One thing that experts know, andthat non-experts do not, is that they know less than non-experts think they do. This much was evident atthe just-completed Spring Meetings ofthe International Monetary Fund andthe World Bank Group. They were three intense days oftalks that brought together finance ministers, central bankers andother policymakers. Our economic expertise is limited infundamental ways. Consider monetary andfiscal policies. Despite decades ofcareful data collection andmathematical andstatistical research, onmany large questions we have little more than rules ofthumb. Forexample, we know that we should lower interest rates andinject liquidity tofight stagnation andthat we should raise policy rates andbanks' cash-reserve ratios tostifle inflation. Sometimes we rely onour judgment incombining interest rate action with open-market operations. But thefact remains that our understanding ofthese policies' mechanics is rudimentary. These rules ofthumb work as aresult ofevolution. Over time, thewrong moves are penalized, andtheir users either learn bywatching others or disappear. We get our monetary andfiscal policies right thesame way that birds build their nests right. As with all behaviors shaped byevolution, when theenvironment changes, there is arisk that existing adaptations become dysfunctional. This has been thefate ofsome ofour standard macroeconomic policies. Theformation ofthe eurozone anda half-century ofrelentless globalization have altered theglobal economic landscape, … Continue reading →