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Articles by chris

The Tories’ dilemma

4 days ago

Matthew Parris in the Times raises a challenge for Tories – but not, perhaps, the one he thinks he does.
The government’s willingness to borrow to get through the crisis, he says, undermines the traditional “Conservative case for prudence in public spending.” And if there are not the limits the Tories thought on public spending, then:

The Tories had better brace themselves serious questions about how we can do it for a virus but not to save a shipyard, or the planet from climate change. Or double the future capacity of our hospitals, or legal aid limits, or nurses and carers’ wages.

I think Tories have – and always have had – two answers here. But they contradict each other.
First, let’s dispose of bad reasons for “prudence.”
In part, it is a legacy from different times. In the

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Another wasted crisis?

6 days ago

In the immediate aftermath of 9/11 there was much talk that the real heroes were firemen rather than hedge fund managers. That talk soon disappeared, and Americans’ indulgence of plutocrats continued as normal. This warns us about clapping for carers: it might prove to be a brief emotional spasm with no lasting social effect.
Yes, crises can be turning points. But those of the 1970s and 2008 tell us that, for the left, they can also be wasted opportunities.
Here are five uncertainties about how the legacy of this one.
Will the crisis shift politics in a more technocratic direction?
It has taught us that we need more spare capacity in the NHS and that the government has prioritized static “efficiency” too much at the expense of resilience. It’s also taught us that the we need to build a

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Against “aggregate demand”

13 days ago

One legacy of the 2008 crisis has been that firms have built up big cash piles. Bank of England data show that non-financial firms now have over £425bn of sterling deposits. That’s equivalent to over two months of GDP and over 12 months of profits. You might think this is a great comfort, as it suggests that companies can respond to their loss of revenues not just by borrowing but by simply running down these cash piles: isn’t that what they are for?
But, but, but. There’s a huge problem here. The firms suffering the biggest drops in cashflow might well not be those with the cash mountains. To the extent that the two groups differ, there will be genuine distress.
Which alerts us to a fact overlooked by basic macroeconomics. The economy does not comprise a “representative agent” firm

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Against one-trick ponies

15 days ago

Those of you who believe that bourgeois economics is mere ideology have had two data points of corroboration recently.
First, Stephen Moore, Art Laffer and Steve Forbes said: "don’t expand welfare and other income redistribution benefits like paid leave and unemployment benefits that will inhibit growth and discourage work."
This contain layers of nonsense. For one thing, during the current public health crisis we want to discourage people from working so they don’t infect others. But even in normal times. Their statement would be wrong. In one survey of the evidence Abhijit Banerjee and Esther Duflo conclude that “there is no evidence that cash transfers make people work less.” (Good Economics for Hard Times, p289). One reason for this is suggested by the fact that the unemployed are

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Winning the argument?

21 days ago

The reaction of many on the left to the big spending rises in yesterday’s Budget is that they show that Labour has “won the argument” for higher public spending. This is partly true.
On current plans (pdf), total public spending will rise to 40.8% of GDP by 2024-25*. That’s a bigger share than Labour spent between 1997 and 2008. The Tories’ justification for this is correct: low borrowing costs make it sensible to borrow to support economic growth and improve our infrastructure. But this is exactly what most on the left – as well as mainstream macroeconomists – were saying years ago. In this sense, the left has won.
In another sense, though, this is awkward for the left. It tells us that the Tories can increase spending at least as much as Labour can. One reason for this is the old

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On (un)predictability

23 days ago

It’s a cliché that stock markets have been in panic mode recently. But why? The answer is not as obvious as you might think. And the issue matters not just for equity investors but for everybody interested in social science.
My chart shows the point. It shows that the All-share index has been largely predictable simply by the dividend yield. Since 1985 the correlation between the yield and subsequent five-year changes in the index has been a humungous 0.8. With the yield now over 5%, history suggests we have the best buying opportunity since 2009.
But, but, but. If investors had believed that the dividend predicts returns, we would never have seen any significant sell-offs of the sort we’ve seen lately. Any incipient rise in the yield would have triggered buying with the result that

