Not us, guv

Academic economists are smart people. In my experience, a few are rather too self-consciously smart. And one or two adopt the characteristic economist persona – perpetual patronisation of, and impatience with, those unfortunate souls working in the lesser social sciences – without obviously having the track record to justify the hauteur. If, that is, it can ever be justified.*

The unwary might be forgiven for thinking that the Global Financial Crisis of 2007-2008, which it is generally agreed most macroeconomists did not anticipate, would take the wind out of economists’ sails somewhat. Some might argue that a degree more modesty about the discipline’s achievements would be appropriate in future.

And there was undoubtedly a period of reflection and self-criticism around 2008-2009. Senior economists were willing to speculate publicly on where it all went wrong. It’s an issue I’ve blogged about on previous occasions.

However, it wasn’t long before some of that smartness had been put to work articulating a range of reasons why the GFC should not be seen as a failure of economics as a body of knowledge, and nor should economists be seen as in any way culpable for the economic havoc that followed the implosion of the financial system in 2008.

Business as usual was returning. The familiar swagger was back. [Read more...]

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Shredded, the RBS saga and banking reform

shreddedI’ve just finishing reading Ian Fraser’s Shredded. I started it when I was up in Edinburgh last month, appropriately enough. But other things intervened and it was only over the bank holiday weekend that I got the time to sit down and read the second half.

The book tells the fascinating story of the growth and subsequent implosion of the Royal Bank of Scotland. Fraser has produced a genuine page turner from material that is, on the face of it, pretty dry.

Quite a few elements of the story are now reasonably familiar – particularly relating to the Fred Goodwin era. I have to admit that I am only an intermittent watcher of what’s going on in the world of banking and finance, so it was good to have the developments laid out systematically and largely chronologically. It was particular interesting to learn what has been happening in more recent years, after the bank found itself pretty much nationalised. Like anyone who pays attention to the news I am aware of the massive fines regularly being handed to the bank for past crimes and regulatory infringements, but I wasn’t entirely up to speed with what was happening in terms of its restructuring or the way in which it has interacted with government.

The story of the rapid growth of RBS after 2000 is pretty hair-raising. But I found the story of what happened after 2008 under Stephen Hester, with the aim of bringing the bank back to profitability, no less alarming, in the sense that behaviour did not change dramatically as a result of lessons learnt the hard way. Indeed, there is the suggestion – although disputed by the bank – that aspects of its behaviour deteriorated after 2008 as it attempted to improve its own financial position at its customers’ expense. Entirely coincidentally, but almost as if to underline the point, RBS finds itself in the news again this week accused of selling mortgages without doing the necessary affordability checks, long after it was supposed to be cleaning up its act. [Read more...]

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Academic economics, institutions and incentives

Economics economistsAn interesting discussion about academic economics and its role in public life has sparked into life while I’ve been away (eg Simon here and here; Chris here and here). This discussion touches on many of the things that are closest to my academic interests – in particular, thinking about economics as a set of social practices as much as bodies of knowledge.

Just before I disappeared for a few days I finished Lanteri and Vromen’s recently published edited collection The economics of economists: institutional setting, individual incentives, and future prospects. It’s a volume that speaks to many of the same issues, particularly with respect to the incentives facing economists individually and collectively. The contributors approach the issues from a range of social scientific perspectives.

I’d been looking forward to reading the book because it includes several economists who I’d go out of my way to read – Arjo Klamer, David Colander, Deirdre McCloskey, Robert Frank.

And there is plenty of interesting material here, touching on diverse aspects of economics. Topics include understanding economics as an academic discipline in which to build a career; how the discipline can be taught most effectively; the risk of European economics losing its strengths and distinctiveness as it seeks to ape US economics; and some challenges regarding the way the economy should be understood. The collection is eclectic; there is little offered by way of unifying themes.

Whether you’ll find the volume of particular interest depends on how familiar you are with the debates. [Read more...]

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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...]

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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...]

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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...]

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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...]

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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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