Johnson doesn’t need economic expertise, just the right tone


11:31 am - October 11th 2010

by Chris Dillow    


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"You don't need to be a professor of economics to be a Treasury minister" says Alan Johnson.

I agree. Expertise has no place in politics.

I say this not because I’m some pompous prat who thinks “judgment” matters, but for three reasons.

1. Politics – at least in opposition – is not about getting the right policy, but about getting the right position. Expertise can be positively harmful here.
For example, if Osborne’s cuts do lead to a “double dip”, Labour will win votes merely by having warned that he was cutting too fast; full-blown Ballsian opposition to the cuts probably won’t get any more votes, even though it would be proved to be the more correct position. Hotelling’s law applies here.

2. What matters in a politician is that he “connects” with the public. And here again, expertise is a handicap. It marks one out as a pointy-headed intellectual. Whilst the public are happy to be ruled by people much richer than them, they don’t want to be ruled by those much smarter.

It’s generally agreed that, in this context, Johnson is better than Balls. As Leigh says:

Alan Johnson's real job, in fact, is simply to make George Osborne look young, inexperienced and flustered

3. Politics is not about economics tutorials. Political journalists can’t or won’t understand anything more than a soundbite, so giving them a lengthy lecture about economics makes as much sense as reciting poetry to a pig. As someone once said, in politics, if you have to explain you’ve lost the debate.

Instead, the job of shadow chancellor is to come up with what Tanweer Ali calls “simple frames” – easily-understood narratives and soundbites. And as Paul says, Johnson might be better at doing this than Balls precisely because he is not trapped by any knowledge.

These points do not apply merely to Johnson. As Jonathan says, Miliband has applied the no-expertise principle quite widely: Yvette Cooper has no background in foreign affairs and Balls little interest so far in home affairs.

There is, however, a cost here. Excluding expertise from politics has a conservative bias, because radical critiques of hierarchical capitalism require in-depth understanding, and cannot be reduced to mere slogans (they often are, but those slogans don't work). But then, the function of managerialist politics is precisely to uphold the existing order.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments


Let’s encourage our politicians to ignore the expertise of scientists when it comes to science policy and drugs policy. Yes.

I agree.

If you’re going to base your economic policy on windfalls from the magical money tree then why not apoint a man with no understanding of economics as your shadow chancellor?

It makes perfect sense.

“Politics is not about getting the right policy”

Just as well for the Labour party.

4. Chaise Guevara

Glad to see you value the thrill of watching your team win over ensuring that we have competent people in charge. What politics in this country needs is a bunch of chancers who have no idea what they’re talking about and so will repeat the same thing till they’re blue in the face, regardless of whether or not it makes any sense.

Wonderful.

Well at least Johnson’s advisors will have the right knowledge and skill-sets, right? Right?

I have a certain sympathy for this point of view. While in opposition you have no opportunity to make public policy. However, you make yourself an easy target for snide remarks.

In a larger context and for the benefit of, well you know who you are, it’s worth repeating “While in opposition you have no opportunity to make public policy”. Playing to the gallery and point scoring is no substitution for electoral success.

2. John

If you’re going to base your economic policy on windfalls from the magical money tree

This is current Conservative economic policy.

The IMF is one big windmill, then.

Chris Dillow: “Expertise has no place in politics”

In the absence of any qualification to that sweeping statement, I plead ambivalence as a long-since retired member of the Government Economic Service (GES). Many policy issues have required and do require a (deep) professional understanding of economics, which is why the GES was founded in 1964 by Sir Alec Cairncross:
http://en.wikipedia.org/wiki/Government_Economic_Service

Speaking in 1968 on the Fulton Report of the Civil Service, the then prime minister (Harold Wilson, an Oxford economics don pre-WW2), said: “The Fulton Report calls for much more professional management at all levels, including economic management and business management within the Civil Service and for social management within the Civil Service.”
http://hansard.millbanksystems.com/commons/1968/jun/26/civil-service-fulton-committees-report

On the role of economists in the civil service, see chapter 2 of the Fulton Report (1968):
http://www.civilservant.org.uk/fulton2.pdf

Typical instances of policy decisions where an understanding of professional economics is crucial include: trade policy, payment of WW1 reparations, the (disastrous) return to the Gold Standard in 1925 at the pre-war parity, monetary policy, fiscal stabilisation policy, exchange rate policy, regulation of public utilities, airport policy, joining the European Exchange Rate Mechanism and the Eurozone, enterprise zones, road pricing (congestion charge), competition policy etc etc.

