantic and expensive organization ?. Only Mario Draghi made significant effort although he had his hands tied by the limited ECB edict.

  3. Hubert Gabrisch   March 27, 2013 at 3:44 am

    Dear Roberto, this is certainly not the only defense paper you are arguing against. But, it belongs to the annoying ones. I share your views completely, but one has to write a manifold of such critical comments – without any impact on the authors addressed . If you read in German, see my website where I am criticising the fiscal consolidation from the very beginning!

    Hubert Gabrisch
    Halle Institute for Economic Research (IWH, Germany).

  4. Andrés Olmedo   March 27, 2013 at 8:15 pm

    Fantastic.