Should economic policy be joined-up and strategic – or not?

Yesterday was the formal launch of the new, independent Industrial Strategy Commission – of which I’m a member. Its chair Kate Barker explained in an article in the FT today why an industrial strategy is important: “Economic theory has always stressed the role government must play in correcting “market failures”. These include the absence of markets for new goods, social benefits in excess of private benefits where there are externalities, the public good of basic research, and uncertainties that will limit private investment due to information asymmetries in financial markets. Clear economic and social challenges lie ahead for the UK that are not going to be solved unless this government and its successors set a strategic direction and stick to it.”

Next to hers was an article by Janan Ganesh, dismissing (very stylishly) the whole thing as a bad idea: “The dread is that clamour for a New Economy — a more scientific, less London-centric Eden to justify the two-year slog of EU exit — will cause these interventions to grow from the fiddly to the invasive without gaining a jot in usefulness.” 

There are many reasons she’s right and he’s wrong, and some of them were set out at the launch by speakers including Carolyn Fairbairn, director general of the CBI, and Juergen Maier, UK CEO of Siemens. They include the obvious fact that governments do all kinds of things that affect the economy – education, training, standards, infrastructure, research funding – and they might as well be joined-up and strategic as not. There are lessons to learn from past mistakes, and there will be new mistakes. There will also be massive lobbying and – as Ganesh says – it’s important to make sure post-Brexit Britain has a tough competition policy to enable new entry into markets. But it’s lazy thinking to conclude “markets” should be left to get on with it. After all, that’s the approach since 1980 that has left us with productivity a quarter lower than France or the Netherlands.

Many of the more positive reasons are set out in a book I’ve been reading, Efficiency, Finance, and Varieties of Industrial Policy edited by Akbar Norman and Joseph Stiglitz. The opening chapter by Mario Cimoli and Giovanni Dosi makes very effectively the case that ‘industrial’ policy is more important in a knowledge economy than in an ‘industrial’ economy: the non-rival character of knowledge increases both the potential benefits of complementarities and network effects, and the extent of co-ordination problems. One of the interesting features of the book is that it covers policy in developing as well as developed economies, so introducing a wide range of discussion of institutions – one of the absolutely key issues in making a strategy to address co-ordination problems a success.

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Cities are the future!

It’s been one of my obsessions for some years that the UK economy is damagingly, dangerously, London-centric. Well, the polity as well as the economy; I argue here in a new VoxEU e-book with my colleague Prof Rob Ford that the ‘anti-Brussels’ Brexit vote can be considered an anti-Whitehall and anti-Westminster vote. Anyway, for years I’ve been working with people in Greater Manchester to chip in my small contribution to the city devolution agenda. This has started to bear fruit in the city devolution agenda, given real momentum by George Osborne in his time as Chancellor, and continuing with the forthcoming election of a Greater Manchester mayor.

One of the people at the heart of Manchester’s long campaign for the devolution of economic power, and political accountability, is Mike Emmerich. Now running his own company (Metrodynamics), Mike spent 20 years in public service, latterly in Manchester, where he played a pivotal role in bringing about the devolution revolution. He has written a terrific book about this important moment in the life of the country’s cities – and the nation: Britain’s Cities, Britain’s Future. The book is the latest in my ‘Perspectives‘ series, so clearly I loved it enough to publish it, with my partners at LPP. Setting that aside, though, the next few years are going to be a challenging time for the UK as the government sets about getting the worst possible Brexit deal (or so it often seems).

Even without this impending upheaval – the UK’s economic record has been pretty dismal, our level of productivity stubbornly much, much lower than in the other big OECD economies, the regional disparities among the widest in Europe and a substantial ‘left behind’ population in terms of both income and geography. Whatever we’ve been doing in terms of economic policy hasn’t been a terrific success. Mike’s book makes a persuasive case for taking advantage of recent signs of urban renewal in the big cities outside London and ensuring that the momentum continues. He blogged about it here if you want a foretaste of the book.51cT3hSZocL._SX326_BO1,204,203,200_

 

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Statistics vs truthiness

I thoroughly enjoyed reading Howard Wainer’s Truth or Truthiness: Distinguishing Fact From Fiction By Learning to Think Like a Data Scientist. I even laughed out loud occasionally, as there’s a lot of wit on display here, and one gets a strong sense of Wainer’s personality. This is not usual in a book about statistics (although having said that, Angrist and Pischke also do quite well on the clarity and fun front, especially for econometricians.)

Truth or Truthiness a collection of essays in effect, published as a response to this brave new world of truthiness (ie. lies that people believe because they want to) in politics and public debate. Wainer writes very clearly about statistics in general, and his main theme here, causal inference. This is of course dear to the heart of economists, and gratifyingly Wainer recognises that the profession is more scrupulous than most disciplines about causation. The book starts by underlining the importance of having a clear counterfactual in mind and thinking – thinking! – about how it might be possible to estimate the size of any causal effect. As Wainer puts it, “The real world is hopelessly multivariate,” so untangling the causality is never going to happen without careful thought.

I also discovered that one aspect of something that’s bugged me since my thesis days – when I started disaggregating macro data – namely the pitfalls of aggregation, has a name elsewhere in the scholarly forest: “The ecological fallacy, in which apparent structure exists in grouped (eg average) data that disappaears or even reverses on the individual level.” It seems it’s a commonplace in statistics – here’s one clear explanation I found. Actually, I think the aggregation issues are more extensive in economics; for example I once heard Dave Giles do a brilliant lecture on how time aggregation can lead to spurious autocorrelation results.

Having said how much I enjoyed reading Truth or Truthiness, I’m not sure who it’s aimed at who isn’t already really interested in statistics. For newcomers to Wainer, I’d recommend his wonderful earlier books, Picturing the Uncertain World, and Graphical Discovery. They’re up there with Edward Tufte’s books on intelligent visualisation (rather than the decorative visualisation that’s become unfortunately common).

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