This doesn’t mean that only technocrats should become ministers but it does mean that ministers need to be capable of seeking out and assimilating expert advice from professionals – preferably several since professionals are prone to disagree and that is true of lawyers, medics, and scientists, as well as economists.

Disraeli was talking cods when he said: There are lies, damned lies and statistics, and: Read no history, nothing but biography, for that is life without theory.

The trouble is that too many have taken his whimsy seriously. The French after WW2 anticipated the need for educating politicians in public administration methods, which is why so many leading political figures in France are graduates of École Nationale d’Administration – Sarkozy is an exception:
http://en.wikipedia.org/wiki/%C3%89cole_nationale_d'administration

Btw the present MD of the IMF, Dominique Strauss-Kahn, was at one time a professor at L’École Nationale d’Administration. There is talk in France about whether he might run as the Socialist Party candidate against Sarkozy in the next French presidential election.

It obviously depends upon what you mean by “expertise”.

A recognised authority?
An experienced practitioner?
A few years’ education in the specific area?

No politician will likely be the first and only a few will likely be the second, eg Cable.

It’s not clear what the third brings which an intelligent layman could not (with some boning up) also provide.

Dillow is right.

11. Roger Mexico

Given that this is the second OP in four with this theme, I assume there’s some panic about this and everyone is running round reassuring each other it’ll be alright really.

Now much of what Chris Dillow says is correct in general, especially about political journalists. They’re basically just gossip columnists about ugly people. And Johnson comes across well as an ordinary sensible man in the street type.

Unfortunately you need a bit more to be Shadow chancellor of the Exchequer. Explaining things in a manner people can relate to is a real advantage, but you need to know the geeky details as well. Otherwise you won’t pick up on the things that matter; if you’re just the friendly face, you’ll look like a glove puppet. Or a fool.

It’s made worse by the fact that people have become much more interested, and a bit more knowledgeable, about economics since the credit crunch. So a “don’t you worry your pretty little head” approach to the public won’t work any more. And Osborne’s tendency to make up policy as he goes, means a quick response is needed and needs to be got right.

This especially applies to policy on the structural deficit. Like it or not, the public believes there is one and believes doing something about it is the most important thing in politics. One little noticed question on the latest ComRes poll:

http://www.comres.co.uk/page190187254.aspx
(page 20/22 of pdf for breakdown)

was “Do you agree with … Labour needs to spell out more clearly where it would cut public spending to bring down the deficit”

82% agreed (and 83% of Labour voters) and only 5% disagreed. You usually only get those sort of figures for motherhood and small fluffy animals.

Now you may feel that main reason for the deficit is that Labour failed to put up taxes on the better off (individual and corporate) during the good times. But even so, you now need a decent, convincing policy explained by an authoritative figure.

Perhaps Cooper wouldn’t take the job and certainly Balls would have been a mistake. But though it might be internally politically convenient, Johnson doesn’t look to have all the skills to do the vital formation and presentation of that policy.

What rank hypocrisy. All the cries of Osborne’s inexperience when shadow chancellor seem rather hollow now don’t they.

And it is obviously all about the right position and making the other side look bad, not offering solutions and a vision to inspire a nation. Sheesh.

All the cries of Osborne’s inexperience when shadow chancellor seem rather hollow now don’t they.

Yet as the weeks go by, those grave warnings seem ever more pertinent…

14. Shatterface

I gave up on Labour some time ago but this article makes me despair for my species as well.

15. Shatterface

‘It’s made worse by the fact that people have become much more interested, and a bit more knowledgeable, about economics since the credit crunch. So a “don’t you worry your pretty little head” approach to the public won’t work any more.’

