Friday, 13 January 2017

A crisis in economics? If only it were true

The Bank of England’s chief economist, Andy Haldane, recently criticised his very own profession. This led to a bout of soul searching for economists as we face, again, the familiar criticism that nobody predicted the 2008 financial crisis (in fact, some economists did) and reflect on whether the subject is being taught properly at school and university.

Yet Haldane’s criticisms are less severe than they might first appear. Indeed they remain largely innocuous at the level of economic prediction.

To his credit, Haldane made some effort to highlight more deep-seated problems in economics. These problems relate to issues of theory and method. They are also related to an unwillingness to allow dissent within economics and to open up to other disciplines.

Unwittingly, however, he distracts attention away from these problems by focusing on the issue of forecasting and misses the opportunity to ram home the point that economics is flawed in a fundamental sense. Better forecasts cannot exonerate economics from its failings now and in the past.

Weak and off-target

Economics should be in crisis. But in reality it is not. Rather, economics remains largely the same as it was before the financial crisis – in effect, it remains just as problematic now as in the past. This is an issue not just for economics but for society as a whole, given the enduring power and influence of the discipline on policy and public life.

To think of economics in terms of forecasting is to limit its nature and scope. Economics ought to be about explanation. It should be able to make sense of the world beyond forecasts of the future. It is not clear that as it exists now, economics is able to understand the world in its present form. To this extent, it cannot help understand the frequency and depth of crises.

Economists remain committed to a particular approach to theory building in which mathematical models are all that count. They are often too abstract to be tested and exist as formal abstractions with no connection to the real world. For example, some macroeconomic models before the crisis were so out of touch with reality they excluded the existence of banks. No wonder the crisis came as a surprise.

As things stand, there is little chance that economics will open up to the ideas and methods of other disciplines. Instead, the discipline has embraced a project of “economic imperialism” seeking to colonise other social sciences. Genuine interdisciplinary debate has lost out in this process.

Haldane’s criticisms of economics, therefore, remain weak and off target. He calls for economics to learn from meteorology. That way it can improve its forecasts. What he misses is the need for radical change at the level of theory and method. He misses the need for economics to embrace reform that turns it into a social science which explains the world as it actually is – not a device for better predicting the economic weather.

Alternatives exist

To be sure, Haldane questioned standard economic assumptions such as that of all actors being perfectly rational. He has also encouraged the use of alternative methods like agent-based modelling, which offers a more realistic view of individual behaviour. Yet, his proposals for reform are limited and weak. The notion that economics might need to be reworked from first principles and rebuilt as a more open and less formal social science remains implicit in his criticisms.

Alternative economic ideas do exist. They exist among dissenting heterodox economists, but they remain on the fringes of economics debate, without any real influence on the core discipline itself.

This fact is probably a surprise to most. Surely the crisis has led to a rebirth in the study of great economic thinkers like Marx, Keynes, and Hayek? After all, these thinkers studied in detail the economic system including its crisis-prone nature.

The sad truth is that this rebirth hasn’t happened. In fact, any rebirth has been stifled by the insularity of the economics discipline. Economic dissenters like Marx, Keynes, and Hayek are still more likely to be studied by scholars outside of economics than within it.

So while Haldane is correct to call for reform in economics he misses the barriers to reform and the need to overcome them. He misses how economics has stifled dissent and how the restructuring of economics requires root-and-branch reform in the way that economics is studied. We need economists that are not better weather forecasters but rather committed social scientists concerned with addressing and resolving real-world problems on an ongoing basis.

*** This blog also appeared at the Conversation

Tuesday, 6 December 2016

Sleep deprivation costs the economy billions – and sends workers to an early grave

The British economy loses £40 billion a year due to sleep deprivation, according to a new study. Beyond the loss of economic output, sleep-deprived Britons are shortening their lives. The study shows that people who sleep less than six hours a night have a 13% higher mortality rate than those sleeping at least seven hours.

Many Britons, in short, are swapping slumber for an early grave. They are sacrificing years of their life by not getting a good night’s sleep.

But what lies behind this sleep malaise? What is keeping Britons awake at night? And what can be done to combat sleep deprivation?

