Let me start by saying that, despite being an economist, I have often been at odds with my profession. While doctors save lives, engineers build bridges that we cross safely, or physicists tell us how the universe works, economists, as standard-bearers of what Thomas Carlyle called the dismal science, have a much less glamorous role. Indeed, we spend our days preaching about future catastrophes, yet we are unable to predict when a crisis is coming, and when it breaks out, its duration and depth.
But here we are in these times of populism, confusion, fake news and, in general, a lack of rigor and precision (unfortunately, also in journalism), which are reconciling me with my profession. No, economists will never save lives, nor will we leave the public stunned by the paradoxes of the quantum world. But if we are ignored, the world could end up in a much worse place than it is today.
In the midst of this turmoil in which we are immersed, it is more important than ever that we economists call for rigor. Because two and two are four, not three or five. Because the fact, the data, cannot be confused with value judgments. Of course there is room for the latter, and for proposing alternative policies that emphasize income redistribution or intergenerational transfers of such income. But there is also a space to remind ourselves that value judgments cannot alter the most basic arithmetic.
What am I thinking of? The controversy generated by the passing on of a tax to prices, for example. The first-year microeconomics manual of the Degree in Economics explains that an exogenous increase in production costs shifts the supply curve (upwards). For a given demand curve, this upward shift will mean that fewer goods will be exchanged at a higher price. To what degree? Well, it will depend on the elasticity of the supply and demand curves—on their shape—which in plain English means that it simply depends on the degree of competition in the sector (a flat supply curve represents greater competition) and the strength of demand (the more inelastic, the more vertical). And this is so, regardless of the value judgments made. It is the theory of tax incidence. Or does anyone think that VAT is paid by the employer? Or that an increase in VAT is paid exclusively by the consumer, without impacting business margins? Gentlemen, rigor, rigor!
And of course there is room for value judgments. For example, the most efficient taxes are those imposed on markets with inelastic demands, precisely because their introduction does not alter the quantities that the market was exchanging before the introduction of the tax. Typical inelastic demands are those for alcohol or tobacco. But basic necessities or goods with no possible substitution, such as medicines for serious illnesses, also present inelastic demands. While criteria of equity and efficiency justify excise duties on alcohol and tobacco, they would hardly do so in the case of basic necessities. Once rigor in analysis is respected, there is, of course, room for economic policy debate and opinion, but we cannot confuse one with the other.
I could go on, but it would probably fall on deaf ears: tolerance for facts that do not fit our ideological positions is increasingly limited in Western societies, which not long ago were a paragon of tolerance for the opinions of others and respect for dissent. Even so, I do not renounce alerting about another “unpleasant” area of our reality that concerns me, and greatly: the high external debt of the Spanish economy. It is a fact. The Bank of Spain has just made public Spain’s net international investment position in the third quarter of 2018: 965,000 million euros, 80.6% of GDP. Given that the 2008-2012 crisis already showed us that sudden stops—the sudden closure of financing markets—were possible in the eurozone and no longer only in emerging countries, we must think that, however hard it may be, the acquiescence of international markets to Spanish economic policy is as relevant as the political support of our Parliament. In other words, we cannot make decisions with our backs to the markets when we depend on their financing to maintain our current standard of living. For now, no tensions are glimpsed. But the memory of the last crisis warns us of how quickly that sentiment can change. It is a fact—another unquestionable fact.