This is spot on: the public is less likely to take economic arguments on trust than perhaps at any time in history. The age of deference to economists is over: we want them to explain their *reasoning*, and we expect them to show us respect.

Because having a decision-making process led by someone who lacks the understanding to know when his subordinates are talking cobblers is exactly the way we should handle the economy. When did knowing what you’re doing become a handicap?

To suggest that a lack of expertise in the field you’re supposed to be overseeing is an advantage is like saying a runner shouldn’t have legs. If a leader doesn’t understand the nuts and bolts of the system he controls he can bury his head in the sand and pretend a situation can be fixed when it can’t, can flagrantly ignore common sense and claim ignorance afterwards.

This has to be the biggest pile of anti-intellectual crap I’ve ever read.

I don’t believe that not having subject knowledge is an advantage but I do believe it’s not the most important asset.

The point is when you are in opposition you have little power though you may have some influence.
“A step backwards on the wrong road is also a step forward”, opposition may be able to delay or water-down some policies but this will depend far more on political skill and/or parliamentary experience than knowledge in a particular discipline.

“t obviously depends upon what you mean by “expertise”.

A recognised authority?
An experienced practitioner?
A few years’ education in the specific area?

No politician will likely be the first and only a few will likely be the second, eg Cable.”

Hardly, its quite likely every MP will have at least a degree in a relevant subject (and the ones who don’t have ‘relevant degrees’ will be those who did engineering, science etc – which hardly make them stupid). Johnson is actually the exception here as he left school at 16.

Plus you have to consider the effects of working a 70-80 hour week in politics for years if not decades has on their knowledge. I think it’s quite likely that most of them will have picked up the basics of what the keynes V Monatarism is, and they’ll also have several paid assistants and party HQs staffed with phds. A minister as well is surrounded by people who have worked in the same field for decades.

The reason stupid policy happens isn’t because we have stupid politicans (although we do have a few – they tend to be the ones on the backbenches who are there to please the activists and get publicity) , its because we have a political culture that incentivises and rewards those who offer simplistic slogans and solutions to problems. Intelligent policy doesn’t win you elections, it gets you crucified in the daily mail. Eg: Evan Harris

There is a tendancy on blogs to assume that the solution to everything is to give every MP an economics textbook. Here’s a controversial statement; Gordon Brown knows more about economics than anyone who posts regularly on this blog, it’s just political pressures made him persue non-optimal policy.

19. Chaise Guevara

@11

“Given that this is the second OP in four with this theme, I assume there’s some panic about this and everyone is running round reassuring each other it’ll be alright really.”

Hah! Someone had to say it. I know this site is multi-authored, but it’s still interesting how much the tone has changed from the article a few days ago titled “OMFG PLEASE NOT JOHNSON NOOOO”. Or something like that.

It was remarked a short while back that a disproportionate number of MPs have the Oxford – specifically Oxford, not Oxbridge – PPE degree in Philosophy, Politics and Economics. Why does PPE rule Britain?
http://www.bbc.co.uk/news/magazine-11136511

A listing of politicians and celebrities with the PPE degree:
http://en.wikipedia.org/wiki/List_of_people_with_PPE_degrees_from_Oxford

By some accounts, a PPE degree has become the British equivalent of graduating from École Nationale d’Administration in France although the latter has far more an explicitly technocratic course with an emphasis on the efficent and effective management of public affairs.

The PPE degree predates the foundation of the Government Economic Service (GES) by decades. Prior to that, the cult of the gifted amateur prevailed in the civil service on economic issues. It might happen that the civil servant tasked to prepare briefs on a particular economics policy issue had an education in economics but that was regarded as incidental. He – and it was usually a “he” – was expected to pick up whatever “expertise” was needed on the subject and brief ministers accordingly.

With Hugh Dalton, Douglas Jay, Hugh Gaitskell (a “desiccated calculating machine,” according to Aneurin Bevan), Harold Wilson, Roy Jenkins, and Tony Crosland, Labour front benches in the Commons post war Have usually been strong on academic economists, much more so than Conservative front benches. The question as to whether Labour ministers or shadow ministers lacked essential expertise in economics has therefore seldom come up in the past.

