An Economic Supreme Court

Thomas Colignatus* argues that the economic crises in the last century amount to a case for national
Economic Supreme Courts.

Policy making in the European Union is often described as ‘management by crisis’. Countries are only willing to agree on common solutions when circumstances force them. This may be an exaggeration for the daily handling of minor issues but the last decades have shown a core truth with also the companion element of ‘crisis by management’. The crises in the Exchange Rate Mechanism (ERM) were answered by the euro, and the crises in the euro are being answered by Van Rompuy’s Roadmap: (i) a banking union, (ii) stricter fiscal co-ordination, with deficits of at most 0.5 per cent, (iii) squaring the circle on both competition and the social impact, and (iv) more hoped-for democratic legitimacy. The Eurozone sticks to an architecture in which fiat money (the euro) still works out as a gold standard, since governments have debt in a currency they have no control over. It is the hyperinflation of 1921-1924 in the Weimar Republic that drives Germany, quite differently from the 1929-1937 Great Depression deflation and unemployment that worries the rest of the world. Berlin now imposes bank rules and the 0.5 per cent deficit target that will cause continued contraction in Europe. In this manner it becomes unavoidable that German taxpayers would eventually have to pay for the unemployed and pensioners in Southern Europe. One only wonders how large the crisis must become before the German government will tell its people the bad news.

Rationality as an alternative
We may wonder whether there is an alternative for this ‘management by crisis by management’. Though the rational expectations hypothesis remains what it is, rationality has appeal over chaos. After World War II Jan Tinbergen created the Dutch Central Planning Bureau, France got its Commissariat Général du Plan, Germany its Sachverständigenrat, the UK recently its OBR. They have a role that appears to be too limited for what is demanded here. These bureaux only provide information but do not have the power to block neglect or distortion. Reading Connolly (2012) on the ERM with the onset of the euro makes one wonder about the limited role of these economic agencies too. Thus: (i) they lack a power role in the democratic process, and (ii) there are no constitutional safeguards for scientific quality (with implied independence) where it matters, in particular for such a power role. Thus we may consider that each nation adopts a constitutional Economic Supreme Court with the role to check the quality of information in policy making.
Arthur Okun (1983:580), chairman of the US Council of Economic Advisers (CEA) in 1968-1969, reflected on how current chairpersons are members of the President’s cabinet, so that the CEA is partial to official policy. He imagined a situation with impartiality: ‘Given these constraints, members of the Council of Economic Advisers are clearly recognized as the President’s men. If they speak publicly, they will be identified as spokesmen for administrative positions. (...) One wishes for a more effective way of influencing public and congressional opinion in the areas of professional consensus. There is a role to be played by a Supreme Court in the profession, although a less important one than that actually fulfilled by the Council and the Bureau of the Budget in recent years.’

I had not been aware of Okun’s view and only traced it after thinking along this line myself and looking for evidence in the literature. My book DRGTPE (2011) presents more evidence and gives also a formal result with a reduced form model that highlights the importance of sound information for policy making. I regard the issue as more important than Okun though.

The analysis suggests that democratic nations would do well to improve the current checks and balances with an additional Economic Supreme Court (ESC). DRGTPE gives a draft constitutional amendment. The ESC can be compared to the Judiciary. This Supreme Court will likely have its internal differences of opinion, but it is better to discuss those within the framework of an independent Judiciary rather than with politics looking in. The same holds for differences in approaches in economics. The ESC is based in economic science and is open to the public but has a veto power over the budget if they deem the information misleading to the public. In principle each nation would have its own ESC. For Europe, the ESCs would exchange information and thus help to provide a backbone of co-ordination.

A key role for the current crisis
Creation of the ESC(s) would be an important element in a proper resolution of the economic crisis both in the USA and Europe. Parliaments can already upgrade their official economic advisers in common procedure while the constitutional wheels turn more slowly. A constitutional change in Holland requires an affirmation by a newly elected Parliament. But a regulation can be created to start working like the intended ESC already.

More evidence for this key role for the ESC(s) lies in the issue of unemployment and the redesign of the welfare state. Colignatus (2013) is a video (somewhat slow since I am still learning for this). An abstract of Colignatus (2014) is: ‘The welfare state was created after 1950 with counterproductive mechanisms and this caused high inflation and high unemployment and stagnating growth by 1970, called stagflation. Since 1970 governments redressed the welfare state but did not succeed in finding workable mechanisms. They rather fought stagflation with the ideology of the day, shifting from vulgar Keynesianism first to monetarism and then to neoliberalism, and now ‘muddling through’. The deregulation of financial markets seemed to solve stagflation but only repressed it and resulted into the crisis since 2007. The return of regulation also causes the return of stagflation: what was repressed before now is into the open again. Re-regulation is required indeed but the fundamental cure lies in focussing on workable mechanisms for the welfare state. Return to the 19th century laissez-faire will generally be rejected. If economic management had made better use of the available information then these policy errors could have prevented. A mixed economy requires a constitutional Economic Supreme Court to monitor the quality of information for policy making.’

References:

Colignatus, Th. (2000, 2005, 2011), Definition & Reality in the General Theory of Political Economy, (DRGTPE) 3rd edition, Thomas Cool Consultancy & Econometrics, PDF at http://thomascool.eu

Colignatus, Th. (2013), ‘Cause and cure of the crisis’, video presentation, http://youtu.be/PxhQ1Sdk1nY

Colignatus, Th. (2014), ‘Cause and cure of the crisis’, September 14, http://mpra.ub.uni-muenchen.de/58592

Connolly, B. (1996, 2012), The Rotten Heart of Europe: The Dirty War for Europe's Money, London: Faber & Faber

Okun, A. (1983), ‘The economist and presidential leadership’, reproduced in Pechman (1983) p579-583

Pechman, J.A. (ed) (1983), Economics for policy making. Selected essays of Arthur M Okun, Cambridge MA: MIT

Note:

* Thomas Colignatus is the name ‘in science’ of Thomas Cool. He is an econometrician and teacher of mathematics in Scheveningen, Holland. He worked at the Dutch Central Planning Bureau in 1982-1991. See http://thomascool.eu.

From issue no. 167, October 2014, pp.20-21

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