Many factors contribute to sleeplessness, from family worries through to financial concerns. But one factor that stands out is work. The work we do determines how much sleep we get by affecting how tired we are, how anxious we feel, and how much free time we get. Thus, sleep loss cannot be properly solved without addressing the way we work – in particular, it entails moves to kick the work ethic and to work less.

The costs of sleeplessness

The study by research firm Rand Europe looks at the effects of sleep deprivation in five countries. It finds that the economic cost (in terms of working days lost) due to lack of sleep is greatest in the US (up to US$411 billion a year, equating to 2.28% of its GDP), followed by Japan (up to US$138 billion a year, equal to 2.92% of its GDP). Next comes Germany (up to US$60 billion, 1.56% of its GDP) and the UK (up to US$50 billion, 1.86% of its GDP). Canada records the lowest economic cost due to sleep deprivation (up to US$21.4 billion, which is 1.35% of its GDP).

These estimates are used to show the significant economic benefits of extending sleep time. For example, if Americans that sleep less than six hours could start sleeping six to seven hours, then the US economy could grow by US$226.4 billion.

The important added benefit of extended sleep time is that it reduces the chances of premature death.

Low sleep levels are a reflection of new trends in our relationship with work. The divide between work and life outside of work has become blurred. People now find themselves at work even when at home. The expectation of being on call outside of work has increased, through the use of smartphones and laptops.

Plus, while official work hours may have declined in most countries, unofficial (out-of-hours) working has increased. This time is not only performed for free; it also comes at the cost of time with family and friends, and crucially time for sleep. Workers cannot easily switch-off from work if they have access to technologies that connect them to their place of work. Checking email can often replace going to sleep. It can also mean lying awake at night thinking of what emails to send or reply to. 


Recent years have also seen a rise in self-employment and other forms of precarious work. This rise has left workers vulnerable to a never-ending cycle of work. Even when not working, time is spent seeking new work or chasing payment from work already done. The stress and anxiety of not having the same benefits as full-time workers and of getting-by on low wages makes for a life where sleep is short and disturbed.

Meanwhile, society’s approach to work remains the same as it ever was. The sanctity of work remains unquestioned, despite it taking time away from sleep and robbing people of their health. In Britain, work is still lauded as the best way to prosperity and health. The illusion is that “work pays” even though for many it lacks any stimulating content, pays a pittance, and is performed at the expense of sleep.

Timid reforms

The study by Rand Europe, despite its critical implications, reaches weak policy recommendations. It refers to the need for people to “set consistent wake-up times; limit the use of electronic items before bedtime; and exercise”. Missing is any reference to peoples’ lack of choice and control. The inability to switch-off from work is not recognised as an endemic problem, in need of collective solutions.

Employers are encouraged to recognise the “importance of sleep” and to “design and build brighter workspaces; combat workplace psychosocial risks; and discourage the extended use of electronic devices”. These are laudable goals but they miss how employers benefit from out-of-hours working (at least in the short run) and how they may be encouraged to turn a blind-eye to sleep deprivation for profit reasons.

Public authorities are encouraged to “support health professionals in providing sleep-related help; encourage employers to pay attention to sleep issues; and introduce later school starting times”. Again there is nothing here on overcoming the deeper-lying limits to sleep time, which connect with the work system as a whole.

We are left with the false impression that sleep deprivation can be tackled in a piecemeal way and without broader action, such as curbs on work time, extended paid holidays, and stronger unions.

Dreams of a better world

Being constantly at work and losing sleep is not good for anyone. It ultimately reflects a culture where work comes before life. It represents a world out of sync with humanity – a perversion of life and a road to ruin.

This is why more radical solutions are needed. Gaining more sleep requires creating a society in which work is less important in human life. It necessitates a move to a society where leisure and rest are given their due weight and technology is actually harnessed to enable more rest and less work – not the opposite.

The demand for more sleep translates into a demand for less work. This means shorter work hours and more free time. It means a life where we rest easy in our beds, get enough sleep, and have the opportunity to dream of a better world to come.

*** This article was originally published at the Conversation (see here)

Wednesday, 5 October 2016

Philip Hammond plays the pragmatist but lacks the vision to deliver as chancellor

Pragmatism was a key watchword of Philip Hammond’s first conference speech as chancellor. He reiterated his intention to abandon the strict fiscal rules of his predecessor. He also announced new spending on housing and other infrastructure.