You may not believe this following but it’s true. As a student, I asked Enoch Powell, who had been a Treasury minister until he resigned in 1958 along with other Treasury ministers – how he had picked up the economics he needed for his ministerial work: reading – although he didn’t seem to have read Keynes’s General Theory – and relying on Treasury advisers was the gist of his response.

The OP is probably correct but that is only because economists have spent the last fifty years speaking to themselves. Only Milton Friedman and Paul Krugman have been able to communicate simple principles in terms that the public actually understand. Although it is not unknown for Paul Krugman to unfairly misrepresent other people he is a good communicator.

The problem arises because the top level graduates stay in Academia and speak primarily to other top graduates. The second order go to work for a national Treasury, IMF or the World Bank and if they do not screw up a developing nation too badly hope to go back to Academia. The third order become market economists and earn four to five times the first order. They speak mainly to other financial market participants usually in consensus speak. They are all routinely shocked that the public, journalists and politicians believe economic fallacies. However, apart from the aforementioned none of are capable of communicating with the public in language they understand. Even Paul Krugman complained he is often reduced to almost baby speak explaining a simple concept like Ricardo’s Comparative Advantage to professors in other faculties.

As a consequence, it is easy for politicians to go on Newsnight and spout drivel with the interviewer totally oblivious to the crap. I would hope Alan Johnson does not go down the populist route saying only what he thinks the public want to hear. However, the incentives of opposition politics means he will probably do just that. Therefore, no expertise other than convincing rhetoric is required.

“Only Milton Friedman and Paul Krugman have been able to communicate simple principles in terms that the public actually understand.”

That is demonstrable nonsense.

As can be easily checked out from the biographies of Keynes by Skidelsky and Moggridge, he was a prolific journalist, among other activities, and often wrote pieces for the New Statesman. Much of his early journalism was published as “Essays in Persuasion”, to which Krugman drew attention a couple of years back as a good guide on how depressions became contagious.

In addition, Keynes wrote several popular polemics, such as: The Economic Consequences of the Peace (1919) and, The Economic Consequences of Mr Churchill (1925). He was also co-author of a pamphlet for the Liberal Party for the 1929 general election: Can Lloyd George Do It?, which made a case for spending on public works to reduce unemployment. The Treasury response at the time was to argue that any additional government spending on public works programmes to create jobs would necessarily “crowd out” equivalent private spending.

But that apart, two British publications, The Economist (a weekly) and the Financial Times (a daily) are widely regarded around the world for the quality of their economics and financial journalism.

So long as Mr Johnson can learn what he needs to know, he will be fine as a shadow chancellor (and if he gets the chance to be chancellor, he will have the experience by then).

The cult of expertise is misplaced – the important thing is to be able to make decisions that you can understand, if necessary getting in experts to explain things. There is a danger in assuming that only experts in any particular field can know things, which then means that politicians and the electorate are not ‘qualified’ to comment, which means that democracy is bunk.

Any argument that either of Messrs Osborne or Johnson is unsuitable for the treasury has to be based either on a proven inability to understand ideas (both seem bright to me, so I doubt this is a problem) or the fact you disagree with one or both’s economic ideas. Any claims of experience or expertise is just allowing an unelected class of experts to take a step towards holding all the power.

Bob, you are the master of the irrelevant and unrelated. Keynes has been dead for 64 years. That would make a thirty year old reading Keynes in the New Statesman 94 years old. It might surprise you but Keynes was not the final word on economics. I doubt his elitism and anti-Semite racism would go down well with a contemporary audience. The issue is who is explaining things now. If I was pointing out who was well known and explaining things in the 1930s, Keynes would be the man. How many of the public do you believe have even heard of Keynes or his biographer Skidelsky ? Very few. In contrast, many have heard of Stephen Hawking or Richard Dawkins. The FT and The Economist are specialist publications speaking to a limited audience who already know what they are on about. If anything you prove my point with Keynes. He was well known beyond Cambridge and the Treasury during the 1930s. The national press often featured him in cartoons so the public knew who he was and what he was saying.

