Saturday, 23 May 2015

Consensus in macroeconomics

Paul Romer has continued the discussion he started, broadening it out from ‘mathiness’ to a more general discussion of how the subject is done. He describes what he regards as appropriate norms of science. The first few are I think uncontentious, but Stephen Williamson has taken exception to these two:

e) In our discussions, claims that are recognized by a clear plurality of members of the community by as being better supported by logic and evidence are the ones that are provisionally accepted as being true.

f) In judging what constitutes a “clear plurality,” we put more weight on the views of people who have more status in the community and are recognized as having more expertise on the topic.

Stephen writes:

This is absurd of course. We don't take polls to decide scientific merit. Indeed, revolutionary ideas - the ones that take the biggest steps toward Romerian truth - would be the ones that would fail, by this criterion.

I can understand that for those who typically work outside the mainstream, and indeed may be known for proposing new and challenging ideas, find this kind of talk threatening. Take it the wrong way, and it sounds like a recipe for conformity and stagnation.

I’m sure that is not what Paul intended, and I also think he is making an important point here. I suspect a natural scientist would see (e) and (f) as simple statements of how things are. In my experience natural scientists have a clear idea of what the “clear plurality” is on any particular issue, and are happy to admit it, even if they disagree with that plurality. There is nothing here that says academics cannot challenge the ideas of the “clear plurality”.

But why is it important to have an idea of what that plurality is and acknowledge it? I can think of three reasons. First, it presents an honest picture to those learning the discipline. Second, it is very important that policy makers are told which ideas are widely agreed and which are the views of a small minority. That does not stop policy makers going with the minority, but they should know what they are doing (as should voters). The public’s trust in economics might also increase as a result. Third, it helps the unity of the subject, mutual understanding and progress. It becomes clear why those who do not accept the views of the “plurality” disagree, and what they need to do to convince the plurality that they are wrong.

Convincing the majority that they are wrong is a strong motivational force for progress. In contrast, working within a small school of outsiders all of whom just know that the plurality is misguided, and as a result never bother to engage or keep up with it, is a recipe for stagnation. Before heterodox economists start hitting the keyboard, that also means that the plurality is open to unconventional ideas and do not just reject them because they are unusual or defy certain generally accepted norms.

It is for reasons like this that I have argued that it is wrong to say that macroeconomics is ‘flourishing’ simply because there are lots of different ideas/models out there. If there is no clear way of establishing which of these command general support and which are the insurgents, and what the insurgents need to do to overturn any consensus, then it is not clear how the discipline can progress.

This is all a bit abstract, so let me give an example from business cycle theory. Here there is, at present, a clear consensus theory, which is the New Keynesian model. I have been challenged on this in the past, but I would want to insist on it because I would attach a good deal of weight to those who are actually involved in business cycle stabilisation i.e. economists in central banks. (I’m not sure how important ‘status’ should be in Paul’s (f), but expertise is important, and having to put ideas into practice and responding to data all the time should count strongly.)

So when fiscal stimulus was used in 2009, those economists who opposed it should have said something like: I understand that temporary increases in government spending will raise output for given nominal rates in the dominant New Keynesian model, but I think that analysis is wrong because …. They should not have said, as some did, that fiscal stimulus was old fashioned nonsense. Whether they did this out of ignorance or contempt for the mainstream, it suggested that at least some prominent economists were not following the norms of science.

Do politicians need to pander to myths?

About UK politics, but raising some general issues about politicians and popular prejudices

Paul Bernal has a powerful post (HT Chris Dillow) where he says Labour lost the election long before 2015, by pandering towards three big myths: the myth that Labour created a huge deficit which required austerity in the midst of a recession, the myth of the ‘scrounger’, and the myth that Labour made a mistake in allowing excessive immigration. I obviously agree about deficits, I’m appalled at the hostility to welfare recipients stoked by the right wing tabloids and the harm done by inept reform, and I’m dismayed that politicians shy away from putting the positive case for immigration. For that reason I should agree that in England at least one of the three major parties should be standing up against all these myths. The Conservatives and Liberal Democrats helped manufacture the first myth, and the Conservatives contributed to the second and pander to the third (although some of their supporters would not favour costly immigration controls). Labour failed to combat all three.

