The death of economics.

• Author: Smick, David M.
• Position: FROM THE FOUNDER

Recently, a Japanese economist visited Washington to explain his government s five-year economic outlook." A five-month outlook might have been more credible. Yet with surprising hubris, the economist offered predictions five years out.

For decades, hubris has been the common currency of the economic policy world. It is killing the field of economics.

In the 1960s and 1970s, liberal economists believed they could eliminate all poverty. In the 1980s, supply siders thought tax policy alone could permanently raise the savings rate.

In the first decade of this century, some economists thought they could engineer monetary policy (with the help of global capital inflows) to eliminate the U.S. business cycle. Instead, the underpricing of financial risk helped lead to the global financial crisis.

The experts also fell behind the curve in Europe. Economic policymakers assumed tiny Greece's debt problems could be contained. Italian policymakers were engulfed in hubris as their government bond yields remained low. Bank of Italy Governor Mario Draghi (now head of the European Central Bank) was in the midst of a victory lap when, to his embarrassment, long-term rates skyrocketed.

Today the euro project looks like a case of hubris on steroids.

Now the world is being flooded with money and debt. The matrix of debt, interest rates, and growth has become the great conundrum of our time, a Rubik's cube of difficult choices. In today's stunningly complex financial system, hubris strangely has shifted into high gear. Keynesians demand massive new government spending, insisting that with so much excess capacity, debt doesn't matter. Conservatives demand fiscal austerity, the announcement effect of which will somehow attract global capital. Yet the austerity produces precisely the kind of market uncertainty that scares away investors.

Then there's the hubris surrounding quantitative easing, a policy tantamount to propping up an economy with a set of training wheels. In the United States and Japan, central bank economists are thrilled because QE has rallied stock markets.

Seldom mentioned is that central bankers have a terrible track record at identifying and controlling financial bubbles. Once the QE-tapering begins, a global billiard ball effect, particularly in Asia, seems inevitable. If the dollar strengthens, capital that had rushed into Asia under QE will likely rush out in search of dollar investments, weakening currencies, hiking food and energy prices...