25. Mike Thomas

A modicum of economic understanding is a pre-requisite for the job.

E.g. the velocity of money is not how quickly a postie can put birthday cards through the letterbox.

“The cult of expertise is misplaced – the important thing is to be able to make decisions that you can understand, if necessary getting in experts to explain things. There is a danger in assuming that only experts in any particular field can know things, which then means that politicians and the electorate are not ‘qualified’ to comment, which means that democracy is bunk.”

IMO that is unmitigated and dangerous rubbish. If taken seriously, why go to qualified physicians for medical advice when any quack would do? Why go to lawyers for legal advice?

There are many example of seriously screwed up economic policy decisions by governments – as with joining the European Exchange Rate Mechanism in October 1990, contrary to the advice of Professor Alan Walters, Mrs Thatcher’s personal economic adviser. The technical issues are complex and Nigel Lawson and John Major really didn’t understand what they were doing.

Churchill was astute about such things. As chancellor in the early 1920s, he had personal misgivings about restoring the Gold Standard in 1925 but eventually went along with the political and financial consensus. He held a dinner party to discuss the issues in 11 Downing Street for Montague Norman, governor of the Bank of England, Reginald McKenna, chancellor 1915-16 and rated for his understanding of monetary policy, and JM Keynes. Only Keynes opposed restoring the Gold Standard at the pre-war parity so Churchill went along with the majority opinion at the dinner party and the city consensus.

The consensus was wrong. In due course, Britain – very sensibly – came off the Gold Standard in September 1931. Relieved of the need to defend the exchange rate of Sterling, Bank rate was cut, Sterling depreciated and the British economy did relatively well during the rest of the 1930s compared with other industrialised countries in Europe and N America – except for Nazi Germany, where the government used a massive public works programme, initially to build motorways, stadiums and government offices to create jobs. In short, what Keynes had advocated in the Liberal Party pamphlet for the 1929 election: Can Lloyd George Do It?

In Germany, unemployment went ” . . from 6 million in October 1933 to 4.1 million a year later, 2.8 million in February 1935, 2.5 million in February 1936, and 1.2 million in February 1937.”
[CP Kindleberger: The World in Depression 1929-1939 (Allen Lane, 1973) p.240]

As PM during WW2, Churchill kept on two scientific advisers to advise on technical matters of defence and weapons systems: Lord Lindemann and the young Mr RV Jones (My Secret War). They often disagreed. It seems that Churchill liked to hear the issues argued out.

@24: “Bob, you are the master of the irrelevant and unrelated. Keynes has been dead for 64 years. That would make a thirty year old reading Keynes in the New Statesman 94 years old.”

I had to go out and so couldn’t complete what I needed to say.

Besides the internationally esteemed Economist and the FT, IMO current standards of economic journalism in Britain are fine in the serious press.

Stephanie Flanders and Robert Preston, respectively the BBC economics and business editors, do great jobs explaining the issues in popular language IMO.. There are good economic journalists in the S Times, the Guardian and the Indy who can set out the issues in language most readers can follow.

The problems of economic illiteracy come more from the tabloid press and from this factor:

“Up to 12 million working UK adults have the literacy skills expected of a primary school child, the Public Accounts Committee says. . . The report says there are up 12 million people holding down jobs with literacy skills and up to 16 million with numeracy skills at the level expected of children leaving primary school.”
http://news.bbc.co.uk/1/hi/education/4642396.stm

In the mid 1970s, half the adult population in Britain had no education qualifications at all. By the mid 1990s, that was down to a quarter.

Political journalists can’t or won’t understand anything more than a soundbite, so giving them a lengthy lecture about economics makes as much sense as reciting poetry to a pig.

Evan Davis and Paul Mason?

The Today programme and Newsnight are likley to be key debating forums.

I have grave doubts that Johnson could stand up to a sustained grilling from either of the above.