The media have, predictably, reached a consensus about why Labour lost: it was too left wing, it was anti-business, it failed to be aspirational (it wanted to raise some taxes on the rich) blah blah blah. But as Peter Kellner and others have pointed out, there is no clear evidence for these assertions. Instead, they just happen to represent the things that much of the media dislike about Labour’s policies. Watching at least some of Labour’s potential future leaders, who the media as a whole describe as ‘modernisers’, fall in line with the media’s diagnosis makes the Parliamentary Labour Party look pathetic. Perhaps it is?

And yet, Peter Kellner also points out that being tough on scroungers and immigration is very popular. And these issues mattered for many voters. In a tweet about Bernal’s post, I asked was it better to lose telling the truth than lose being complicit in a lie? But it would be better still if a political party could tell the truth and win! Yet that seems a hopeless task. Jonathan Portes has championed the evidence on immigration, but as the BBC’s Nick Robinson put it, he would not get elected in any constituency as a result.

It is tempting at this point to blame the media for this state of affairs. In one sense I agree: I think newspapers should have a responsibility to tell the truth, rather than pander to prejudice when it suits their owners to do so. But in terms of practical politics this does not get you very far. One of the depressing conclusions that will be drawn from the election result is that it is fatal to stand up to Rupert Murdoch. [1]

Is it also true that cutting the deficit is widely popular? Here I think the evidence is less clear. I agree with John McDermott that perceived competence is vitally important, and not only in relation to self-interest. That is why Labour made a strategic mistake in not challenging with more force the coalition’s blatant myth making on the deficit issue. As Jonathan Hopkin and Mark Blyth point out, it is incredible how the blame for our current problems has so easily been transferred from the finance sector to fiscal profligacy, and not just in the UK. (But not so incredible if you follow the money, and take media power seriously.) 

Perhaps I can also make a very personal point here. As one of only a few academics who have written an academic paper on the Labour government’s fiscal record, which concluded that Labour profligacy was a myth, you might have expected Labour at some stage to have used some of the many words I have written on this to support their case. As far as I know they did not. Perhaps they were put off by some of the my criticism of other aspects of Labour’s programme. But this didn’t put off Alex Salmond, who was happy to quote my support of the SNP’s line on austerity, suggesting it had all the more force because I was not an SNP supporter.

Talking of which, I think there is one more piece of received wisdom that needs exposing, and that is Scottish exceptionalism. As I hinted at the beginning, there was one major UK party that did campaign against austerity, was pro-immigration and supportive of welfare. No doubt other factors also led to the huge success of the Scottish national party, but their position on these three issues didn’t seem to do them any harm, and in some cases probably helped a lot. This example suggests the answer to the question posed in the title is a clear no. 

It is generally presumed by the media, both sides of the border, that this is all because Scots are inherently more left wing than the English. But the evidence suggests differences in social attitudes between Scotland and England is not that great. The question Labour (or at least somebody) should be asking is why the SNP can avoid pandering to these three myths and win decisively, when the consensus is that doing the same in England would be electoral suicide.   

[1] Some people who comment on this blog say that when I voice concerns like this I’m being a bit passé, but on other occasions I’m accused of being anti-democratic! Somehow a politician choosing to delegate macro policy to experts reduces democracy, but allowing rich media barons to control the information that much of the electorate receives, and as a result have a considerable influence on politicians, is just fine.

Friday, 22 May 2015

We want helicopters, and we want them …

Not now exactly. In the UK, for example, the MPC has scope for some further reduction in interest rates. (I think they should use that scope now, but that is for another day.) But, as Mark Blyth, Eric Lonergan and I argue in the Guardian, if something serious goes wrong in the next year or two, or if another financial crisis happens in the next decade or two, monetary policy is under equipped.

Does this mean that I no longer think it is a good idea to have a fiscal stimulus in a recession when nominal interest rates are at their floor? Of course not, because helicopter money is essentially just like a tax cut. What is true is that helicopter money is not my ideal form of fiscal stimulus, partly because there is some uncertainty about how much of it will be spent. I would much prefer additional public investment, for which there is a strong microeconomic as well as macroeconomic case. [1] Michael Spence [2] is one of a huge list of eminent economists, which includes Ken Rogoff, who think additional public investment across the OECD would be beneficial.

We should continue to urge governments to recognise this, but we also have to accept the awkward fact that they are not listening. In political terms, the need to reduce deficits trumps pretty well anything else. (Perhaps things are turning in the US, but until the Republicans start losing power I’m not counting chickens.) One of the many depressing things about the Conservative election victory in the UK is that it looks like deficit obsession is an economic strategy that can win, as long as the austerity is front loaded, which is why Osborne fully intends to do it all over again. 

