Things don’t get much more fun than what I did last night.
Two hours of pleasure, stimulation and thrills.
For someone with my idiosyncratic predilections, a two hour talk with Paul Krugman, Martin Wolf and Sir David Hendry is seventh heaven. So the commentary below maybe slightly tinged with the hysteria of a teen after a pop concert. Although “The Distinguished Sanjaya Lall Fellowship Welcome Panel Discussion: The Economic Possibilities for the New Government” isn’t quite the catchiest gig title.
In brief, Krugman is a nobel laureate in economics and New York Times op-ed columnist, Wolf is the chief economics commentator and associate editor at the Financial Times and Sir David Hendry is an econometrist – who was Head of Economics at Oxford and is currently the Nuffield College and Program Director at the Institute for New Economic Thinking at Martin School, Oxford. The chair was Anthony Venables, BP Professor of Economics and Director of the Oxford Centre for the Analysis of Resource Rich Economies (OxCarre).
It’s important to digest these credentials before we continue… and if you are new to the economic debate, you will need to brace yourself.
Each spoke separately and then took questions as a panel. But the central theme of all their presentations was the same, encapsulated by the following three (paraphrased) remarks:
Hendry: We live in a time with some of the “stupidest people in power I can remember”. The government is making policy contrary to empirical data.
Wolf: The notion that there has been an economic policy success is “insane”.
Krugman: The UK election is a great victory for intellectualism, but not so great for policy. The election backs up the research that elections are won on the behaviour of the economy in the six months prior to the election.
Labour’s attempts at opposition does not come out much better.
Wolf: Labour were “unbelievably conservative” in their policy response.
Krugman: You can’t have an opposition that “folds”.
And the media gets a kicking too!
Krugman: “… the horrible quality of the debate.”
Hendry: When due to go on a television debate “I was told not to use graphs.”
In many ways, attending this event was rather like going to a pop concert. The hits were not songs but graphs. (I have shared many of those hits on this blog and related social media.) In true boy band style, each had their own character: Krugman’s entertaining meekness reminded me of a Woody Allen-esque innocent; Wolf is bullish, often bellicose; Venables’ bright demeanour is at full tilt when, enjoying an entertaining moment, his eyebrows jiggle like a comedian’s encouraging you to laugh at his naughty joke; and Hendry’s contribution was an eruption of statistics and graphs so abundant that I couldn’t process their data and take useful notes at the same time. (I understand that all the slides and even video of the event will be available on the Said Business School website soon.)
The Problems and the Solutions
The two key problems noted were the lack of fiscal stimulus and the peculiarity of the UK’s falling unemployment.
In the Romanes Lecture two days prior, Mervyn King pointed out that we have run out of monetary policy options. For King, that is the end of the road – now personal and national debt must be paid off before we can escape “secular stagnation”. But Krugman and Wolf point out that when monetary policy fails, the way out of a demand slump is fiscal stimulus.
Wolf states that fiscal stimulus is not just an obvious solution to the demand slump, but a fix-all solution to the productivity drop. (It was noted that productivity had been falling since 1978 – and Krugman half-joked that the recent productivity drop correlated with the introduction of the launch of the iPhone. King had said that the productivity drop was a blip.)
Krugman said the evidence for the effectiveness of fiscal stimulus in the short and medium term was solid: 95% of US macroeconomists have agreed that Obama’s fiscal stimulus has significantly increased employment.
How then should the UK pay for this stimulus?
Wolf argued that to not borrow was madness as there is a 30 year interest rate of minus 1% – and for the first time in a long time, the UK has no long term debt. (I missed any verification on this – hopefully it will be available on the event’s content on the Said Business School website.)
Krugman noted that with inflation so persistently low, that we should allow ourselves to push inflation higher. Especially as even the 2% target (NB: not a maximum, but a target) is a historically low rate of inflation.
At his most rampant, Wolf railed against the housing shortfall – showing a telling graph depicting the slump in house building resulting from the cessation in building council houses in the 1970s. He restated that the evidence shows that in 2007 the economy was not above trend (ie overheated) – the accusation used against (but not effectively defended by) Labour.
He also lamented that household borrowing would rise massively as a result of the slowing of the national economy.
And all speakers agreed that the UK was now vulnerable in the event of another economic downturn – which, according to Krugman and Wolf, is not unlikely. (Double negative used to give the impression the discussion gave me!)
Aside from the problems of the demand slump and fiscal tightening (austerity) where there should be stimulus, the curiosity of the UK’s falling unemployment economy was a rich vein for conjecture.
Krugman suggested that the UK is still technically depressed (yes, you read that right!) with it’s low inflation, low interest rates and low gilt values. The rise in jobs must be in parallel with falling income.
I have noticed much fluctuation in the tax receipts over the past few years – and combined with the changing landscape of employment and the methods used to calculate income rises there is certainly more to reveal here.
Wolf suggested that the productivity fall off is in part due to the largest section of reduced income from abroad was in professional / financial services. In other words, we are not making as money as we were in rent from abroad.
To my mind this was not as significant a factor to merit being singled out as an overwhelming cause – but it certainly had contributed.
Hendry’s content was so rapid and dense that it is hard to evaluate until I can see the information again! So all I can offer is a summary. He was keen on the idea that we must use our problems to solve other problems. For example immigration can solve the current shortfall in the working age population. He warned against waiting for climate change to “right itself” even with progress being made as nature tends to “right itself” with shocks. A champion of nuclear power, he promoted the latest “molten salt waste burners” and small scale nuclear generators. He pointed to Anthony Atkinson’s book “Inequality” as the ultimate solutions guide.
So it was a two hours like no other – complete intellectual vindication for those of us who have criticised the lack of fiscal stimulus and weak political opposition to austerity measures in the zero lower bound liquidity trap. And enormous fun to enjoy the endless statistical evidence showing that the UK is not in the recovery that has been sold to us.
The audience questions were uniform in asking how can we get this information across to the public. There are no great answers. The panel can keep writing and blogging. Armchair economists like me can try and spread the word and we can put pressure on broadcasters to discuss these issues with experts not just politicians.
What is surprising to me is the simplicity of the message. (There is a slight disconnect that bothers me about the effect of stimulating national demand in a global demand slump, but I hope to have more detail on this soon.)
To steal Boris Johnson’s favourite phrase, “it is not beyond the wit of man” for an opposition party to adopt an agenda of borrowing when interest rates are negative to fund strong investment. Why is this message not already prolific? The panel levelled criticism at the media, weak political opposition but also at finance economists. Both Wolf and Hendry were very critical of theoretical economics – Hendry even attacking what he called, “fairytale economics.” I wonder if Krugman might launch a partial defence in the next few days*.
So, gig review over. If the boys are in concert near you soon, go. It’s a treat.
* Krugman did post a partial defence of academic economic theory a couple of days later here. But one must note that it is not in answer to the Wolf / Hendry accusations. It is in particular pointing out the strength of Krugman’s favourite theorist Hicks.