Knowing and Making

Reader Bill Spight writes from the US, pointing to today's Brad Delong article and asking if I think the British psyche has a special tendency towards austerity. I hadn't read Delong's piece (I find his blog a little too predictable usually, and while I agree with much of what he says, I don't need to re-read the same opinions every day). He is quite right, though, about the Tories' lack of a real economic theory behind their actions. Osborne obviously has some acquaintance with economic theory - though it may be selective. He understands the idea of crowding-out, the impact of long-term interest rates on private investment, and the idea that monetary policy can sometimes compensate for fiscal policy. But the current cuts are more driven by political ideology than economics. Notably, they fail to understand the difference between public borrowing in an economy with high unemployment and output gaps, and in an economy running at full capacity. This of course is ...

Much speculation today about the signal sent by Alan Johnson's appointment as shadow chancellor. Does this mean Miliband has decided to stick with Alastair Darling's policy of halving the deficit in four years? Is it a snub to Ed Balls, designed to avoid a new Blair-Brown style conflict between Labour's leader and (shadow) chancellor? A search for ' "Alan Johnson" economics ' mainly shows today's news - neither Google nor Bing seems to allow me to exclude articles from the last 24 hours. Fortunately Bing simply isn't up to date yet, so I can find a few old articles - this speech from last October  is typical, being a recital of Labour's standard policy message. The nearest thing to an economic policy statement is his speech saying there's no reason to worry about UK population growth to 70 million; and this item suggesting that the government should nationalise a dock in his constituency to stop it falling into disrepair. But actually,...

The Conservatives apparently think a " new economic model " is needed to restore the strength of the British economy. I wonder what they mean. I assume they aren't talking about a model in the way an economist would think of it: a simplified representation of the operations of the economy. Probably they mean "we need to run the economy in a different way". This is how businesses use the word "model" when they talk about choosing a business model, or a revenue model. So maybe he just wants to use a different set of rules for taxes, employment or general economic incentives. This speech  gives some clues - it's tricky to read through the rhetoric to find any common underlying model, but what he seems to want is to set three "priorities" for government economic policy. But taking him literally reveals a more interesting way to think about the question. What if he really does want to change the descriptive model that we use to think abo...

Here we go again. Every so often, somebody reads about a policy idea based on behavioural economics and thinks they're so clever to have come up with the following counter: "Well people may  be irrational, but people who work in the   government  are just as irrational. Therefore their attempts to regulate will be just as flawed as the behaviour they're trying to fix." Now to be fair, Chris Dillow is  clever, but he falls into the same trap here. Of course politicians and civil servants make many incorrect judgments, and have the same cognitive biases as any of us. But this is irrelevant. We don't expect physicists and engineers to be immune from the law of gravity. Yet we still trust them to design planes that can help us transcend our own gravitational problems. The goal, of course, is to design a limited number of interventions to help achieve agreed-on social goals - designing them carefully, rationally and with sufficient time and th...

The relative economic strength of the last eight years has for me contained one abiding mystery: why isn't there more business investment? Paul Krugman's current lecture series emphasises the contribution of a housing boom (exacerbated by cheap secured home loans); there's a consensus that debt-financed consumer spending has been the other driver of growth. Worldwide saving has fallen and, with it, investment. And yet, as Martin Wolf points out today , returns on physical capital have been excellent - above 13% for several years. So why aren't more people investing? A shallow answer is that consumers are focused on the short term and prefer the instant gratification of consumption to the long-term returns of investment. But this isn't really a question for consumers. The mystery is why savers have accepted miserable returns on consumer, mortgage and government debt instead of earning more that twice as much money by investing. You might think that there are few vali...