Because helicopter money is mainly a form of fiscal stimulus, and because the case for fiscal stimulus in a liquidity trap is largely agreed by most academic macroeconomists, the debate over helicopter money is essentially an issue in political economy. Persistent demand deficiency is clearly preventable, and represents a huge economic cost to society. Politicians will not do what economists call a bond financed fiscal stimulus because spreading scare stories about public debt is a vote winner. That leaves us with a money financed fiscal stimulus, of which helicopter money is one form. With independent central banks, that means giving these banks the power to undertake helicopter money.

I think the biggest obstacle to helicopter money is probably central banks themselves. This is for two reasons. First, they seem far too optimistic about the efficacy of creating money to buy financial assets (QE), even though they almost certainly need to create far more money by this route than they would through helicopter money, with a far less certain impact. Second, there is this residual worry that creating money now will mean they will lose the ability to control inflation in the future, as if a modern government in an advanced democracy would ever refuse to provide them with the assets they need.

The consensus among macroeconomists is that independent central banks are a good idea. The belief is that the business of macroeconomic stabilisation is best achieved if the task is delegated. But making central banks independent is not the same as completely delegating the task of macroeconomic stabilisation, because of the problem of the lower bound for nominal interest rates. Indeed independent central banks made the obvious way of getting around the lower bound problem, which is a money financed fiscal expansion, more difficult to achieve. Helicopter money is a way of making the delegation of stabilisation policy complete. 

[1] I have suggested how (see here and here and here) we could have ‘democratic helicopter money’ that could encompass additional public investment, but I’ll happily settle for the plain vanilla kind for the moment.

[2]  HT Diane Coyle

Thursday, 21 May 2015

Ferguson tries again

Perhaps stung by the widespread criticism of the way he treated data in his original FT op-ed piece, Professor Niall Ferguson has had another go. This new piece is distinctly better than the original. For example, he now acknowledges that “From 2010 to 2015, average inflation-adjusted weekly earnings fell more than under any postwar government.” Let me focus here on his central claim, which is that the economy did far better than Keynesians had predicted, and that Keynesians have refused to acknowledge this. (There are some other problematic points in the piece, but they are largely distractions from the main idea.)

Rather than get into the pointless business of comparing quotes, let us do this the academic way, which is to see what the Keynesian model says. Recall this is the model that pretty well all central banks use to regulate the economy. Everyone agrees that UK austerity was at its most intense in the first two years of Osborne’s Chancellorship. The UK Office of Budget Responsibility, which does the number crunching for Osborne, calculates using standard (although conservative in the current context) Keynesian multipliers that austerity in those first two years reduced GDP growth by 1% in each year. That is the basis for my calculation that austerity cost the average UK household at least the equivalent of £4,000. The OBR also calculate that overall UK austerity had no significant impact on growth in subsequent years.

Does the data show that Keynesian assessment is clearly wrong? Ferguson includes an IMF chart in his article, and I commend the fact that it uses GDP per head. Unfortunately it also includes a forecast, which is as reliable as most macro forecasts, so just focus on the part that is data. In 2011 and 2012 the UK flat lined, and only started recovering when the drag imposed by austerity came to an end. This is entirely consistent with my and the OBR’s analysis. (For the record, I also said three years ago that we would see a recovery in subsequent years.) Anti-Keynesians like to point to UK growth from 2013 onwards being healthy compared to other countries, but this is also entirely consistent with Keynesian analysis, because if you look at underlying primary balances UK fiscal austerity was much weaker in those years than in the US or the Eurozone.

General government underlying primary balances: source OECD Economic Outlook

In a way Ferguson acknowledges all this, because he lists other potential reasons why UK growth might have been weak in those early years. Fair enough, except that his central claim is that the numbers show the Keynesian analysis of austerity is wrong. But his chart shows that the numbers are in fact completely consistent with the Keynesian story. That does not prove the Keynesian story is right, but it sure does not show it is wrong!

Macroeconomics is a messy subject, because there are always so many things going on. For this reason the impact of policy is often not immediately apparent in the data, and some econometrics is required to sort things out. The unusual feature of the last few years across the UK and Eurozone is that events have largely followed the Keynesian script - no econometrics required. An election result does not change this fact.

Wednesday, 20 May 2015

On what I said before

This is something of a personal indulgence, but my excuse is obvious given recent posts.

