Osborne’s surplus rule and citizen economics

3542341781_2e07e18657_nThere is much that is troubling about George Osborne’s proposal to oblige future governments to run a budget surplus in normal times.

There is the small matter of identifying “normal” times. It implies something important about how one is thinking about the macreconomy. What does “normal” look like? In the thirty years that I’ve been paying attention to the macroeconomy there always seems to have been some argument or other floating around as to why things weren’t quite normal just at the moment.

This could drive us to the conclusion that the whole thing is a charade. It’s a policy that will never be implemented because there is so much wriggle room built in.

A contrary conclusion might be that whatever macroeconomic behaviour we’re observing is normal, given an appropriate understanding of the macroeconomy. So it’s surpluses all the way.

And then there is the small matter of who gets to define “normal”. It would appear that George Osborne would quite like to pass the responsibility to the OBR, who clearly aren’t all that keen to take it.

A more significant reason to find the Osborne proposals troubling is the sense that they are all politics, no economics. They owe everything to Osborne’s desire to drive home the Conservatives’ political advantage on the economy. It is the next stage in the strategy of boxing Labour even further into a corner. It is clearly working, if Chuka Umunna’s comments in yesterday at the Independent are anything to go by. [Read more…]

Resuscitating Greek myths

4432808605_43e7400304_nNick Clegg has a rather extraordinary post at the Telegraph today.

The second half of the post is pretty standard: the Libdems are less spendthrift than Labour and less ideologically anti-state than the Conservatives. Split the difference and aim for the sensible centre.

But in order to grab the opportunity to reiterate this message he has to find a hook to hang it on. And the hook that he – or, presumably, someone in his team – chose was the Greek election.

He makes some comparisons between Greece and the UK in 2010 when the current UK coalition was formed. In doing so he resuscitates some myths about the state of the UK economy and, therefore, makes some implausible claims about the role of the Libdems in government. [Read more…]

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…]

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…]

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…]

Help to Buy and the death of Keynesianism

House Prices High Monitor Showing Expensive Mortgage CostsWhen I first studied macroeconomics the Stagflation era of the 1970s and the death of Keynesianism were still being quite hotly debated. They were still contemporary events. Well, they were contemporary events in the way that the election of Tony Blair is a contemporary event for us today – it seems like just yesterday for the lecturers but has almost no significance for the students because they were far too young at the time.

At an empirical level the death of Keynesianism was intimately associated with the breakdown of the Phillips curve. The trade-off between inflation and unemployment had been at the heart of macroeconomic management. The death of Keynesianism was hastened at a theoretical level by the Lucas critique and the rise of rational expectations.

But the death of Keynesian was also tied up with the argument that the nature of the macroeconomy is such that government attempts to fine-tune demand were inevitably doomed. Active policy has its effects only with a significant lag – 12 or 18 months. Governments were succumbing to the temptation to ‘fine-tune’ before they’d let previous changes work their way through the system. As a consequence the economy was forever under- or overshooting. Volatility was greater than it would have been if governments had resisted fiddling around. This is a practical argument, but it is also an ontological argument. It is about the very nature of the economy.

This old argument came to mind when we saw yesterday that asking prices for housing in London had increased by 10% over the last month, according to Rightmove. That follows a sharp upturn in prices in the previous month. The London average now stands at a truly eye-watering £544,232. [Read more…]

Interpreting Osborne

8501244926_80f2423585_nThe more I think about economic policy the more I think that there isn’t a big enough dose of interpretivism applied to it. This thought recurred yesterday reading George Osborne’s set piece speech in which he, as Isabel Hardman of the Spectator put it, “trashed” Plan B. I think trash-talk would perhaps be a better description of his approach.

One thing that – some – economists have learnt from the Great Recession of 2007-08 is that our understanding of the economy is rather more partial than had hitherto been assumed. That doesn’t mean that economists don’t have interesting and useful things to say. But the economy can behave in ways that economists found difficult to read. Some would say this means models need to be refined, respecified, recalibrated. Other would take a more radical stance and say that the economy and economics needs to be rethought. Conventional models and methods don’t have room for some of the characteristics that are fundamental to the way the economy functions. Chris Dillow highlighted some key points last week in the context of a post about the difficulties of forecasting.

If you were thinking about it in terms of narratives you might suggest that what is needed is a change of root metaphor. [Read more…]

Economists in reflective mood

Next weekend Bristol will host the Festival of Economics, organised under the auspices of the Festival of Ideas. The programme for the Festival of Economics has been assembled by Diane Coyle of Enlightenment Economics. It brings together economic journalists, applied academic economists, and economists in the think tank world who seek to talk directly to policy makers. Some are relatively mainstream in their orientation. Some are decidedly more heterodox.

The arrival of the festival coincides with my finally getting the chance to finish Diane’s recent edited collection What’s the use of economics? Teaching the dismal science after the crisis (WTUOE). The book arises out of a seminar held back at the beginning of the year, which I would dearly have loved to have attended. Unfortunately it clashed with teaching my economics of public policy unit. The book comprises 22 brief chapters giving a range of perspectives on how economists should respond to the deficiencies exposed by the 2007-2008 financial crisis.

At least some parts of the economics community are in reflective mood. [Read more…]

The Queen’s Relaunch. The Coalition’s Speech … Oh look, Tractors …

There was a bit of social media sniping yesterday that, despite David Cameron’s protestations to the contrary, the Queen’s Speech didn’t contain much of any substance to help the ailing UK economy.

That doesn’t seem to me to be entirely fair, for two reasons. First, there were some useful measures in the Speech – on banking or energy market reform, for example – that have the potential to make a difference to the performance of the economy. Second, it’s not obvious that the Queen’s Speech is the place you’d expect to find a menu of measures designed to stimulate the economy. If the Government wanted to get serious with the economy then much that it might consider doing can be achieved without the aid of new primary legislation.

So maybe we need to look back to the Cameron-Clegg relaunch event on Tuesday to get a better idea of policy action on the economy. After all:

The primary task of the Government remains ensuring that we deal with the deficit, and stretch every sinew to return growth to the economy – providing jobs and opportunities to hard-working people across Britain who want to get on. [Read more…]

The developing case for capital controls

The desirability of free capital movement is an article of faith for the international organisations that seek to govern the global economy. The perspective is shared by the governments of most developed countries. Liberalisation of capital markets is typically part of the medicine prescribed to ailing countries. A weakened country might consider imposing capital controls in a bid to gain some relief from a battering in the global financial markets, but international treaties can stand in its way. This is part of the challenge currently facing Hungary, as discussed by Frances Coppola here.

A month ago I blogged On the wisdom of free capital markets, in which I drew on James K Galbraith and Keynes to argue that an overwhelming emphasis upon retaining the free movement of capital is mistaken. This becomes even clearer when one looks at the issue from a development perspective. Successful development has not been founded upon free capital markets. Free capital markets have led, historically, in a different direction.

Given this starting point, my eye was drawn to an article by Heather Stewart in yesterday’s Observer entitled Financial crisis could turn the tide against unrestricted capital flows. [Read more…]