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On centrist decline

26 days ago

One of the BBC’s most successful comedy shows of recent years is Radio 5’s 6-0-6, wherein actors pretending to be football fans phone in to spout gibberish about the game. A recurring trope is the need for “passion”: managers are expected to be passionate, and teams lose because they “didn’t want it enough.”
I was reminded of this by a tweet from Andrew Adonis, that Labour must “get real about winning” – as if the party would win elections if only they wanted it more.
This is yet another example of one of the great political changes of my lifetime – the utter intellectual collapse of the Labour right.
Think back to the mid-90s. Blairism – lest we forget – was at the time a genuine intellectual project, an attempt to accommodate (mild) social democracy to the economic realities of the

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On capitalist stagnation

29 days ago

One of the problems with even the best journalism is that it reports day-to-day events without putting them into context, thereby telling us about the weather but not the climate. So it is with the news that ten-year Treasury yields have hit a record low.
Although the latest move is due to increased risk aversion triggered by the coronavirus this merely continues a long-term trend. Nominal yields have been trending down since the 80s, and real yields probably since it 90s.
Why? Standard explanations talk of the shortage of safe assets and global savings glut. Useful as they are, such explanations miss something important. This is that basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds

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Incentivized stupidity

February 26, 2020

Two good things I’ve read this morning raise an under-appreciated point – that people can be incentivized to behave in ways that seem stupid.
First, there’s Tom Chivers’ review of Mervyn King’s and John Kay’s Radical Uncertainty. He says it is “completely terrifying” that they thought their book needed to be written, because economists and finance types shouldn’t need to be told that “models are not 100% precise representations of reality.”
Of course, he’s right. Models are unreliable and the historic data that goes into them might not be a guide to the future – points well made by Richard Bookstaber in The End of Theory and by Nicola Gennaioli and Andrei Shleifer in A Crisis of Beliefs. But investment bankers have indeed made precisely this error, most famously when Goldman Sachs’

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Immigrants as scapegoats

February 21, 2020

Several observers believe that insofar as the government’s points-based immigration system reduces immigration (which as Jonathan says is “far from certain”), it will do real economic harm. Ian Dunt says it “is a bitterly stupid and small-hearted thing to do.” And Anthony Painter writes:

The scale of the change and its suddenness risk very significant negative impacts. Businesses and public services could struggle to fill vacancies, seasonal businesses could especially suffer, and costs could escalate impacting business and public service viability.

These harms arise because, to the extent that the new policy is based upon economics at all, it rests upon a fallacy – the idea that, as Iain Duncan Smith told The World at One (20’58” in), immigration has a “very negative effect on

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Barriers to cognitive diversity

February 18, 2020

Cognitive diversity is a good thing. We need it if we are to avoid the pitfalls of groupthink, and because – as Hayek said – adequate knowledge of a complex world cannot be known to a single mind. I therefore had sympathy with Dominic Cummings call for “weirdos and misfits” to join Number 10.
And yet one of the first such hires has ended in failure with Andrew Sabisky’s departure following a row about his support for eugenics.
Which poses a question. Why is it so hard to achieve cognitive diversity?
In Cummings’ case one problem is simply the poverty of thought on the right. Intelligent thinking does not come from unaided individuals, but from traditions. And these traditions have withered on the right: free market economics, for example, has pretty much died. Without such moorings,

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When reputation misleads

February 14, 2020

Rebecca Long Bailey inadvertently posed a good question yesterday, when she tweeted:

Rishi Sunak the new Chancellor is a former Goldman Sachs banker who has backed anti trade union regulations; tax cuts for big business; opposing tax avoidance clampdown; cutting tax for wealthiest. The mask is slipping already, this isn’t a different kind of Tory government.

