Given the conflicting reports we’re hearing on what sort of approach the ECB is encouraging regarding our debts, thought this might be a good time to run this column from last month.

THE HOMEOPATHIC RUSE OF AUSTERITY

From The Irish Times, March 2nd, 2013

 Let’s be honest. Who among us didn’t take a moment at some point during the week to marvel smugly at the predicament the Italians have got themselves into, voting in their droves for a clown and a comedian, Silvio Berlusconi and Beppe Grillo.

Don’t the Italians realise that they must vote for serious parties and politicians who will impose the reforms required to get their basket case of an economy back on track? The guy who introduced the phrase bunga-bunga to the lexicon doesn’t fit the bill.

If we’ve learned anything from our own situation, it’s that these elections are supposed to be an act of national self-flagellation – and look how well we’re doing now, right?

The reaction from serious commentators across Europe has been scathing, with Die Welt in Germany summarising the mood: “More than half of Italians voted for some form of populist. This amounts to an almost childlike refusal to acknowledge reality.”

The reality they’re rejecting, of course, is austerity: everyone expected the Italians to continue imbibing the harsh medicine, just like us.

The phrase “harsh medicine” is telling. In this paper last weekend Donald Clarke dismissed another sort of medicine: homeopathy. Predictably enough, it prompted a heated response from believers in alternative medicine, for whom the scientific process is unpersuasive.

That particular controversy confirmed a truth that many of us prefer to ignore a lot of the time: lots of people don’t have or even value evidence-based world views.

On an individual basis it could be argued that not having an evidence-based view of the world causes little harm, but on a collective basis it is hugely corrosive – most obviously, witness the way the baseless scepticism about climate change is retarding efforts to combat the problem.

That realisation is discomfiting, but I’d suggest an understanding of many people’s factproof tendencies makes the Italian debacle a bit easier to comprehend. In this case, I’m not sure it’s the electorate who are behaving entirely irrationally.

When seen as a rejection of austerity, the Italian vote actually makes some sense. As a supposed cure-all for everything that ails us, austerity is sorely lacking in evidence to support its efficacy. Notwithstanding the promising indicators we’ve seen here in the past week, there isn’t much sign the patient is improving.
In fact, even if you ignore the neer-do-wells at the periphery, the patient isn’t doing well at all, what with the UK being downgraded and Germany’s economy stuttering.

While it’s a stretch to say that austerity is the economic equivalent of homeopathy, it certainly isn’t doing the job it was supposed to.

None of this is to suggest that there isn’t widespread need for reform and fiscal balance, of course, but as Martin Wolf of the Financial Times put it during the week: “I wonder whether the euro zone will survive its cure”, suggesting it is not so much sham medicine as the wrong medicine.

Increasingly, the evidence is clear that austerity has been counterproductive, but instead of being dismissed by policy-makers, it is still being stubbornly prescribed by them. In this case, the corrosive effects of evidence-proof thinking is coming from the top down.

No shortage of experts are willing to testify to the harmful effects of austerity, from the Nobel laureate Joseph Stiglitz to, awkwardly enough, IMF’s chief economist, Olivier Blanchard. Most prominent of all is Paul Krugman, who regularly compares austerity policies with another debunked treatment: bleeding the patient with leeches, more punishment than cure.

And just like homeopathy, austerity even has its own sort of placebo effect: the mythical “confidence fairy”, the chimerical wisdom of the market that must be placated at all costs.

Faced with research from Blanchard critical of austerity’s impact on Europe, Krugman reports that Olli Rehn, European Commission’s vice-president, wrote “a letter to finance ministers and the IMF declaring that such studies were threatening to erode confidence”. The placebo effect wears off if you discover it’s just a sugar pill, you see.

Our doctors don’t prescribe homeopathy or placebos, and our departments of health tend not to rely on complementary medicine as a cornerstone of public-health policy. Unfortunately, in capitals and central banks all over Europe and North America, the promotion of fiscal policies that run contrary to the evidence are the only policies that are being entertained right now.

So perhaps we should consider Italy’s choice: what sort of quacks and chancers might we be compelled to turn to if our doctors and hospitals insisted on prescribing unproven remedies that only exacerbated our worst ailments?

It’s a question that is going to be asked again and again in the near future, and we might not like some of the answers.