Yet, despite the talk of policy change, his speech continued to repeat the same mantra of fiscal consolidation and balancing the budget. It lacked the vision and content to deal with the deep-seated problems of the UK economy.

Despite his attempts to insist otherwise, Hammond’s speech was more ideological than pragmatic, and again revealed the flaws in current macroeconomic policy in the UK. The chancellor’s rhetoric may have softened, but his commitment to an ideologically-driven agenda of austerity remains in place.

The need for change

The chancellor was eager to give the appearance of change. He wanted to signal that a different approach is needed to match the new circumstances in which the world finds itself. He was careful not to criticise his predecessor, though his move to a looser fiscal policy is a clear sign that previous policies are unfit for the present and future.

The commitment to achieving a budget surplus by 2020 – a much prized target of George Osborne – has been the most high-profile goal to be abandoned. In truth, this target was always arbitrary. It had no proper basis in economic theory and its pursuit has come at the expense of slower growth. Hammond’s move to a more pragmatic policy is an admission of the folly of his predecessor’s fiscal rules.

Yet, if the chancellor’s speech is anything to go by, the change in fiscal policy is likely to be too modest to make much of a difference to the UK economy. The announcement of extra borrowing of £2 billion to speed up housing construction is hardly a game changer. This investment will address neither the acute housing needs in the UK nor the lack of investment in the wider economy.

The problem here is the lack of ambition. Hammond rightly noted that infrastructure is important for the productive capacity of the economy but he fell short of the spending commitments needed to make it work to that effect.

The timidity of Hammond’s spending commitments highlight the lack of vision at the heart of his economic strategy. The impression is that ideology is still ruling economic policy, preventing the necessary investment in the UK economy that could help to secure a more sustainable recovery.

With low interest rates, the government should be borrowing to invest, not relying on the confidence fairy to magically restore investment.

Missing elements

There were also important things that Hammond missed out in his speech. There was talk of record levels of employment, but nothing on the slump in real pay that has harmed many millions of UK workers. The unprecedented drop in real pay has placed restrictions on aggregate demand and is a key reason why economic growth has been subdued. There was also nothing in his speech about the large trade deficit, despite its negative effects on economic growth.

Reference was made to lagging productivity in the UK but there was no clear solution on offer beyond rhetoric on improving skills and education. Hammond exhorted industry to invest more, but this was not underpinned by any plan to unlock the money within businesses and divert it to productive investment. Issues of short-termism and corporate governance (including workers on boards) were also missing.

Predictably, Brexit loomed large in Hammond’s speech. But, as in other speeches at the Conservative conference, Brexit acted as a smokescreen to deflect attention away from the home-grown problems of the UK economy. This diversionary tactic can only go on so long. It is imperative that attention be given to the need for reform within the economy as UK leaders talk about what a post-Brexit UK will look like. The connected problems of low pay, low investment, and low productivity require a coordinated approach that goes beyond the austerity policies sadly reiterated by Hammond in his speech.

Ideology wins again

The renewed talk of pragmatism in UK macroeconomic policy has a rhetorical appeal, but beneath the surface there remains a continuity in the policy stance of the current government. The ideological bias against deficit spending remains deeply-rooted and there is still no genuine commitment to rebalancing the economy away from household consumption towards investment. The personnel and rhetoric may have changed, but the supporters of austerity remain in charge.

A truly pragmatic macroeconomic policy would entail a wholesale reversal in fiscal policy and a resolve to invest for the long term. In this case, it would seek to challenge the established policy and political consensus in the UK.

Lamentably, as Hammond’s speech underlines, the UK still awaits an economic strategy that can improve the fortunes of the economy. We are all poorer for the absence of such a strategy.

This article was originally published at the Conversation.

Friday, 15 July 2016

The challenges ahead for Britain’s new chancellor, Philip Hammond

Philip Hammond, the UK’s new chancellor of the exchequer, has a lot on his plate. He faces a slowing economy urgently in need of stimulus. He confronts tough choices over public spending and will be under pressure to reverse the austerity policies of his predecessor. The question for Hammond is not whether to stimulate the economy, it is when and how.