This raises the same question that is being begged by the Labour leadership contest: to what extent does a person’s past behaviour and beliefs predict their future behaviour?
We have countless examples of it not doing so. All of you will have worked with somebody who arrived at your firm with a glittering CV but who turned out to be a dunderhead, and conversely with somebody of no great reputation who turned out to be

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Thatcherism’s death

February 12, 2020

Thatcherism is dead. Boris Johnson’s love of big infrastructure projects conflicts with her preference for markets and caution about spending public money. His pulling out of the single market contrasts with her hailing it as “a fantastic prospect for our industry and commerce.” His increase in bus subsidies conflicts with her antipathy to public transport. (She never actually said that any man on a bus after the age of 30 should consider himself a failure, but the fact that it is so widely believed that she did so reveals something about her). And, of course, whereas Thatcher chose free market ideology over the wishes of northern (now post-) industrial towns, Johnson is making the opposite choice.
John Harris has quoted a senior minister as saying that “some very prominent strands of

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The dangers in balance

February 7, 2020

Would balanced and impartial news and current affairs journalism be dangerous, even if it were done with maximum integrity and competence? I ask because of a recent paper by Benjamin Enke and Thomas Graeber.
We’ve known for a long time that, in the words of Glaeser and Sunstein, balanced news can produced unbalanced views. In a famous experiment (pdf) in 1979, for example, Charles Lord, Lee Ross and Mark Lepper showed people mixed reports on the effects of the death penalty and found that people who supported capital punishment became stronger in their support of it after reading them, whilst opponents of the death penalty also became more dogmatic in their opposition. Balance, then, can lead to polarization.
This mechanism, however, works on partisans – those who fancy themselves

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In praise of trade frictions

February 5, 2020

Are restrictions on free trade a better idea than generally thought? I ask because, despite his lauding of it, it is reported that Johnson will impose customs checks upon goods imported from the EU. This lends credence to the estimate (pdf) by The UK in a Changing Europe that Johnson’s plan might eventually cut UK GDP by over six per cent.
But might this estimate miss an important mechanism and thus over-state the costs of us leaving the single market?
What follows cuts against all my instincts in favour of free trade and EU membership. My gut tells me to agree with Martin Wolf’s claim that Johnson’s proposals mean shooting ourselves in both feet. But we should always question our beliefs. And there is, I suspect, more to be said in favour of trade frictions than we have heard so far.

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On socially influenced preferences

February 2, 2020

Some ideas are both radical and conservative at the same time. This is a thought triggered by reading Robert Frank’s latest book, Under the Influence.
“Context shapes our choices to a far greater extent than many people realize” he writes. “In virtually every domain, evidence suggests that our consumption patterns tend to mirror those of others in our social circle.” He shows that behaviours such as smoking, becoming obese, committing crime (pdf) or even how many children we have are all heavily shaped by what our peers do.
This, he says, means that much of what we do imposes externalities upon others. The biggest externality of smoking, he says, is not so much the passive smoke that smokers impose upon others but the fact that their smoking encourages some others to take up the

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The bias against social science

January 29, 2020

We need the social sciences, but the media does not provide them. I say this because of a recent tweet by Frances Coppola:

If there is one thing we should learn from Auschwitz, it is that atrocities are committed by ordinary, nice people with the full support of other ordinary, nice people.

This contains an unpleasant truth, captured by Hannah Arendt’s phrase “the banality of evil”: at least some of the perpetrators of the greatest crime in history were just very ordinary men.
But this is an extreme manifestation of a general truth, which is the essence of social science – that social events are not the simple product of individual character. History, said Adam Ferguson, “is the result of human action, not of human design.” His contemporary Adam Smith thought that the invisible

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We don’t want economic growth

January 26, 2020

In launching a new 50p coin to mark Brexit, Sajid Javid seems to be interpreting the role of Chancellor in the same spirit that Trigger regarded Del Boy’s request to talk about money: “I saw one of those old £5 notes the other day.” We might have hoped that his energies would be better directed towards improving the UK’s lamentable productivity performance.
In fact, though, we should not snark. Mr Javid has grasped an important point not understood by leftists and economists (two groups which increasingly overlap) – that the public do not want economic growth.
We know this because they have consistently voted against it. The party of austerity won a majority in 2015; the public voted for Brexit in 2016; and they supported Johnson’s hardline Brexit deal last month even though it will

