When the Treasury and its Models Seize Power

Abstract

This paper explains how short- and medium-term macroeconomic projections are undertaken within the Danish Ministry of Finance (DMF) by the use of an annual macroeconometric model, ADAM, together with a theoretical, structural general equilibrium model, DREAM. DREAM is used to calculate the structural public sector budget deficit, which by law is required never to exceed ½ percent of GDP. This legal restriction on fiscal policy gives the structural model (and the ‘model-operators’) a hitherto unseen political power. This ‘institutional’ status of DREAM causes a number of questions about democracy to be asked. First, why has an elected government accepted to surrender its legal right to undertake an active fiscal policy? Secondly, how can it be that DREAM – a neoliberal general equilibrium model without proper empirical tests and operated by anonymous civil servants – has been elevated to a position akin to a high court’s? The paper demonstrates how this model set-up within the DMF reproduces reality poorly. Therefore, these models should rather be seen as social constructs predetermined be neoclassical/neoliberal economic theory, which has to be acknowledged as a democratic challenge.

Keywords

• economics; political economy
• Keynes
• Denmark