Macro amateurs, micro geniuses?

Simon Wren-Lewis says the coalition’s austerity is a “major macroeconomic policy error.”

It’s difficult to imagine the government ever acknowledging this. On Wednesday, Cameron resorted to immunizing strategies such as blaming the euro crisis (without noting that exports to the euro area have risen by 11.3% in the last 12 months), or celebrating the “lowest interest rates for a hundred years“, oblivious to the fact that these are a sign of economic weakness. I suspect that even if the GDP numbers had been much worse, he’d have used similar arguments.

Macroeconomic policy, then, is not only made by rank amateurs - not one of the five Treasury ministers in the Commons has a postgraduate qualification in economics and only one has significant experience in financial work. It is made by amateurs who seem immune to feedback. Errors are only to be expected.

Which raises a paradox. The job of running the economy is entrusted to anyone.  But the job of running companies requires people of such rare and delicate talent that only multi-million salaries will attract and motivate them.

Why the inconsistency? I suppose you could argue - Robert Lucas style (pdf) - that the benefits of good macroeconomic stabilization policy are small, as are the costs of bad policy, so it doesn‘t matter much who runs macro policy. But the government isn’t doing this. And anyway, the benefits of “good management” are also small. Even if Stephen Hester could raise RBS’s value by 50%, the annuity value of this to tax-payers would be only 0.03% of GDP.

An alternative argument is that fiscal policy is not meant to be competent, but is instead meant to reflect the preferences of voters, and democracy is an intrinsic good, not an instrumental one.

There is, though, a third possibility. The purpose of macroeconomic policy is not to stabilize the economy or to raise growth, but is instead merely an ideological cover for shrinking the state. And that justification for multi-million salaries is merely ideological cover for kleptocracy. It’s just class war.

Comments

[David Hurley]

These government keeps on blaming each other despite to take some serous step for the country.

[Agog]

Well, yes - the approach of the right post-crisis has been to say effectively "The sky is falling! And unless we [insert list of long-held, long-term right-wing priorities] we're all doomed!"

But the left could also use the crisis as cover for their aims, couldn't they - "We're doomed! - unless we take drastic steps to [eg. lower unemployment, redistribute, (re)regulate]."

It's always class war (or at least conflict between sectional interests). It's just that most are too polite, too embarrassed, or too deluded to say so.

[Keith]

Yes it is class war and the wrong class are winning. You can be sure the parts of the state the ruling class like will not be cut such as nuclear bombs and other war mongering. Or spending on The Queen.

It is however as you point out a strange fact that people who have no formal credentials in economics ponitificate about it and the need for austerity like the pope in his chair speaking Ex cathedra; ignorance makes politicians infallible! Equally they are experts on education despite never having studied teaching or taught any children or adults. Few people would claim they were competent to perform brain surgery without attending medical school and passing exams. Yet all sorts of people particularly politicians have no qualms about screwing up society with evidence free theories and outmoded treasury view political economy from 1921 re packaged as efficient market thing amy gig. Despite there being plenty of web sites with more useful insights on offer.

[Account Deleted]

It is necessary for the health of a democracy to allow the unqualified to make decisions (which can be explained in layman's terms), because the alternative is to privilege experts who are just as ideological and tend to dilute accountability (because they believe the rationale for their decisions cannot be understood by the common herd).

Also, bear in mind that the unqualified are untainted by professional bias and subject matter paradigms. Being able to state the bleeding obvious is a talent of the non-expert. Of course, if your politicians are recruited from a narrow, unrepresentative elite, they will exhibit other biases.

All macroeconomic policy is built on ideological foundations because it presumes to know how people will act, i.e. it's a scoial science, not pure maths.

[Account Deleted]

All politics is class warfare. It's just not always obvious which classes are fighting.

Cameron's Brussels moment was significant not because of the emotional Euroscepticism, but because he let the cat out of the bag in making it clear that the interests of The City were paramount in forming national policy.

The "march of the makers" was always alliterative tosh because the interests that this would benefit (regional business and workers) are not significant enough to the Tory party today.

Class (i.e. sectional interest) is as much about the dimensions of commercial sector and region as it is about the traditional dimension of wealth and culture.

The financial crisis in the UK can be read as the culmination of The City's 200-year struggle with British industry. The key event was the co-option of the commercial banks (originally founded as regional providers and antagonistic to The City), as a result of deregulation 25 years ago.

[Jimmy Hill]

Haven't you had quite a few posts suggesting that the government can do very little to alter economic growth?

If this is true then we're not letting amauters run the economy, we're just letting them fiddle around at the margin for little loss or gain.

To even ask this question suggests that you have fallen under the spell of managerialism...

[anon]

Macroeconomic policy is mostly run by central banks nowadays. The BoE has been very aggressive on this front, which is one reason why Cameron can point to record-low interest rates. I don't agree with those viewing fiscal austerity as a mistake, because it is balanced by monetary easing, at least in the UK (unfortunately, the EU is a different story; their central bank has been making grossly incompetent choices).

