Kilkenomics – laughs and books

I’m off later this morning to Kilkenomics, the brilliant festival of comedy and economics in Kilkenny, and taking a look at the programme reveals that the authors of many fine books will be there. Radical econo-politicians Yanis Varoufakis (The Global Minotaur) and Corbyn’s guru Richard Murphy (The Courageous State) will be there. The mutli-talented Gillian Tett (The Silo Effect) and her FT superstar colleague Martin Wolf (The Shifts and the Shocks). There’s also the radical economist George Cooper (Money, Blood and Revolution), Joris Luydendijk (Swimming With the Sharks), Professor June Carbone (Marriage Markets), Larry Elliott (The Gods that Failed), Nassim Taleb (Antifragile and The Black Swan), Philippe Legrain (European Spring), Stephen Kinsella (Ireland in 2050) and Steve Keen (Debunking Economics)


I can’t miss the chance to plug the new paperback edition of GDP: A Brief But Affectionate History. London-based folks, I’m doing a talk on GDP and matters digital on Monday 16th November at the LSE.

Just before that comes the Bristol Festival of Economics – next weekend, record sales but some tickets left.


Economic progress

It’s reading week here so I’ve had the luxury of an afternoon in my office, thinking quietly about my favourite subject, economic statistics and their meaning. I picked up Colin Clark’s The Conditions of Economic Progress from the shelf: “The securing of an abundant supply of these goods and services, though among the most important objects of economic science, is by no means the only object. We properly include among the objects of economic science the attaining of a just distribution of wealth between individuals and groups, and security of their livelihoods, the mitigation of economic fluctuations, and the increase in leisure, though recognising that these objects are sometimes inconsistent with each other.” To improve the trade-offs, he continues, we need “disciplined study of the facts.”

Hear, hear. The question of the aims of economic policy (and economic science) came up at the conference I attended this morning, organised by my politics and development colleagues in honour of the late, great Sammy Finer. For policy debate has become narrowly focused on GDP growth, and it isn’t obvious how anybody can break out of the cycle: media criticise politicians on economic growth record – politicians obsess about GDP – statistical effort is dominated by GDP figures – published GDP figures grab media attention.

I guess my hope is that modernising economic statistics will inject some humility about taking the GDP statistics as accurate gospel, and ultimately lead to some conceptual work on measuring economic welfare better than current statistics allow us to do. Hence some of my recent posts – this for the latest NIESR Review and this for the FT’s The Exchange blog.

Back to Colin Clark.

The devil take the debt

Adair Turner’s Between Debt and the Devil: Money, Credit and Fixing Global Finance – out this month – joins a select group of books that provide as clear an explanation of the financial crisis as one could hope for. It complements John Kay’s Other People’s Money, with its emphasis on globalisation, financialisation and the switch from relationship to transactional finance. Between Debt and the Devil emphasises above all the inherent instability of banks’ ability to create credit, when not restrained by policy, especially given the scarce supply of that all-important asset, real estate. The growth of the shadow banking sector amplified this pre-existing source of volatility.

The book starts by pointing out that it was always foolish to think financial markets would satisfy the criteria for efficient (and stable) outcomes. The pre-crisis orthodoxy of liberalisation ignored the pervasive information asymmetries and non-rational choices in finance. Minsky features prominently here. As Turner points out, it isn’t as if there was any shortage of evidence from history that financial crises occur reasonably frequently. He adds the distinctive feature of the recent crisis, the increased inequality of incomes driving demand for easy credit, which banks were only too happy to meet. (Echoes of of Raghuram Rajan’s Fault Lines.)

The third part of the book covers the global dimensions of the crisis, in particular the China-US flows, and the role of the Euro. The financial flows not intended for direct investment were both immense and destabilizing, he writes. Among the high income countries, gross cross-border flows increased from less than 10 times GDP in the 1970s to 37 times GDP in the 2000s, with even larger proportionate increases for middle income countries. There is no evidence at all, he argues, that financial flows on this scale play any socially useful role at all.

And in this context of unsustainable credit growth at home and destabilizing flows across borders, only a minority of banks proved able to manage their balance sheet risks. To make matters worse, those that were good at risk management looked after themselves by offloading their bad risks onto other financial institutions, less well able to manage them. So the outcome for the system as a whole was even worse.

Given the difficulty of tackling the three drivers of the crisis – a limited supply of land and real estate, income inequality and global imbalances – what does Turner, a former head of the FSA, recommend? His answers are interventionist, suggesting a total rejection of the idea that finance can be left to ‘the market’. “To achieve a less credit-intensive and more stable economy, we must … deliberately manage and constrain lending against real estate assets,” he writes. He also advocates central bank monitoring of credit growth, constraining it when necessary; taxation of land values; taxation of debt to bring its treatment in line with taxation of equity; and raising bank equity ratios and minimum liquidity requirements (a step advocated by every, but every, economist who has given a moment’s thought to the crisis – shocking that the banks have lobbied their way out of this minimal step towards systemic stability).

Indeed, the book’s final chapter has some sympathy for even stronger measures: outlawing private money and credit creation; taxing credit creation funded by debt; and encouraging equity and hybrid instruments in place of debt.

However, the book concludes with a caution: “We face a choice of imperfections, and some of the imperfections are unfixable.” Financial markets are imperfect; so are policy-makers. Simple rules will never deliver stability, Turner argues. Far tougher constraints on the financial sector are needed. But policymakers will always have to make judgments as conditions change, and will get it wrong sometimes. Still, he suggests, not as wrong as in the mid-2000s.

Turner is at the tougher end of the spectrum in terms of his recommendations for constraints on the financial sector. But his calls for reforms join an honourable roll call of economists – as well as Kay and Rajan, Admati and Hellwig, Mian and Sufi, for example. As Between Debt and the Devil points out, millions of people are still suffering from the effects of the financial crisis. Yet the policy response has been minimal, and there is nothing to stop the whole thing from happening all over again. At least if it does, nobody will be able to blame the economists this time for not having sounded the warning.

Winner of the Enlightened Economist Prize 2015

It has been a tough year to decide which of the titles on the longlist would win. The rules are that I make up the criteria and decide for myself – it’s a combination of readability,  telling me things I didn’t already know, and likely shelf longevity. And I have to have read the book in the past 12 months; publication date is not relevant.

The shortlist included Cybernetic Revolutionaries by Eden Medina, Why Information Grows by Cesar Hidalgo and Other People’s Money by John Kay.

But the winner is: Mastering Metrics by Joshua Angrist and Jorn-Steffen Pischke. It might seem surprising that I chose an econometrics text, but seriously if you have any interest at all in understanding how to treat evidence carefully and reason about causation, this is a very accessible explanation. It is also straightforward to read and understand – the technical bits are in an appendix to each chapter and easily skipped. I certainly think every economist and student of economics ought to read this book.

American growth

Back from a trip to New York to find this proof copy awaiting me – excellent!

Forthcoming in January from Robert Gordon

Forthcoming in January from Robert Gordon

On the flight I read The Valley by Richard Benson, a wonderfully written and evocative slice of Northern working class live over the past century. It’s an account of his family, set in the south Yorkshire coalfields. It does not romanticise that context at all – people who are from a working class family never make that mistake – but the book is all the more powerful for it. Highly recommended and absorbing enough to make the 6 hour flight pass quickly.

Tomorrow – drum roll – I’m going to announce the winner of this year’s Enlightened Economist Prize.