Economics keeps letting me down. The decade or so following the financial crisis spawned thousands of papers researching the financial system. I had a sinking feeling that none of it would help. Policy-making in economics, and economic research agendas, tend to follow the paradigm of PTSD sufferers. The trauma of the global financial crisis was itself protection. Researching manias, panics and crashes ex-post, was time-wasting. Manias such as crypto and NFTs (check out the digital tulip company) are harder to suppress. In contrast to banking crises, bubbles in lottery tickets have infinite disguises, but also do less harm.
An edge in understanding shadow banks expired in late 2008. The real wisdom was to see the next set of problems. Isabella Weber, author of the brilliantly thoughtful book, “How China Escaped Shock-therapy” stands out as a rare beacon of foresight. My knowledge of economic history didn’t really include pandemics (unlike David McWilliams), and to the extent that I know anything about serious inflation problems it was a cartoon history of prior attempts at wages and incomes policies in the 1970s. In the cartoons I had read these policies were entirely discredited. Isabella’s work suggests that price interventions by the state can be far more nuanced. (Jeffrey Garten’s “Three Days at Camp David: How a secret meeting in 1971 transformed the global economy”, is also an unexpected challenge to prevailing thought.)
Let’s put this in context. The depressing truth is that central banks across most of the developed world are simply raising interest rates until they cause a recession – which is best described as a significant increase in unemployment and widespread business failure. The human cost of recessions of this sort, is truly awful. For central banks armed only with an interest rate and targeted lending programmes, this may be the best of a bad set of options, but however one views it, this is a damning reflection on macroeconomics. Probably the most constructive thing a central bank can do is instruct all research staff to focus their thought on alternative policies to bringing down prices. Surely we have a wider option set than recession or price controls? And if we pursue the latter, how best to do it?
Re-purposing targeted lending programmes to rapidly accelerate investment in cheap renewables was an obvious choice, which practical and creative economists suggested. We should all know that central banks can affect energy prices, through the effects of monetary policy on both supply and demand. The shale oil boom from 2011-14 and the related fall in oil prices, was probably the main economically-significant effect of latter-stage QE in the US – proof that easy money can be disinflationary. At the same, we know that recession will collapse demand for oil.
The policy learning from these observations is that dual interest rates, which Megan Greene, Mark Blyth and others have advocated, is not just an enlightened way around the zero bound, but should be part of the ongoing armoury. Tinbergen was right: two levers are better than one. It is not too late to deploy these policies, but they have barely been discussed in the prevailing policy debate (researchers at Positive Money Europe and the New Economics Foundation are notable exceptions).
We are now either in recession (the UK) or soon to be there (the United States). Let us at least prepare the right contingency policies. It is a reasonable bet that inflation, when it properly turns, could fall very substantially, and the regime of the last ten to twenty years will come back now that it is being abandoned by many grave thinkers. Despite the price inelasticity of demand and supply of fossil fuels, their price volatility is symmetric, and we now have increasingly-competitive substitutes. The great irony, is that transitioning electricity from fossil fuels to the technologies of wind, solar and batteries favours anticipating an important positive secular stimulus to productivity, and therefore trend disinflation.
Noah Smith has expressed similar frustration with Macroeconomics, arguing that micro economics has had more flattering achievements. I’m not so sure. The examples he cites are helpful, but hardly earth-shattering. My research over the last five years with Corinne Sawers, into the economics of climate change, suggests a more dismal contribution from micro. Economists in this field have diverted everyone to the chapter on externalities. Thankfully, policy makers in the largest economies have ignored the advice. But the cost is still great. The focus of effective economic policies on climate change should be on how to accelerate investment by regulated utilities (derisk the electricity price, collapse the cost of capital, and regulate accelerated investment), and how to alter the price elasticity of demand for carbon intensive activities (create near-perfect substitutes through aggressive subsidies). And if economists know one thing about human behaviour it is the power of incentives. Where we face perfect substitutes we always go for the cheaper option. “Make the green option cheaper”, should be the slogan of Extinction Rebellion. (EPICs are even better).
Finally, to Kilkenny. A small town in the south of Ireland is host every year to an economist’s nirvana. It’s not just the combination of Irish pubs and Italian restaurants. Comedians struggle to stop an audience laughing when they turn to economics. The economists, hand-picked by David McWilliams and Naoise Nunn, bring tension, drama and insight. This year was no different. One of many helpful thoughts I acquired was listening to the Korean economist, Ha-Joon Chang. To paraphrase, macroeconomics should not be taught as a body of knowledge which progresses on a linear path through time. Instead, there are a set of macroeconomic environments, most of which we already have substantial knowledge of, and different schools of thought apply to each. There is little progress through time, in part because we don’t really know which regime we will find ourselves in next. More optimistically, none of the recent crises are black swans – they have all happened before. The zero bound was nothing new, and the required policy hacks had been clearly articulated in 1968. Where will be in twelve or eighteen months time? What will be the next major ‘crisis’? Recession and substantial disinflation are high probability. After all, that is the intention of policy. This time around, we should at least have a better plan for what to do when we get there.
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