[Curt Doolittle]

There is a vast difference between a state negotiates exchanges between classes, and a state that attempts to legitimize transfers between classes.

Humans will never tolerate transfers except in small highly homogenous countries - and even then, only when they are very limited. That's what the data shows us.

Until there is an expected return from recipients of transfers, there will be no increase in tolerance for them.

[Laurie Knight]

A lot of what you write makes sense but I get the impression from this post that you don't believe the state needs shrinking?

Surely you aren't suggesting this, tell me I've got the wrong end of the stick?

I thought it became quite apparent to even the most foolish that state spending could not keep on increasing, in the latter years of the last administration (I mean when the Labour party left the monster in charge).

Or do you still believe Gordon abolished Boom and Bust? I don't think even he believes that any more...

[Dipper]

Aren't all you economists missing the main point? That not all economic activity is of equal value? That what you spend the borrowed money on matters quite a lot? Isn't the belief that what determines our economic health is a bunch of economists sat in the BOE pulling policy levers the main problem here?

[Gareth]

UK real GDP growth by year:

2008: -1.1%
2009: -4.4%
2010: 2.1%
2011: 0.9%

now tell me which year was the "major macro policy failure"? 2011? Seriously? Especially given the elevated deflator in 2010 and 2011 vs 2008.

2008-2009 was the *worst UK recession since the Great Depression*. Annual nominal spending FELL. This has NEVER HAPPENED SINCE THE GREAT DEPRESSION. Never. Not on single time in eight years.

And now you are talking about major macro policy errors in 2011, with positive real GDP growth, nominal spending growth of 3-4%? This kind of BS actually makes me angry.

[CharlieMcMenamin]

"Macroeconomic policy, then, is not only made by rank amateurs - not one of the five Treasury ministers in the Commons has a postgraduate qualification in economics and only one has significant experience in financial work. It is made by amateurs who seem immune to feedback."

Well, perhaps. But this lack of responsiveness is not necessarily because they are amateurs. Professionals in all fields are notorious for not really listening to anyone outside a narrowly defined field of 'competent' persons. Why should professional economists or financiers be any different?

*All* professional fields should be subject to control by amateurs (sic) in some ultimate sense - otherwise where is the accountability of any profession to society.

Quite how all this works through, though, is a hugely difficult question. No one wants amateur surgeons removing their appendix - but neither does anyone want appendix surgeons buying spiffing new appendix removing machines costing x trillions without some form of accountability.

But , at minimum, surely all but the blindest financier or carpet chewing libertarians accepts politicians (those amateurs at everything) should take the big economic national decisions?

[Mike Killingworth]

Well, to paraphrase Charlie McM, quis custodiet ipsos custodes?.

I doubt that your favourite (or least unfavourite) government, Chris, had Treasury ministers any better qualified than the present incumbents.

And I wonder how many more people were put off economics, as I was, by textbooks' habit of starting with absurd assumptions (notably perfect information) and then talking grandly of "relaxation" without ever specifying rules for proper and improper "relaxation".

I tend to your "democracy is an intrinsic good" position. Although when all the main parties are indeed signed up for shrinking the state, you begin to wonder. One factor, I'm sure, and one which economists of any stripe can't handle, is that a precondition of welfarism is solidarity, and that in turn requires a degree of ethnic homogeneity which we had in the 1950s but have no more. Two world wars in thirty years also promoted solidarity, but wh remembers them now? "Dam' few, and they're a' dead."

[UnlearningEcon]

Gareth,

There was this sorta global crisis in 2008. We are now supposed to be recovering.

[Gareth]

"There was this sorta global crisis in 2008"

Are you getting this, people? Are you reading it and staying absolutely calm?

There was no macro policy failure in 2008, only a GLOBAL ECONOMIC CRISIS. That was nothing to do with macroeconomic policy, though. Ha! Nope. What a silly, silly idea, that a GLOBAL ECONOMIC CRISIS could be caused by macro policy failure.

No indeed, 2008 was just your average GLOBAL ECONOMIC CRISIS that comes along every 80 years. Nothing to see, move along

[MrD]

Apologies for the smugness but I am taught by this man! My life and favourite blog finally meet.

[Thalber]

shocking that the rich have a gareter share of the tax burden!? LOLyou lost me at that point. This dude is pedalling a load of BS.

[Haruyo]

The fact is that hetlah is very much out of the hands of individuals. Most are born hetlahy, some are born very unhetlahy. Universal hetlah care should be desired among any nation calling themselves civilized. The burden should be spread across all citizens. Why would a for profit insurance company take on the risk of those born unhetlahy? The goal in a free market system is to maximize profit, is it not?

[Natalie]

ever wendor if the bias they assume of your sources by nature of them being capitalist is nothing more than projection?