I always smile when certain people claim that Keynesians said there would be no recovery. There are two reasons. The first is personal. A well known UK economist (clue: someone who the economics editor at a well known newspaper finds it best to ignore!) reminded me of this post I wrote three years ago. Here is an excerpt:

“Good spin is simple, and plays off real events. So the line “we have to reduce debt quickly because otherwise we will be like Greece, or Spain” works, while the response “but the Eurozone is special because member countries do not have their own central bank” is too technical to be an effective counter. In contrast the argument that Wolf and Portes put forward above – why not invest when it’s so cheap to borrow – is effective, which is why it is dangerous. So of course is “austerity is stifling growth”, as long as growth is negative or negligible. However, come 2015, the spin “we have done the hard work and the strategy has worked” will accord with (relatively) strong growth, while talk of output gaps and lost capacity will have less resonance. True, unemployment will still be high, but not many of the unemployed are Conservative voters, and the immunising spin about lack of willingness to work can be quite effective.

Will the strategy, and the associated spin, work? The risk that growth will not be respectable in 2014 must be low: by then consumers and firms should have adjusted their borrowing and wealth sufficiently such that growth can resume.  If there is a chance that it might not be, I expect to see some measures in next year’s budget that do not conflict with the overriding ideological objective, such as incentives for firms to bring forward investment.”

I got two things wrong here. First, I did not foresee the continuing stagnation in productivity, and therefore that unemployment would fall rapidly despite at best average output growth. (Perhaps another piece of Cameron ‘luck’?) Second, I got the example of a budget stimulus measure wrong (we in fact got Help to Buy), because I was thinking like an economist and not a certain politician. But one thing I did not get wrong is that there would be a recovery. Indeed I was if anything expecting a rather stronger recovery than actually took place.

The reason I got this right, and the second reason I smile, is that this has nothing to do with any personal insight on my part. As Paul Krugman explains, I was just using the standard Keynesian model. What amuses me is how some anti-Keynesians seem to think that Keynesian ideas are embodied in the words of certain well known Keynesians, rather than in the journals, textbooks and central bank models. As Paul has rightly said many times, the basic ideas of Keynesian economics have been pretty well vindicated by macroeconomic developments in recent years. This, you might argue, is why they are in the textbooks and central bank models in the first place. 

Tuesday, 19 May 2015

The trouble with macro

Diane Coyle, writing in an FT blog, says
 “There are two tribes of economists, the macro and the micro. I’m one of the latter group. We have our empirical controversies, of course – much of our applied research concerns public policy choices in areas such as education and health, so vigorous disagreement is inevitable. But I think it’s fair to say that few of the micro disagreements compare in intensity to the all-out war of words between different macroeconomists about the effects of fiscal stimulus or austerity.”
She goes on to say that it is macroeconomists’ “certainty that’s astonishing”. Her comments could be summarised as asking why macroeconomists are so sure and shrill compared to their micro colleagues.

Now it could be that there is something odd about those who choose macro rather than other types of economics, but I’m not sure I’ve noticed any character traits more evident in macro people. (But who am I to judge - an open invitation for microeconomists to comment!?) It could be something to do with the nature of the theory and empirics involved, but since macro became microfounded that seems unlikely. I think the problem is in a way much more straightforward.

I think you only need to look at the recent UK election to understand the problem. One of the central themes of the Conservative’s attack on Labour involved their alleged incompetence at running the macroeconomy when they were in power. For whatever reason, macro rather than micro policy issues become central in political debates. That makes macro unusual for various reasons.

One immediate consequence is that many beyond the tribe of macroeconomists think they can write with authority of macroeconomic issues. As a recent example of a shrill macro debate Diane cites Krugman vs Ferguson. But this is not to compare like with like. On one side you have an economics Nobel Prize winner who has made important contributions to macroeconomics, and as a result is careful about what he writes. Both data and theory are respected. On the other side … well I’ve said what I think in an earlier post.

To take another politically charged topic, I have seen plenty of debates between climate change scientists and deniers who are not scientists. Often the scientist will go into detail to get the facts straight, and say how uncertain everything is, while their opponent by contrast will be confident and clear. A scientist will not be fooled by this confidence, but many others will be. When one side argues out of conviction or ideology or political bias rather than knowledge, it is difficult for someone who does have that knowledge not to respond in kind if they want to be convincing.