Perceived comptence on the economy is the litmus test for any party. Putting a lightweight in charge is a very dangerous strategy.

You just do not get it, Bob. BBC correspondents parroting whatever the last person they spoke to said? Priceless. Robert Peston the Treasury mouthpiece. Their effect on the public is between zero and insomnia. The likes of Milton Friedman was a regular guest on popular chat shows for decades watched by millions. One did not have to agree with his fundamentalism to appreciate he was a good communicator who could explain concepts in ways people could understand. The public do not understand the maths or the algebra. They do not understand why economists believe certain things and the models of the economy that underpin that belief because nobody ever explains it to them. Paul Krugman is the only one that reaches a wide audience. Whether one agrees with him or not, his is not the only view.

Since nearly all our problems are monetary one would expect it to be mentioned occasionally. How many people realise the huge decisions which will be made by the Fed over the next few months with global ramifications? Apart from specialist publications and blogs monetary policy is never discussed. As I said earlier economics speaks only to itself.

Radio 4 carried a profile of Yvette Cooper over the weekend. Having listened to it twice, she comes across as a mega-wonk without much experience of life beyond politics. Precocious and heavily focused. On the plus side, journalists have remarked that she has become more human in recent years. (My summary is harsh and the programme used its length to paint a broader, more sensitive picture.)

This is not intended to be a personal criticism of Yvette Cooper but of “professional politics” culture. You don’t get the impression that Ms Cooper worked in a shoe shop as a teenager and acquired non-formal knowledge: that the parents with two children might be juggling whether to buy two cheap pairs of shoes or one more expensive pair that would last longer; or whether the manager performed gymnastics with the payroll figures to keep full time workers employed.

But Ms Cooper was one of the obvious bright young types who advised senior Labour politicians in the 1990s. That is fine so along as there are other advisors who have had a foot in life. Who have exercised judgement.

Political cut and thrust is not a good classroom for practical policies. Nor even for politics.

I agree with the broad point that a less competent more convincing candidate is better in opposition, where the point is to get back into power so the broadly right Labour policies (not destroying public services) can be put into practise, but disagree with the substantive arguments for Johnson.

1) Loudly rejecting virtually all cuts (a la Balls) might well be more successful than arguing that cuts are necessary, but slower. The former makes a clear and simple point that Labour oppose cuts, easily picked up on by the public and the media. The latter risks being ignored entirely or viewed as weaselling compromise. Pitching to the centre will not necessarily pick up more votes from people to the right.

2) Ed Balls’ image is hardly that of the “pointy-headed intellectual,” (I have to keep reminding people he’s a trained economist) so much as the “bruiser.” If the straight-talking bruiser could come up with some adroit intellectual arguments that would be great. Also intellectualism is not necessarily a bad thing. Cf Vince Cable’s rise to stardom on the back of stating some obvious facts and sounding like he understood what he was saying. “Pointy headed intellectualism” might well be bad if it’s an obsession with high-flown political philosophy, but not so with economics. In any case, we need something to counter the anti-intellectual “the cupboard is bare, all the money’s gone, you can’t spend what you don’t have” household economics of the Tories.

3) Relatedly, it doesn’t hold that having more ideas will trap one in theory. It doesn’t take much for one’s background expertise to add more weight to one’s non-theoretical statements.

Richard W: You have forgotten to mention J K Galbraith, worthy of note for his tireless promotion of economics.

Excellent analysis.

Blair did much the same thing in 94, incidentally. Almost all of the Shadow Cabinet then got jobs they knew nothing about and had little interest in. I remember conversations with Mo Mowlam (Northern Ireland) and Clare Short (Development) and it was just embarassing how little they knew about their briefs. Three years later and you would have thought they were born to the roles.

Blair did much the same thing in 94, incidentally. Almost all of the Shadow Cabinet then got jobs they knew nothing about and had little interest in. I remember conversations with Mo Mowlam (Northern Ireland) and Clare Short (Development) and it was just embarassing how little they knew about their briefs.

