The economics we need, not the one we’ve got

econafterthecrisisA little late in the day I’ve just finished Adair Turner’s Economics after the crisis: objectives and means, published in 2012. It is based on Turner’s 2010 Lionel Robbins lectures.

Economics after the crisis is a thoughtful book which makes a number of relatively simple but profound points.

The early pages note some of the findings emerging from the literature on happiness. In particular, it examines the paradoxical finding that there is an apparent disconnection, once national income per head reaches a certain level, between further rises in average incomes and reported levels of happiness. More money on average doesn’t appear to make people happier.  Turner notes some of the mechanisms that could generate this finding. He notes that trends towards increasing income and wealth inequalities, which seem to accompany market-based economic growth, exacerbate the problem.

These empirical results present a challenge to simplistic views about the desirability of pursuing economic growth as an overriding policy objective. Turner argues that a proper understanding of the conventional economic arguments means they don’t justify the policy anyway. It is a radical simplification of these arguments that gets used to justify simplistic policy prescriptions associated with uncritical marketization.

And that is before you consider the arguments from behavioural economics about the importance of relativities in consumption. Some of the new behavioural economics thinking moves you even further from conventional thinking on growth. [Read more...]

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On the impact of economic ideas

Supply and demand graphYesterday Noah Smith discussed whether economists’ ideas and arguments have much of an influence on policy and practice. He used an edited version of a famous quote from Keynes as his jumping off point. He then considered whether we can credibly claim that any living economist has significant influence over the path of public affairs. He mentions Paul Krugman, Robert Barro, Martin Feldstein and Greg Mankiw. These are high profile economists who are leading candidates for influence. If they aren’t influential then perhaps no economist is.

Smith differentiates influence on public opinion from influence on elites. He notes that the general public is quite frequently strongly opposed to ideas that have a strong hold within the economics community – such as free trade being a good idea or rent control being a bad idea.

Smith concludes that while there might be some dead economists whose ideas still hold sway – Friedman’s libertarianism being the prime example – whichever way you slice it living economists aren’t demonstrably influential. They are not, in Smith’s assessment, anywhere near as influential as “writers”.  [Read more...]

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Beyond the council tax

row of potted treesThe council tax is unlovely and unloved. It was rushed into being as a replacement for the hated poll tax. Its structure has always been an uncomfortable compromise, somewhere between a charge for services and a genuinely progressive property tax. The property values upon which it is based haven’t been uprated for twenty years in England and Scotland and ten years in Wales. This means that, because local housing markets have traced out different trajectories, the relativities built in to the council tax bandings bear very little relationship to the current distribution of property values. The truncation of the council tax bands means that higher value properties are relatively lightly taxed compared to lower valued properties. The tax is, broadly speaking, regressive.

There are good reasons for reforming the council tax as a basis for gathering revenues to fund local authority services. But there is another aspect to the debate. The Joseph Rowntree Foundation’s Housing Market Taskforce argued a couple of years ago that property taxes may well have the potential to act countercyclically in the housing market and dampen housing market volatility. That is, as prices rise the tax burden will increases, and that puts a brake on further price rises. Such a property tax could take various forms, including creating additional council tax bands for higher value properties or moving to a flat rate or progressive property tax. The latter has the advantage of removing discontinuities, but brings greater informational demands in assessing property values.

These are ideas I have blogged about before.

Last week, Chris Leishman and colleagues produced a report that explores these issues empirically. It is based on an ambitious attempt to create a comprehensive dataset of property values for England and then model the impacts that changes to local property taxation would have both spatially and at household level. The researchers were interested in how alternative tax structures could improve fairness between places and fairness between people, and whether it is possible to detect any influence of property taxes on price volatility. [Read more...]

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Fighting talk

Why_PovertyThese days it seems we’re more likely to hear politicians talk about a “cost-of-living crisis” or, possibly, allude to problems of housing affordability than we are to find them discussing “poverty”. Indeed, we’re back in an era where the whole concept of poverty, and whether there are any households in genuine poverty, is being questioned. The translation of the banking crisis into a crisis of welfare has seen benefits cut and uprating mechanisms pared back. The prevailing policy narrative of over-generous welfare provision has caused the discussion to loose its moorings. The political elite fail to show any great appreciation of when or whether their cuts might be at risk of reducing citizens to an unacceptably low standard of living.

Yet, in recent weeks the term “destitution” seems to have made an unwelcome return to the political lexicon following the intervention by Archbishop – now Cardinal – Nichols to raise the issue of overzealous benefit sanctions.  And there’s been some discussion of quite how far the UK will miss its child poverty targets by, largely as a consequence of the Coalition’s welfare “reform” agenda.

Into this fog of political euphemism and misdirection comes Julia Unwin’s Why fight poverty? This brief book was published towards the end of last year, but I’ve only just got to reading it.

The book is a timely reminder of what is at stake. Unwin provides a restatement of why poverty is a major social problem – not just for those who find themselves poor at a particular point in time but for everyone. Poverty is risky, costly and wasteful. [Read more...]

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The intolerance of uneconomic economics

Global Economic CrisisOver the last couple of days two of the big beasts of the economics blogosphere have offered views on a question of considerable significance for the field of macroeconomics.

