Once again the UK Chancellor of the Exchequer’s Autumn statement has provoked a storm of claim and counterclaim among economics commentators. The particular breed of expert whose voice is loudest is the macroeconomist. They have a lot of important things to say. And yet their analysis is often superficial. We end up talking about the wrong things.
There is a magnificent imperial power about macroeconomics. It looks at economies in aggregate, and develops a broad sweep. It deals with national income, growth rates, productivity, inflation, unemployment – all concepts that are represented by neat numbers. Their policy instruments are referred to as fiscal and monetary policy – policies that are meant to influence these aggregates in a fairly direct way, and which
For me, the metaphor of imperial rulers to represent these experts has strong appeal. It conveys the right sense of arrogance. I conjure up pictures of imperial aides to the Russian Czar (or his Soviet successors) implementing arbitrary policies to be implemented across their domain. They deal in the big picture – and refuse to hear the special pleading of provincial representatives. Of course things don’t work out in every detail, they say, but the reach and sweep of their rule means that much more good than harm is done.
Macroeconomists themselves no doubt would prefer an analogy with classical 19th century scientists. They did not concern themselves with the movement of individual atoms, but derived physical laws that worked at a higher level. In aggregate the behaviour of atoms and people are predictable.
The idea that leaders deal with big strategic matters, and leave the details to their underlings is an old one, that has enduring appeal. It enhances the egos of the leaders. It doesn’t work, though. The best leaders find themselves having to command both the strategic sweep and the tiny detail. The Russian Czars came acropper. And the theroties of 19th century scientists turned out to have much less value than they thought in the real world.
This is true of macroeconomics too. In the first couple of years of taking an Economics degree, you learn about macroeconomic models – about the use of fiscal and monetary policy to guide the aggregate movements of an economy. It is tremendous fun – but by the third year you really should be growing out of it. In the end economies are driven by what is happening at the level of individual people and businesses – and as people are highly adapable, and behaviours change – never mind the evolution of technology – what works one year may not the next. Unfortubately too many economists can’t seem to get past the imperial illusion.
Take the current furure over the British economy. It’s full of growth rates, deficit levels – and demands for this and that on fiscal and monetary policy. Two elements of the macroeconomist’s stock in trade are prominent: international comparisons (the British growth rate is less than Germany’s, etc.) and comparisons with the past, going all the way back to the Great Depression of the 1930s. And the analysis usually stops there – few attempt to pick apart the differences and similarities that these comparisons invite.
And yet there are a number of big changes taking place in the British and world economies that are bound to affect the choices open to our policymakers. These get superficial coverage, if at all. Here are a few:
- Finance’s role in the economy is diminishing, as we understand that much of its alleged value is illusory. This means that a sector that appeared to be highly productive in macroeconomic terms is shrinking. That is not a bad thing – but people seem to be screaming blue murder when the national income figures suffer the inevitable outcome.
- Likewise the benefits of North Sea oil are fading – another statistically highly productive sector shrinks, though this one has more underlying substance.
- Banks’ lending practices are changing, as credit to private individuals becomes less easy, and loans to property developers more difficult. This is inherently a good thing, as it helps get the economy onto a sustainable path – but it is playing havoc with the macroeconomic statistics.
- The gains from globalisation are going into reverse. For years in Britain the prices of imported goods fell or stayed the same while wages and domestic prices rose steadily at 3-4%. These “gains from trade” added a lot to the feel-good factor and growth before the crisis- even though we whinged about loss of manufacturing and overseas call centres. Now import prices are rising steadily while pay remains frozen. These gains from trade were not permanent, bankable changes – but reversible. This is nothing to do with protectionism, by the way, but arises from the perfectly predictable workings of the economic law of comparative advantage.
- Meanwhile “additive manufacturing” and other technology changes mean that fundamental technological change is alive and well, bringing both new opportunities and continued obsolesence – but of quite unknown impact on conventional economic measurements.
I could go on. These factors, and others, should be very much part of the discussion. They invalidate historical and international comparisons – until and unless we dig a lot deeper. To me the wider message is that we can’t simply wind the clock back to where we were in 2007, and it is not self-evident that a sustainable growth rate of 2% or even 1% can be regained just a lifiting levels of confidence a bit. Therefore using fiscal policy to stoke up aggregate demand may simply bring short-term relief followed by an even bigger crisis. Increasing government sponsored investment is almost certanly a good idea, but it matters where this goes. But neither the government’s critics, nor even its defenders seem interested in such details.
In an excellent article in this week’s FT, Sebastian Mallaby shows how macroeconomic success leads to microeconomic complacency, which in turn leads to breakdown. The developed world has just gone down this route. Now the BRICs are doing it. China shows no sign of dealing with the baleful influence of its state owned enterprise; India is content to let curruption and inadequate infrastructure go unaddressed; Russia sees no reason to change its contempt for the rule of law; and Brazil’s government is releuctant to take on vested interests. All these economies are now slowing.
Meanwhile, back in the developed world you would have thought that we had been cured of macroeconomic complacency. And yet almost nobody seems prepared to take on the deeper issues that lie behind the crisis and any solution to it.