This is all the more the case given the Bank of England’s decision not to lower interest rates. With monetary policy at its limits, the onus is on Hammond to act – and act swiftly – to deal with the current economic headwinds.

The obvious challenge to the UK economy at the moment is Brexit. The prospect of leaving the EU has created significant uncertainty. Although it is not yet clear how this has influenced the UK economy, it is likely that firms and households have cut back on spending, dampening economic growth. The higher cost of imports is also likely to reduce spending, offsetting any positive effect on exports from a lower pound. Unemployment may well rise in coming months too, as a result of a slowdown in economic growth. 

Pragmatism has its place 

Hammond, as a member of the Remain side, predicted dire economic consequences from Brexit (just not as visibly as his predecessor). He now confronts the task of mitigating these. Here he cannot escape the need to adopt a looser fiscal stance.

Hammond’s predecessor, George Osborne, was forced to abandon his budget surplus target in the wake of the Brexit vote. This U-turn, however, was not accompanied by any relaxation of austerity and government spending cuts – it simply extended the period of planned austerity and government spending cuts.

Hammond will need to review this approach. Bad economic data may very well force him to reverse economic policy. Indeed, the prospect of a recession could lead him to ditch his reputation as a “fiscal hawk”.

Being open to the advice of experts and not letting ideology rule economic policy are key lessons that Hammond needs to learn. Fiscal pragmatism has its place, especially in the context of a slowing economy. 

Three problems to solve 

Beyond Brexit, there are wider challenges for the new chancellor. The most obvious is the unbalanced nature of the UK economy. Growth is occurring only because households have run down savings and spent beyond their means. The large trade deficit and reduction of the budget deficit, on the other hand, remain barriers to growth.

Hammond therefore faces the challenge of rebalancing the UK economy away from its dependence on consumer spending. He needs to find ways, in particular, to stimulate exports and investment.

The chances of him achieving this aim depend on wider changes in policy. Here he needs to contemplate the deep-lying problems of the UK economy.

Three problems can be highlighted, in particular:
  1. The dominance of finance over industry: this helps to explain the low investment record of the UK and its widening trade deficit.
  2. The low productivity problem: decades of under-investment fuelled by the forces of deregulation and financialisation have led to lower productivity in the UK, holding back living standards.
  3. The entrenched problem of low pay: the previous coalition government and present Tory government have presided over an economy that has seen an unprecedented squeeze in real pay.
Taking a lead

These problems require urgent action. In truth, they need to be tackled in coordination with different government departments, not by the new chancellor alone. Hammond, however, needs to take a lead in creating the fiscal environment in which firms invest and export more.

Rather than cut its spending, the government needs to invest in new infrastructure. At a time of low interest rates, this kind of investment makes fiscal sense and can be a means to tackle problems of low productivity and low pay (in the latter case, by creating more high paid jobs in construction).

Beyond this, the government should look to support a more active industrial strategy, investing in strategically important industries like steel. If this entails some form of state aid, then so be it. The alternative is to allow industry to wither, with potential adverse and irreversible costs for the UK’s skill base and productivity potential. 

Hammond’s stance on fiscal policy is key here, as its helps to set the foundation for wider economic policy. His commitment to a fiscal stimulus would bolster confidence and would encourage economic activity in other parts of the economy.

May signalled her intention to challenge the corporate governance structure in the UK, including the involvement of workers on company boards. This is a welcome move and, if implemented, could help to address the problems of low productivity and wage inequality. Hammond’s policies on tax and spending remain important here in creating an environment conducive to shared forms of wealth and ownership. For example, he could seek to tax those companies that fail to include workers on their boards.

In truth, the challenges faced by Hammond are huge. They require a reversal of austerity and a move to a more supportive state. If he is to live up to the rhetoric of his new boss and create an economy for everyone, rather than just the “privileged few”, he needs to embrace a more radical reform agenda. Failure to deliver would show the need for a different government.

