Policymakers seek simple answers to complex issues

Index May13.png3 years ago, two Harvard professors published a book with the eye-catching title, “This Time Is Different: Eight Centuries of Financial Folly”. Marketed as “the landmark work of financial crises”, it went straight into the best-seller lists and became required reading for policymakers.

The blog, trying to keep up as always, also bought a copy. However, it found itself completely unable to follow the logic, and instead gave the book for resale to a charity shop. It therefore guesses that most policymakers also never actually read beyond the introduction.

This didn’t stop many from acting on its most significant finding, that growth rates collapsed in countries whose debt was 90% or more of GDP. As the New York Times reports:

“Many politicians interpreted the research as showing a direct relationship between debt and growth. If a country reached a debt burden of more than 90 percent of its annual economic output, the logic went, it would quickly fall into a debt trap that would leave it struggling to grow in the coming years. Prominent politicians — including Olli Rehn of the European Commission and Representative Paul D. Ryan, the chairman of the House Budget Committee — cited it as a reason to try to impose major budget cuts”

The only problem is that the book’s own data didn’t support the argument. Researchers at the University of Massachusetts recently tried to replicate the results and foundsome simple miscalculations or data exclusions that sharply altered the ultimate results“. They discovered that the growth rate for countries with a 90% debt load should have been 2.2%, not -0.1%.

The story highlights how policymakers’ search for simple answers to complex questions has been highly damaging to the global economy. As the blog’s monthly Boom/Gloom chart above shows, the trendline of austerity (red) is now rising sharply. Whilst the Index itself (blue column) continues to flatline just above the Gloom level.

If this is happening in the seasonally strong Q2 period, the outlook for H2 cannot be good.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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