Inclusive capitalism

Mark Carney’s speech yesterday to an Inclusive Capitalism conference has attracted plenty of press coverage. And rightly so.

It is a fascinating speech. But it is not necessarily fascinating for the arguments it sets out. The arguments are familiar. It is fascinating because it is Carney who is making the arguments. Markets erode social capital; inequality undermines the legitimacy of capitalism; more robust regulatory structures are insufficient on their own to deliver a safe and socially useful financial system; banking should be viewed as a support to broader, more important social objectives rather than an end in itself; we need to rediscover a focus on the long-term and the systemic.

These arguments have had currency among the critics of the established financial order for many years. And they have achieved much greater profile and urgency among those outside the citadel since the global financial crisis.  The need for the financial system to undergo an ethical overhaul becomes ever more compelling as each new area of fraudulent market-rigging becomes exposed.

Now the arguments are more clearly registering with insiders. [Read more...]

Share

Is third party expertise just what the kids need?

On Thursday Noah put up a brief post on the Market Priesthood. It relates the story of Steven Levitt and Stephen Dubner, of Freakonomics fame, meeting David Cameron, of Coalition Government fame. Levitt and Dubner tried to persuade Cameron that health care was just like any other part of the economy. Cameron was, apparently, not impressed.

Noah riffs off this story:

This is exactly what I call “free market priesthood”. Does Levitt have a model that shows that things like adverse selection, moral hazard, principal-agent problems, etc. are unimportant in health care? Does he have empirical evidence that people behave as rationally when their health and life are on the line as when buying a car? Does he even have evidence that the British health system, specifically, underperforms?

No. He doesn’t. All he has is an instinctive belief in free markets … I don’t think Levitt has a model. What he has is a simple message (“all markets are the same”), and a strong prior belief in that message.

Then yesterday in the Guardian Patrick Butler picks up on the proposals put forward by the Department of Education to local authorities the power to outsource pretty much all of their children’s services apart from adoption. [Read more...]

Share

Economics Budo

’The spectrum of response to this week’s Post-Crash Economics Society report on economics education – or their more specific proposal on a module panics and bubbles – has been intriguing, if not entirely unexpected. Some economists have welcomed the students aspirations for greater critical engagement with the material they are presented with. Others have been rather dismissive of the students’ desire to be offered a more pluralist curriculum – non-mainstream approaches to economics are seen as offering little or nothing of value.

In some respects, a chunk of this commentary simply replays the criticisms of the PCES case that are outlined and rebutted in the report itself.

Several prominent economists have blogged their thoughts (for example, here, here and here). The posts and the comment threads are well worth reading, for different reasons. [Read more...]

Share

Policy Unpacked #4 – Rethinking post-crash economics

Policy Unpacked logoSince the Global Financial Crisis questions have been asked about the adequacy of dominant approaches to economic analysis. Are they sufficient to help us understand the economy or do they need supplementing or reformulating?

This is an important question for policy not simply because of the debate over austerity but also because economic ideas and arguments are increasingly influential when seeking to shape, justify or change policy more generally.

Students at a number of British universities have sought to question whether the economics curriculum they are offered for their undergraduate degree is adequate. This week the Post-Crash Economics Society at Manchester University published a report seeking to make the case for a more pluralist, critical and broad-based economics education.

[Read more...]

Share

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...]

Share

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...]

Share

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...]

Share

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...]

Share

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...]

Share

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...]

Share