Writing at Project Syndicate, economist Ashoka Mody notices that projections of global economic growth have been overly optimistic.
PRINCETON – In April 2010, the International Monetary Fund’s World Economic Outlook [WEO] offered an optimistic assessment of the global economy, describing a multi-speed recovery strong enough to support roughly 4.5% annual GDP growth for the foreseeable future – a higher pace than during the bubble years of 2000-2007.
But, since then, the IMF has steadily pared its economic projections. Indeed, this year’s expected GDP growth rate of 3.3% – which was revised downward in the most recent WEO – will probably not be met.
Persistent optimism reflects a serious misdiagnosis of the global economy’s troubles...
Most notably, economic projections have vastly underestimated the severity of the eurozone crisis, as well as its impact on the rest of the world.
And recovery prospects continue to depend on the emerging economies, even as they experience a sharp slowdown. The WEO’s prediction of a strengthening recovery this year continues the misdiagnosis.
Economic forecasts are useless in the post-meltdown world, as I noted in Economics As Religion.
... you may now also understand that to say that economists are "right" or "wrong" about this or that is simply nonsense because, necessarily, their many errors all go in one direction (rebuffed optimism). And when we combine this inescapable bias with the acknowledged fact that the laws of economics do not exist, we can clearly see that economists form a secular clergy whose primary function is cheerleading.
As if to reinforce my point about faith-based economics, Mody goes on to say the following:
Economic forecasts rest on the assumption that economies ultimately heal themselves.
But economies’ powerful self-healing capabilities work slowly.
More problematic, a misdiagnosis can lead to treatments that impair the healing process. Overly optimistic economic projections based on mistaken assessments of the global economy’s ailments thus threaten recovery prospects – with potentially far-reaching consequences.
One could write a book about problems with the optimistic assumption of self-healing economies. One could just as easily assume that, sooner or later, economies always blow up.
Suffice it to say that the key word here is slowly. Humans are in a hurry to get to wherever they're going. People are unemployed right now. People need food stamps in order to eat right now. We need more growth right now.
So humans (economists) try to treat the patient (economy). But if they misdiagnose the patient, they can further fuck up the patient's health, making it harder for the economy to heal itself, and further delaying the inevitable recovery.
So it is important to diagnose the patient correctly to speed up the self-healing process. Naturally, Mody has the correct diagnosis and thus the cure.
In Europe, the banks’ wounds must be closed – weak banks must be shut down or merged with stronger banks – before recovery can begin. This will require an extensive swap of private debts for equity. For the global economy, the malaise reflected in anemic trade growth calls for coordinated fiscal stimulus by the world’s major economies. Otherwise, the risk of another global recession will continue to rise.
Is Ashoka Mody right? Probably not, but it doesn't matter.
Summing up, Ashoka is saying—pay close attention here—that excessive optimism leads to misdiagnosis of problems, which invariably makes those problems worse.
How about you?
There is beauty in the world. Shawn Colvin sings Shotgun Down The Avalanche.