Don’t Believe in an Economist’s Crystal Ball? Steve Hanke Might Make You Think Twice

By: Contributor - May 9, 2014, 7:18 am

EspañolI am skeptical of economic forecasters in general, but when it comes to economic crises, I have to admit Steve Hanke’s record has been particularly impressive as of late.

I had lost track of Steve Hanke’s work for a couple of years, but he came back to my radar with a short, incisive blog post at the Cato Institute that is not a prediction per se. However, it shows how anyone willing to pay attention to the very predictable effects of the Muslim Brotherhood’s economic policies could have foreseen their fall from power last year — even without taking into account the more complex issues surrounding the very particular political situation in Egypt:

“As the accompanying charts illustrate, the story of a failing Egyptian economy is the story of a troubled Egyptian pound — and of the inflation troubles that accompanied it. Indeed, as of July 1, 2013 (shortly before before Morsi’s ouster), Egypt’s annual inflation rate was 27.1 percent.”

The fall in the value of the Egyptian pound

Egypt's annual inflation rates

“While Morsi’s final hours were filled by lectures on ‘constitutional legitimacy’, Egyptians weren’t listening – they were preoccupied with a plunging pound and an inflation rate that is over three times higher than the official rate… In the final analysis, the Egyptian people have taught Morsi and the Muslim Brotherhood a harsh lesson: bread is more important than ideas.”

Our own Fergus Hodgson then reminded me of Hanke’s prediction, back in 1991, that the convertibility system of Argentina would eventually collapse, as it did in 2002, plunging the country into one of the worst economic crises of its recent history.

Hanke advised Argentinean officials on monetary reform back then. But the convertibility system that was finally implemented, while instrumental in putting an end to the hyperinflationary period that Argentina was going through, differed in several key aspects from Hanke’s original proposal.

Hanke warned about the serious institutional loopholes — mainly the allowance of domestic, volatile assets as part of the portfolio that backed up the peso — in Argentina’s convertibility system in an October 1991 op-ed for the New York Times. And again, 11 years later, history proved him right.

Hanke’s prediction of the Argentinean collapse is not only interesting per se; it illuminates a great deal of the taboos and prejudices of Argentineans regarding their own contemporary economic history.

The average Argentinean will probably tell you that the terrible performance of the economic reforms implemented by the Menem administration was due to its blind faith in the economists that advised them.

The other night I met someone at a dinner party who graduated in economics during those years in Argentina, and he told me that he was weary of stating it in his resume when applying for jobs back then. That’s how widespread the idea was that economists and their “imported” theories had destroyed the country’s economy.

How ironic is it that the historical record shows that what happened was exactly the opposite: it was an economist who warned that the country would collapse precisely because his prescriptions were not being appropriately implemented.

Sadly, those prejudices are still alive in Argentina. And ever since the Kirchners came to power, they have exploited those prejudices with a vengeance. The crisis of 2002, supposedly created by “the surrender of politics to economics” is the one and only datapoint that Kirchneristas, to this day, insist on using as a benchmark to compare the results of their terribly misguided economic policies.

Last but not least, in April, Hanke released the first edition of the International Misery Index, which sums the unemployment rate, the lending rate, and the inflation rate, less the percentage change in real GDP per capita.

According to this simple formula, Venezuela heads the list with the highest level of misery on the planet. What’s more, Hanke predicted that this would have a negative impact on president Nicolás Maduro’s popularity, since the index has historically shown a high, negative correlation with the popularity of US presidents.

2013 Global Misery Index Scores

In other, commonsensical words, Hanke noted that “for most people, their quality of life is important. Constituents prefer lower inflation rates, lower unemployment rates, lower lending rates, and higher GDP per capita.”

I have to confess that when I read this for the first time, I was skeptical. Commonsensical as it is, I have become just a tad too pessimistic as of late about the capacity of the average Venezuelan to see the root cause of the economic mayhem the country is going through. After all, it’s not like Argentineans are the only people on earth capable of holding outrageously misleading beliefs about how the economy works.

Maybe, I thought, there is still an important part of the population that buys the government’s line that there is an “economic war” going on, orchestrated by evil businessmen hellbent on “speculating” with prices, and “hoarding” basic products in order to launch a “market coup” to the revolution.

Well, happily, the latest news seems to confirm that once again, Hanke’s prediction was right on spot, and I was wrong: the latest Datanálisis poll shows that almost 60 percent of respondents disapprove of the Maduro administration, and almost 32 percent see him as the most responsible for the problems the country is going through.

Watching how stubbornly people insist on turning a blind eye to basic economic realities, inflicting a great dose of pain on themselves in the process, can be a bit of a depressing experience. It’s great news to know that the work of razor-sharp dismal scientists like Hanke can nevertheless give us a reason to see the light at the end of the tunnel.