*** This blog originally appeared at the Conversation

Friday, 24 June 2016

Brexit bleakness

The repercussions of Brexit will be seismic – turmoil, followed by uncertainty. Things are never going to be the same again.
In the short term, a sliding pound will add to inflationary pressures, pushing down real wages. Any boost to exports from a lower-valued pound will depend on likely trade renegotiations with the EU.
The uncertainty surrounding the UK’s exit from the EU will have a depressing effect on investment, both domestic and foreign, and will inhibit growth. Recession remains a real possibility. This would be in line with the prediction of the majority of economists.
The reaction of the Bank of England will be important. It will face pressure to raise interest rates due to the inflationary threat from Brexit. Any rate rise would put further downward pressure on the economy.
The government’s stance will also be crucial. George Osborne, the chancellor of the exchequer, talked about an emergency budget in the event of Brexit. This would be the wrong course of action; more austerity at this stage will simply depress the economy and impose greater hardship on UK citizens. Osborne would do better to abandon his surplus target and to loosen fiscal policy. The task for the Labour Party is to promote an alternative (anti-austerity) economic policy that addresses the challenges of a post-Brexit economy.
One important message from the EU referendum is that a majority of the British electorate believe that economic policy and the economy is not delivering for them. Sadly, Brexit is not going to address people’s real concerns; instead, it is going to mean more hardship and pain. This is a bad day for the UK.

Thursday, 26 May 2016

Why Brexit should not blind us to the errors of current macroeconomic policy

The Institute for Fiscal Studies is the latest body to highlight the costs of Britain leaving the European Union (EU). It has warned that austerity measures would be prolonged by two years in the event of Brexit.

The independence of the IFS adds credibility to the case for Remain and its intervention has provided valuable ammunition to the government against the vote Leave campaign.

Yet, beneath the blur of claim and counterclaim over Brexit, there is a broader critique to be made of the present government’s policy position and of austerity more generally. This critique remains valid, regardless of Brexit. It also feeds into considerations around the need for reform in the EU that go beyond the current debate over Brexit.

The sad reality is that neither the Remain nor Leave side in the Brexit debate is offering any real alternatives at the level of economic policy – indeed depressingly, both sides seem to be taking austerity for granted. This needs to change.

The IFS suggests that lower GDP growth and extra borrowing costs caused by Brexit would worsen the public finances. The effect would be that the government would only be able to achieve its self-imposed target of a budget surplus by 2022, rather than by 2020. If Britain votes to leave the EU, then it faces two more years of higher taxes and/or spending cuts – a dire prospect.

The forecasts of the IFS assume continuity in government policy – in effect, they accept the continued commitment to a budget surplus target and with it a programme of austerity.

The criticism here is that the budget surplus target is arbitrary and self-defeating. There is no justification (other than naked ideology) for such a target at the present time – rather, under present circumstances, with a large trade deficit and weak private sector investment, there is a strong case for maintaining a budget deficit. Indeed, given the above circumstances, the government risks jeopardising recovery by sticking to its surplus target. It creates this risk by taking demand out of the economy at a time when growth is being propped up by households spending and borrowing beyond their means.

The point is that, Brexit or otherwise, the government’s current pro-austerity policy stance needs to be reversed. The danger is that the government is buying support for its own flawed economic policies by citing the costs of Brexit. In effect, it is seeking to cultivate a commonsense around the legitimacy of its macroeconomic stance, stifling critical debate. We should be wary of the diversion tactic and keep our sights on the errors inherent in present macroeconomic policy.

This is not a coded appeal to the Leave side. The latter are seemingly just as committed to the folly of a surplus target and austerity as many on the Remain side. Rather it is an attempt to cut through the rhetoric of Brexit and to promote the case for alternative economic policies (from a renewal of publically funded infrastructure investment to a revived industrial policy). These alternatives, it should be said, are ones that the electorate can potentially vote for at the next general election.

One further point can be made here. This relates to the polarisation of the Brexit debate. Either you believe in the EU or you reject it. That is how the debate has been framed. Missing is any wider awareness of the need for a reformed EU. The idea of an EU that supports greater cooperation between nations, say via an expanded EU-wide fiscal and regional policy and stronger labour rights and protections, has yet to be fully heard (though the barriers, economic as well as ideological, to reform remain formidable). This positive and progressive vision of a reformed EU indeed is in danger of being crowded out by the promotion of a commonsense that takes austerity for granted.