On Friday Simon Wren-Lewis discussed whether New Keynesians made a Faustian pact when they decided to engage new classical economists on their own modelling territory. He concludes that New Keynesians were not compelled against their will to adopt modelling devices such as rational expectations and inter-temporal optimisation at the individual level. These modelling techniques were perceived as an improvement on existing practice. But it may nonetheless have turned out in retrospect to have been a strategy that carried significant costs. New Keynesians may be less able to shed light on fast moving events in the real world than they might otherwise have been.

On Saturday, Simon’s post elicited a response from Paul Krugman. Krugman takes a slightly different position. [Read more...]

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On agreeing with George Osborne

3542341781_2e07e18657_nI have to admit I found the whole situation rather discomfiting. Yesterday I found myself agreeing with George Osborne.

Of course, as David Gillon (@WTBDavidG) pointed out on Twitter, we can all join George Osborne in agreeing that Iain Duncan-Smith is not perhaps the sharpest knife in the drawer. But, beyond that, most right-thinking people tend to find themselves parting company from the biggest cheese on Horse Guards Road.

So when I read reports of Osborne’s comments on raising the minimum wage I was rather surprised that my initial response was to agree with him. Especially as he seemed to be setting out a position in opposition to that adopted by St Vince of Cable, who, as we know, is generally right about such things. [Read more...]

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Bittersweet sympathy

two workers Much of the media reporting of today’s IPPR briefing note on the economic recovery focused on the alarm it sounds about the rapid increase in household debt – in particular the risk that Help to Buy II will further increase house prices. The economy may give the appearance of rapid recovery, but it is not occurring on a basis that is sustainable for any economy, and particularly not for one in which households are already heavily indebted.

But to focus upon the issue of debt is to rather miss the bigger point the report is trying to make. The point is that when judged against the objectives the Chancellor set for himself back in 2011 he has fallen a long way short. The talk back then was of a ‘march of the makers’ – a renaissance of British manufacturing and exports – and a rebalancing of the economy away from its reliance on financial services and house price inflation.

What we have seen subsequently, despite initiatives such as the Funding for Lending Scheme, is poor public and private investment performance and an expansion in exports that has just about balanced off the increase in imports. And we’ve seen the Chancellor switch strategy to create a short-term debt-fuelled consumer boom. This is precisely the situation we faced going into the Global Financial Crisis of 2007-8.

Except this time the Government has chosen this road in the full knowledge that it has few supporters and many critics – the Help to Buy initiative, in particular, has few friends beyond the Quad at the heart of Government. [Read more...]

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Filling in the b(l)anks

the bankA couple of weeks ago Martin Wolf blogged on the way in which modern macroeconomics has neglected the explicit and integrated treatment of the financial sector. The consequences of this omission have turned out to be of enormous practical significance. It left analysis mostly blind to a range of important real world developments. He provided a brief summary of the characteristics of the banking system that he considers economics students need to be familiar with.

This is a theme developed by Professor Wendy Carlin in the revision of her textbook currently under development. She blogged about the aim of the project a year ago. The revision seeks to move instruction beyond a three equation model which does not explicitly incorporate money or credit. The approach retains that three equation model at its heart, but grafts on to it a financial sector that is, rather than a gross simplification, relatively rich in institutional detail. The motivation is that the model needs to be able to explain how changes in financial markets shifted and intensified risk in ways that ultimately precipitated the financial crisis and the subsequent macroeconomic turbulence.

It strikes me that this is an important project. Rather than leaving consideration of the impact of a highly developed financial system to more esoteric later study – if it is ever studied at all – it starts students off with an appreciation of the fundamental significance of finance for the functioning of the macroeconomy. [Read more...]

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Economics after the crash

Economics after crash coverOne of the topics I’ve revisited regularly on this blog over the last three years is the nature of economic knowledge and economic analysis.

I have brought together nineteen of these blogposts as a collection of essays on the philosophy, ethics and methodology of economics. The essays touch on questions such as why economists missed the global financial crisis, debates about how economics needs to change, and the impact that economic analysis has on the real world. The issue of orthodoxy, heterodoxy and pluralism in economic analysis features prominently. The need for a stronger ethical component to economic education and economic analysis is a recurrent theme. Several of the essays make the link between economics and a broader political economy.

The essays are available free to download below the fold here, from the bookshop, or direct from my Scribd site.
[Read more...]

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Would post-crash economics be a step backward?

Finance and MarketsDiscussion of the need for the reform of economics in the post-crash world continues to gather momentum and prominence in parts of the econosphere. Wendy Carlin set out a case for change at the FT (£) on Sunday, while a group of post-Keynesian economists stuck their head above the parapet in a letter to the Guardian on Monday.

The thrust of the post-crash economics argument is not that mainstream economic approaches should be rejected in favour of an alternative. Rather it is the more modest plea that economics should be taught more pluralistically and contextually. Mainstream approaches should be set alongside alternative bodies of thought. Economics students would benefit from rediscovering economic history, genuinely institutional analysis, a dose of philosophy, and the history of economic thought. It’s an agenda with which I have a lot of sympathy.

We are seeing bits and pieces of a backlash. That is inevitable. [Read more...]

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