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The interest rate puzzle

January 23, 2020

Simon points to the widespread (but not universal) consensus among economists that house prices are high because (pdf) interest rates are low. For me, this raises a puzzle.
On the one hand, this seems not just true, but trivially true. Housing is an asset. And the price of an asset should be equal to the present value of its future cashflows: rent if you’re a landlord or the rent saved if you’re an owner-occupier. Lower interest rates raise the discounted present value of future cashflows and so raise asset prices. Which is consistent with the fact that house price to income ratios have trended up as real interest rates have trended down.
This is just common sense.
But, but, but. There is one significant asset class that has not benefited from the downtrend in real interest rates –

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Inequality under New Labour

January 21, 2020

Zarah Sultana’s recent claim that we have suffered 40 years of Thatcherism prompted Blairites to point to a big difference between Thatcher and New Labour – that whilst inequality rose a lot under Thatcher it largely levelled off under New Labour.
Measured by the Gini coefficient, this defence is correct. According to IFS data for incomes after housing costs, this coefficient rose from 0.261 to 0.374 from 1979 to 1996-97, but edged up only slightly more (to 0.405) during the New Labour years.
What should we make of this? A bit of me recalls Chris Rock: “you want some credit for some shit you’re supposed to do.”
Also, though, the Gini coefficient is, essentially, an average of all inequalities. It can stay the same if inequality increases in some respects but falls in others. And this

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A case for nationalizing pensions

January 17, 2020

One of the fundamental questions in politics is: what should be done by the state, and what by the private sector? In at least one respect, I suspect that we have the mix wrong because there is a strong case for nationalizing pension provision – stronger, I suspect, than is the case for nationalizing utilities.
I say so because, as I point out in the day job, retirees and those approaching retirement face enormous uncertainties if they are managing their own pension: how long will I live? What will my spending needs be? And what will be investment returns? (Yes, equity returns have been great in recent decades, but we have no assurance whatsoever that the future will resemble the past.)
The state, however, is much better placed than the private sector to bear these risks. It can

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Great economics, bad politics

January 16, 2020

Non-economists (and quite a few trained economists too) often claim that mainstream economics is a simple-minded defence of free markets and inequality. Abhijit Banerjee and Esther Duflo’s Good Economics for Hard Times is a superb refutation of this.
They argue that:

It is unreasonable to expect markets to always deliver outcomes that are just, acceptable or even efficient.

A big reason for this is that the economy is “sticky” and that “resources do not always flow to their best use. Workers who are laid off because of international trade or technical change do not quickly move to decent jobs: instead, job loss has permanent adverse effects on wages. Banks are slow to lend to good new ventures and to cut credit to failing firms. Efficient companies find it hard to displace less

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Two conservatisms

January 14, 2020

The death of Sir Roger Scruton reminds us of an overlooked fact, that there is a massive difference between the sort of conservatism he championed and free market economics.
Scruton defined conservatism as the “instinct to hold on to what we love, to protect it from degradation and violence and to build our lives around it.” The creative destruction of the free market economy, however, often endangers what we love. It is always threatening to destroy traditional communities and industries. Coal miners and steel workers in the 80s, protesting against pit and plant closures, were conservatives on Scruton’s definition but certainly not Thatcherites. And Patrick Minford’s vision of a post-Brexit economy in which manufacturing disappears is surely alien to the Scrutonian love of tradition.

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The strange death of libertarian England

January 8, 2020

It wasn’t just the Labour party that took a beating in last month’s general election. So too, but much less remarked, did right-libertarianism.
The Tories won on policies that repudiated many of their professed beliefs: a higher minimum wage; increased public spending; and the manpower planning that is a points-based immigration policy. And the manifesto (pdf) promise to “ensure that there is a proper balance between the rights of individuals, our vital national security and effective government” should also alarm libertarians. John Harris quotes an anonymous minister as saying that the libertarianism of Britannia Unchained is “all off the agenda” and that “some of the things we’ve celebrated have led us astray.”
Tories are not out of step with public opinion here. If anything, it is

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Labour’s public opinion dilemma

January 4, 2020

To what extent should Labour accommodate itself to public opinion, and to what extent should it try to change it? This fundamental question is posed, perhaps inadvertently, by Jess Phillips in an interview with the Times.
She says that people didn’t trust Labour to deliver the many promises in its manifesto:

People in working class communities know that you can’t always have everything. They know that this week you’ll put the money away for your holiday, next week you’ll put the money away for Christmas.

