On economic amnesia

Economists, one might assume, have something useful to say about the current problems afflicting the world economy. Yet, since the crash of 2008 there has been a considerable amount of reflection in parts of the discipline about its failure to anticipate the crash and its failure to offer effective prescriptions for getting the economy out of the hole it’s in. Of course, elsewhere in the discipline it is business as usual – with a range of prescriptions for privatisation and deregulation at the microlevel and fiscal restraint at the macrolevel.

This week’s Nobel announcements are salutary in that respect. Olaf Storbeck described them as a prize for the Ancien Régime. He was criticised for doing so, but his intervention might be better seen as simply the most recent in a chorus of disapproval directed at an approach to macroeconomics that came to dominate the field. Thomas Sargent, who shared this year’s prize, did as much as anyone to propel rational expectations and new classical macroeconomic models to the forefront of the field, and his macroeconometric work has been hugely influential. That is why he was awarded the Nobel prize. But that can be separated from the question of whether, looked at from a broader perspective, such models actually shed much light on the way the economy operates.

Some see the solution to the problems afflicting macroeconomics as the need to search for new ideas. Paul Krugman has recently argued, on the contrary, that the problem is that the discipline has amnesia. Read more of this post

Economics as a vaccine against economists?

On Friday a quote from the great Cambridge economist Joan Robinson was circulating on Twitter:

Purpose of studying economics – to learn how to avoid being deceived by economists

In fact, the full quote is:

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

This pretty much sums up the spirit in which I teach economics to policy students, so I thought it was worth a Retweet.

But it triggered a bit of deeper reflection. Read more of this post

Understanding housing market choices

Occasionally I divert myself from tweeting and blogging long enough to write something a bit more academic, usually about housing. I have a paper in the current issue of the journal Housing, Theory and Society. It looks at Uncertainty, expectations and behavioural aspects of housing market choices. The paper is coauthored with my good friend Ken Gibb from Glasgow University.

Here’s the abstract:

Housing is a complex commodity and housing market choices carry with them substantial economic and social consequences for the households making them. Housing market decisions are complex, uncertain and involve expectations-formation. This paper argues that the standard economic theory of decision-making under uncertainty – expected utility theory – is particularly ill-suited as the basis for understanding such complexity. The paper then explores alternative avenues for potential development, reviewing the key characteristics of owner-occupied housing markets and housing search, and examining how the resources of institutional and behavioural economics could be used to inform our understanding of the residential mobility process. The paper concludes by outlining an agenda for empirical research. Read more of this post

The Work Programme isn’t working …and that raises bigger issues

The Work Programme (WP) is the Coalition Government’s £5bn replacement for the range of programmes – including the Flexible New Deal – designed to assist unemployed people back into work. While the WP learns from and builds upon previous initiatives it also represents a departure. Its key characteristic is a more thorough-going application of the payment by results approach.

Last week the Social Market Foundation published a brief report on the Work Programme, which got a fair bit of coverage in the mainstream media. The headline conclusion is that all is very much not well with the new approach, as currently structured. The programme is, as they put it, at risk of “financial collapse”.

Even if assistance for the unemployed isn’t particularly your interest, this debate is important. It has much broader resonance in the light of current directions for public service reform. Read more of this post

The middle classes, mansions and Mr Pickles

Last Friday’s Telegraph published a couple of brief pieces drawing on a wide ranging interview with Eric Pickles. The Communities Secretary had a few characteristically pithy observations to make in relation to the ongoing debate over the future of the 50p tax rate and the alternative mooted by the Liberal Democrats of moving to a tax on high value properties.

The Telegraph reports that Mr Pickles:

… is determined to face down Liberal Democrat sensitivities and reduce tax for the middle classes. New taxes on more expensive properties are definitely not on the agenda.

“We as a government have got to understand that middle-class families put a lot into this country and don’t take a lot out,” he says. “It would be a very big mistake to start imposing taxation on the back of changes in property values.”

Mr Pickles also goes further than some of his colleagues by insisting that the 50p higher rate of income tax should be scrapped for ideological reasons.

The Treasury is conducting a study to establish whether the new top rate actually raises much money, but the Liberal Democrats have said it is “cloud cuckoo land” to consider scrapping the tax at the moment. Mr Pickles expresses the views of many Conservatives when he says: “We always said it [the 50p rate] was temporary.

“We’ll get an assessment at the end of this financial year as to how much money we’ve got [from the tax]. But you know I’m a Conservative, I like the idea of lowering taxation.

“I believe you get more tax revenue by lowering taxation because people work harder. I like people to keep more in their pockets for their family.”

Elsewhere in the Telegraph he is reported as saying that:

“… a mansion tax on high-value homes could hit many ordinary middle-class families because of high property prices in some areas.”

“People will suddenly find themselves in a mansion and they hadn’t realised it was a mansion,” he says. “If it is only going to be mansions, the kind of thing you and I would regard as a mansion, it ain’t going to raise very much.”