The choice for the electorate in the referendum is between austerity and more austerity – no other alternative is on offer. This sorry state of affairs reflects badly on the state of economic and political debate in Britain. It highlights, in short, the way in which such debate is hemmed in by a narrow agenda that is ultimately supportive of the status quo.

The referendum should be an opportunity to challenge conventional wisdom including current macroeconomic policy in Britain. In reality, it provides the opposite – a vote for continuity, and with it, an austere future. The people of Britain, and of the EU, deserve better.

Wednesday, 23 March 2016

The two big failures of George Osborne’s budget

After a rollercoaster week for Britain’s chancellor, his eighth budget has been approved. George Osborne will be breathing a sigh of relief. After proudly announcing his budget on March 16, things began to unravel just 48 hours later, thanks in part to the shock resignation of the work and pensions secretary, Iain Duncan Smith.

The furore over plans to cut disability benefits brought about a farcical backtrack on the issue and an effective rewrite of large parts of the Budget. This script could have easily formed part of an episode of the political satire The Thick of It.

The reality, however, is that the chancellor has presided over countless failures, from missed targets to growth downgrades. Worries over how Osborne will now fill the £4.4 billion gap that has resulted from the U-turn on welfare cuts are overblown. The UK economy remains in a poor state, despite and indeed arguably because of his budgets and much vaunted long-term economic plan.

Two of Osborne’s notable failures are his fetish for a budget surplus and his seeming unwillingness to invest and spur growth.

Budget surplus 

Osborne has set himself the target of achieving a budget surplus by 2019-20. This target, in truth, has no basis whatsoever in economic theory. It is a fiction invented by the chancellor that, along with connected rhetoric of “living within our means”, is part of a naked attempt to reduce the size of the state. It constitutes an attack on the principles of collective interest and mutual support that have underpinned the welfare state in the UK from 1945 onwards.

In his latest budget the chancellor loosened fiscal policy – for example, he announced several tax giveaways favouring higher earners. This pragmatism partly reflected the slowdown in growth. But the result is that Osborne faces having to make deeper cuts in the future to meet his budget surplus target. This translates into even more austerity coupled with poorer public services. One wonders why he needs to adopt such a strict budget surplus target when the realities of the economy suggest that a looser fiscal stance would be more appropriate. Perhaps ideology is ruling economic policy?

The truth is that the budget surplus target is neither needed nor justified. Osborne, in short, would do better to target other objectives such as that of full employment. His fiscal mandate is ultimately a distraction from the real policy interventions needed to revive the fortunes of the UK economy.

Route to recovery

Osborne’s second major failure relates to the routes he is using to bring about an economic recovery. In his view of the world, cuts in the budget deficit and the return to a budget surplus will be matched by a revival in the fortunes of the private sector, via higher investment or high exports (or ideally both). Growth in the private sector, he hopes, will fill the gap left by the public sector.

This view is wrong on several counts. First, it fails to see how the state can lead in the growth process – not just by investing in vital infrastructure, but also by supporting the private sector through, for example, an industrial strategy. The fact that the government has cut capital expenditure is a real concern here and highlights the contradictions in the government’s own growth strategy.

Second, there is the fact that the UK is reliant on a budget deficit to offset imbalances in other parts of the economy. With the continuation of the trade deficit and the continued sluggishness of business investment, the budget deficit has provided a vital prop to the UK economy by adding to aggregate demand.

The growth of the UK economy, in recent years, has come mainly from households running deficits. This is not sustainable. The government, through its use of the budget deficit, has a role to play in re-balancing growth away from consumption and towards investment. This it can do through increasing spending on capital investment projects. It can look to offset, in this case, the failure of private business to use its own excess funds to invest and export more.

But none of this is happening. Instead, we face the reality of the UK government sticking to an arbitrary budget surplus target that will restrict growth and lead to a more unbalanced and precarious economy.

Osborne’s failure, in essence, stems from his lack of understanding of basic economics. What he fails to grasp is that the government has a vital and essential role to play in supporting aggregate demand when other parts of the economy are spending too little. We should worry less about the government spending too much and focus on policies that revive investment and exports.


***This article was published at the Conversation (see here). It replaces an earlier blog post called "Budget reflections: Bad economic policies underpinned by bad economics"