Now, I’m willing to accept that this is a fair description of many people’s attitudes to Labour’s borrowing plans. But it is, of course, a wholly wrong assessment of the economics.
For one thing, government borrowing is not like household borrowing. When the government borrows, it

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Conservative arguments for radical ideas

January 3, 2020

In my previous post, I used a rhetorical device which I think leftists should copy. This is that we should use conventional, orthodox economics to reach radical conclusions.
The point here is that we don’t persuade people by telling them that their worldview is wrong and by demanding that they change the ideas of a lifetime. We are more likely to succeed by showing them that their ideas are consistent with things they might not have considered.
Here are some examples of what I mean.
 – Fiscal policy. We don’t need MMT to argue for a significant fiscal loosening. Simple maths tells us that we can run big deficits and still see government debt fall as a share of GDP when real interest rates are negative, as they now are. And as Simon has said for years, the idea that we should use fiscal

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Wages vs social value

January 1, 2020

Today is the 23rd anniversary of the death of Townes Van Zandt, who is now universally regarded as one of the greatest songwriters ever.
And yet during his lifetime he made very little money. Even in his best years he got less than $100,000 from song-writing royalties, and for much of his life he might well have earned more from the oil drilling rights bequeathed by his rich family than from his music.
Which vindicates a recent tweet from Cameron Murray:

Actions that have social value only rarely coincide with actions that are monetarily compensated.

In Van Zandt’s case, this was partly because his genius was not fully recognised during his lifetime. But there are other reasons why Cameron point is correct in many more cases – reasons which are in fact entirely consistent with

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Yes, the BBC is biased

December 31, 2019

Over the weekend we saw two related examples of BBC bias. One came from Emily Maitlis, who said:

So often people read conspiracy into a thing when it’s really a confluence of cock-ups.

Sensible people, however, do not allege any conspiracy at the BBC. Instead, we have other concerns. Some are about incentive structures: which mistakes does it regard as mere cock-ups, and which as more serious offences? Another is that journalists, like all professionals, are prone to deformation professionelle – the fact that our training inculcates into us particular, and partial, ways of seeing things – which entails missing other things.
It is factors such as these that lead the BBC into error. Tom Mills, for example, says the corporation is too deferential to business and the state. It was

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A case for collective leadership

December 17, 2019

The debate about who should be the next Labour leader begs the question: should there be a single leader at all rather than a leadership team?
There’s much to be said for the latter*. For one thing, a good leader must do several jobs. They must develop policy; unite and inspire the PLP; win the votes of older Northerners without alienating metropolitan liberals; and motivate and recruit activists and organize an effective ground campaign. (The latter is important: Labour cannot win a top-down campaign and needs a strong mass membership to combat media lies.) There’s no reason to believe that the candidate best able to do one or two of these jobs an do them all. That’s a case for collective leadership.
Nor is there any reason to suppose that Labour members are well-equipped to choose a

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The failed marketplace in ideas

December 10, 2019

The “marketplace of ideas” is failing. That is the message of Stefan Stern’s complaint that, in this election even more than others, lies seem to be winning.
Of course, Stefan is right to say that politicians have always been economical with the actualite. But there is, surely, a big difference between Johnson and, say, Thatcher. Whilst we lefties hated much of what Thatcher did, we only rarely thought she was lying. Being a liar was the least of Thatcher’s sins. But it is the essence of Johnson’s identity.
This was not supposed to happen. Liberals used to think that the marketplace of ideas was like other markets – that good products would drive out bad, that, as Mill said, “wrong opinions and practices gradually yield to fact and argument.
But they don’t. A big reason for this is

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