I’m currently in the UK at the University of Warwick for my six months Erasmus, really thrilling experience, really good teaching quality (have an awesome Econometrics1 Professor!) and a very vibrant environment with tons of conferences and seminars.
Yesterday evening I attended two of these one-hour conferences in a row: one held by the Permanent Secretary to the Treasury, Sir Nicholas Macpherson, the other by economic historian Nick Craft. Some very quick thought about the first one, because understanding what’s going on in policymakers’ heads is key – and quite discomforting in this case.
The lecture’s title was “Crisis: what we’ve learned seven years on”. I walked away with the impression that the answer was “nothing”. This because of Sir Macpherson’s contradictory statements:
- he stated that the UK is something like 15% under its pre-crisis GDP trend – a tremendous gap – and that, at the same time, cutting the deficit would be “sensible”. It needs little macroeconomic accounting in Wynne Godley-style to get it’s not sensible at all!! If Y= C+I+G+X-M and Y=C+S+T, then I+G+X-M=S+T, or (I-S)+(G-T)+(X-M)=0. If the UK’s current account balance is negative as it is right now, you need either the public sector running a deficit or the private sector dissaving/making more debt, or both. Cutting the deficit would leave the burden on the private sector, and little space for more real recovery!
- he also claimed that inequality is a problem, which is right: it is a drag on economic growth and a threat to social peace. Well, he should tell Cameron that cutting tax credits and in general welfare isn’t going to make the situation any better: markets alone only worsen inequality.
- then productivity, which “finally has begun to rise” (maybe thanks to weak growth?). He pointed out that Cameron’s government presented a productivity plan (of course, all about supply-side policies) and emphasised the pace at which corporate taxes have been cut (it may leave firms space for investments, but is questionable with respect to distributional issues). I think that this one-sided approach to productivity growth and the implicit technological determinism are quite misleading. Endogenous growth theory and the demand-pull hypothesis make more sense and explain better the poor performances in the last decade (Vernengo’s paper and blog might be insightful): from this perspective stimulating aggregate demand is key (difficult to achieve if you continue cutting the deficit).
- “We need to create incentives to save and invest”. I hope I’m wrong, but to me it seemed like the saving funds investment view, which is a tremendous misunderstanding of how today’s monetary economy works.
- regulation! It went like “Sometimes it’s useful but we have to pay attention it doesn’t become an overhead”. Now, it depends on the type of regulation which we’re talking about: product market, labour market, financial markets? I’ll admit I already can’t remember the exact context of the phrase, but it was a lecture on the crisis, a crisis made possible by financial deregulation. I would at least have expected a vigorous call for financial regulation.
Bottom line, I feel dismal if this is what our policy makers have not learnt.