There is a deeper reason for shrillness, however. The debate over austerity is not a normal academic discussion about the likely size of parameter values. Here Diane is mistaken in saying that the key issue is whether the multiplier (the size of the impact of cuts in government spending on output) is greater or less than one. In talking about UK austerity, I have typically quoted OBR figures which assume a multiplier below one, which gives me the £4000 per average household cost of UK austerity. My own best guess would be that the multiplier has been larger than one, which gives me significantly higher costs, but I have never suggested that I know with certainty what the size of the multiplier has actually been. However there has, to my knowledge, been no public debate on these terms.

Instead supporters of austerity typically want to suggest that the multiplier is close to zero. They want to suggest that sacking nurses and cutting back on flood defences will be very rapidly met by an increase in private sector labour demand and investment. Although theoretically possible via various different mechanisms, the evidence and recent experience overwhelmingly suggests this does not normally happen in the kind of situation we are currently in. For much of the time those arguing for the virtues of current austerity seem to be doing so from a position of faith or political convenience rather than evidence.

Why is it important to recognise this? Because there is a danger that microeconomists may misdiagnose the problem, and suggest that macro contains some fundamental flaw which undermines eighty years of intellectual endeavour. This provides useful cover to those who have an ideological or political agenda, and want policymakers to ignore the bits of the discipline that clearly work. Sometimes microeconomists seem to think that if only they could disassociate themselves from macro, economics would become a better and more respectable subject. That is an illusion: the ideological and political forces that cause such problems for macro are not unique to it.

So I’m not sure that academic macroeconomists suffer from an excess of certainty compared to their micro colleagues. Instead I think the trouble with macro is that it is prone to ideological and political influence: like all economics, but just more so.

Monday, 18 May 2015

David Smith's gotcha quotes

In response to this post, David Smith of the Times tries a bit of gotcha journalism. Chris Giles tweets “A justly irritated @dsmitheconomics reminds @sjwrenlewis of some of stuff he has written and forgotten”. Only one problem: it is nonsense, and slightly embarrassing nonsense at that.

The facts are not really in dispute. A number of economists have drawn attention to the fact that the original austerity plan to eliminate the (cyclically adjusted) current deficit by 2015-16 was changed in 2012. David Smith wants to argue, as the government does, that “the government has stuck pretty much to its consolidation plan”. Call this claim X. What economists argue from the data could be described as not-X.

But how can you make claim X, when the data clearly shows that the pace of deficit reduction between 2012 and 2015 was slower than was originally planned? I argued in my post that David sets up a third claim, call in claim Z, that austerity was “abandoned in 2012”. By then showing, correctly, that the deficit was reduced between 2012 and 2015, David shows claim Z is false, and attempts to suggest (erroneously) that claim X is therefore true. It is crucial that the term 'abandoned' here is unqualified. Claim Z could not mean temporarily abandoned just for a year, or put on hold, because the data is quite consistent with that claim. Nor do I think I’m mistaken in my reading of what claim Z was. In the last two sentences from his original post David writes: “Did the austerity stop? No, and the economy's stronger recovery in the second half of the parliament ran alongside continued austerity.”

In my post I argued that claim Z was a straw man. I had not seen anyone make claim Z. David responds first by quoting a Guardian leader that uses the word abandoned in an unqualified way, and I must admit I do not read Guardian leaders. But he then provides two quotes from Paul Krugman and two from myself where we say austerity in 2012 was ‘put on hold’, that the government ‘essentially stopped tightening fiscal policy before the upturn’, or that austerity was ‘temporarily abandoned’. This is quite different from claim Z, involving complete abandonment. So they are hardly support for his straw man.

It is also pretty clear David knows this. He writes “I am not sure when the suspension or (temporary) abandonment of austerity Simon refers to is supposed to have come to an end.” That is cover to translate what I wrote into claim Z. But just a few sentences down from the first of his quotes from me I write: “followed by a projected return to austerity from 2014 onwards”. Whoops.

If all this seems a bit silly to you (as it does to me), you need to understand the bigger picture. Why is David (alongside others) so keen to argue that the government stuck to its consolidation plan, when the data clearly suggest otherwise? Well I think I know why the government wants to pretend that there was no change of plan in 2012. Because the moment you admit that the pace of deficit reduction was slowed (by action or inaction), people will ask why, and the obvious answer was that the original plans were hurting the economy and delaying the recovery. Most economists and the OBR know this, but the government has tried very hard to make sure that knowledge is not disseminated more widely.