It is important to put these comments in perspective. Read more of this post

The riots and the return to the big picture

Last week’s riots were shocking. The effect upon the many communities, families and individuals affected was undoubtedly profound. They have prompted plenty of soul searching and a wide range of diagnoses. If we are optimistic we should hope that they act as a catalyst for addressing problems of urban Britain that have been developing over many years.

The riots have not shown the political classes in a great light. There was the slow response from the Government – was this really a situation sufficiently serious to justify curtailing our vacations? There was the muddle over who has shaped policing strategy, leading to a potentially damaging war of words between the Government and senior police officers. And there is the extraordinary range of illiberal and disproportionate measures that David Cameron has seen fit to propose in response to the crisis. He seemed intent on manufacturing a full blown moral panic in order to take a worryingly authoritarian turn. Liberal Democrat MPs are clearly very uneasy at the way in which Mr Cameron has changed his tune from those far off days of compassionate Conservatism.

The riots have pushed just about everything else to the back of the news agenda for the last week. That is deeply unfortunate for at least two  reasons associated with this period of momentous – indeed unprecedented – economic turmoil. Read more of this post

Is nudging enough?

Rene Kinzett, one of my fellow contributors over at Dale & Co, posted Nudging or Nannying last weekend. The argument was perhaps a little cryptic, but the point was that relying on the subtlety of trying to “nudge” behaviour in the right direction is not an adequate policy response to certain types of problem. His example of treating rickets among young women who for cultural reasons do not have enough exposure to sunlight is an interesting one. He referred to minimum alcohol pricing, a policy being introduced in Scotland, and banning smoking in cars carrying children, a policy being introduced in Wales, as more conventional regulatory policy that will help those on the edges of society, when nudges are judged inadequate.

A couple of comments took Kinzett to task for this argument. One made the point that nudge theory is being preferred for developing policy at the moment because it has been shown to be more effective than traditional regulatory approaches. It was also arguing that no one is suggesting that nudge can be used in isolation and should be combined with other mechanisms to deliver better social outcomes.

It seems to me that these comments miss the mark in at least a couple of ways. Read more of this post

Steve Hilton, blues skies thinking and the resurgent deregulatory impulse

Steve Hilton has attracted flak across the old and new media following the FT’s revelations about his suggestions for stimulating economic growth. The proposals that hit the headlines included the abolition of maternity leave, labour market policies that contravened European law and the suspension of all consumer rights. Many have criticised the proposals for a range of offences including apparently overlooking the rule of law. Others have defended the utility of blue skies thinking when seeking ways to deal with the challenges that face us.

Personally I’m not averse to blue skies thinking. But the idea that off the wall thinking is central to the role of a strategy director is curious. One would have thought strategy should entail something rather more concrete and grounded, at some point in the process at least. And as someone more disposed to bottom up decision making and a Parliamentary party that is charged with representing the collective will of its members, I’m not so keen on the idea that one unelected, unaccountable and largely anonymous individual should have such influence over policy in the first place.

But the main thing that strikes me about these revelations is that they are not very “Blue Skies” at all. Read more of this post

Democratic deficits

Liberal democracy faces profound challenges. Radically different future trajectories present themselves. We are living through momentous times.

In Britain the media has spent the last fortnight preoccupied with the Hackgate scandal. Incremental, and ongoing, revelations have exposed the inner workings of the nexus between Westminster politicians and the tabloid media. What we witness is the political class showing an alarming level of deference to powerful economic interests. The alleged intimate connection between sections of the Metropolitan police and the tabloids raises equally urgent questions about the prevailing culture and ethics at the heart of a core social institution.

The British media has been preoccupied with this evolving soap opera involving many of its own. And the scandal has certainly opened up a welcome window of opportunity to reform relationships vital to a healthy democracy. But events unwinding elsewhere are likely to play a bigger role in shaping economic and political trajectories in the short and medium term. Read more of this post

Open Public Services: market fundamentalism with a thin sugar coating?

We forget at our peril that markets make a good servant, a bad master and a worse religion.

Amory Lovins, CEO, Rocky Mountain Institute

The Government’s long delayed White Paper on public service reform – Open Public Services – has now been released into the wild. I blogged an early reaction to its rationale over at Dale & Co on Tuesday. I’ve now had a chance to come to grips with the detail, such as it is. My feeling is that this is an intriguing, infuriating and – at times – alarming document.

It is a document that lacks coherence in a way that suggests it is the product of several hands, or a fevered mind. It is a document that lacks detail in its justification and its implications in a way that is troubling. The policies and initiatives it identifies as being in accord with the Open Public Services agenda are a ragbag of largely unrelated actions, some of which are problematic in themselves.

There are some components of the proposals that are welcome and sensible. They point, for example, to greater local government or community control over services delivered in their area. If the White Paper had stopped there then it would be a very different beast. But such moves to enhance local democratic control are the secondary storyline. This is the sugar coating.

The overarching message is the onward march of marketisation. Read more of this post

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