Yes but in domestic politics these are pretty small beer. Fucking up at the Northern Ireland office or in International Development is unlikley to have major political ramifications. Getting it wrong on the economy is curtains. Right now we are facing unprecedented cuts and I am not convinced that Johnson has the gravitas to convince the electorate that he has the answers on the economy.

Plus he ain’t got three years he’s only got nine days.

36. Just Visiting

Chaise

> but it’s still interesting how much the tone has changed from the article a few days ago titled “OMFG PLEASE NOT JOHNSON NOOOO”. Or something like that.

It’s also interesting how the tone on LC has changed the last few months. There’s far less chat about principles, and discussing what the ‘right thing for society would be’.

Instead there seems a whole lot now about having winning strategies, and the game of politics with it’s own amoral set of rules – such as the value of Ed’s lying to the electorate now – in order to be a more winnable leader against the backdrop of the coalition.

Or is it just that Sunny coming out for Labour has made the debate more partisan than before?

@29: “Since nearly all our problems are monetary one would expect it to be mentioned occasionally. . . As I said earlier economics speaks only to itself.”

Really? I’m surprised that any who regularly follow media news reports on Britain’s economy could make such a claim.

How about getting folk on Incapacity Benefit into jobs – the subject of another thread here?

Never any problems arising from Britain’s low productivity compared with peer group countries?
http://www.ons.gov.uk/about-statistics/user-guidance/productivity-handbook/index.html

The published minutes of the Bank of England’s Monetary Policy Committee are, in fact, extensively reported in daily media coverage. Within the last few days:

http://www.guardian.co.uk/business/2010/oct/04/former-bank-governor-predicts-rate-rise

Stephanie Flanders, BBC economics editor: “Economists have drawn such contrasting conclusions about the future of the recovery this week, you’d be forgiven for giving up on the lot of them.”
http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/10/the_most_important_question.html

Time for more QE, by Andrew Lilico
http://www.telegraph.co.uk/finance/comment/8039586/Time-for-more-QE.html

David:
Loudly rejecting virtually all cuts (a la Balls) might well be more successful than arguing that cuts are necessary, but slower

Erm, this mis-characterises Balls’ position, and it’s not a vote winner either.

Firstly, EB isn’t opposed to all cuts. His point is that the Darling plan cuts too hard and too fast, but everyone recognises that you need some mix of cuts in a deficit reduction plan. It won’t be 100% tax rises.

And even then, why should I be opposed to all cuts? I’m happy to cut Trident, ID cards, some quangos, salaries at top of the government, and subsidies to various groups.

Secondly, the vast majority of the public recognise that some cuts are necessary in order to cut the deficit. A call to cut nothing at all loses credibility and is not a vote-winner. They just want less cuts, and more focus on growth to tackle the deficit.

That is an argument we can make. Just standing there saying ‘no cuts whatsoever’ is an electorally losing argument. You’ll have to show me evidence that proves otherwise.

“ID cards”

What’s in a name? I’m aware of opposition to ID cards and share popular concerns about the prospect of yet another failed government computer database project. But the fact is that I’m regularly asked for proof of identity in many different contexts – collecting undelived parcel post, opening accounts, applying for pensioner passes, renting storage space and so on. The irony is that I’m often told, “a passport will do fine,” when passports are ID cards by another name. No one is proposing to abolish passports, are they?

“Hardly, its quite likely every MP will have at least a degree in a relevant subject ”

What subject(s) count as being “relevant” here, exactly??

Of course Dillow is a well-known (expert?!) proponent of anti-managerialism, and thus smaller government (though I think he would want more income redistribution – a separate question) and less hierarchical decision-making in business.

“Gordon Brown knows more about economics than anyone who posts regularly on this blog,”

I doubt it. I’m sure Luis or Tim W could give him a run for his money.
Though even if true, look where it got him or more importantly us!
Certainly neither of those two believed the business/credit cycle had been abolished.

37. Bob B

‘ Really? I’m surprised that any who regularly follow media news reports on Britain’s economy could make such a claim. ‘

Yes monetary, Bob. Here is a bit of advice for you Bob, if you want to make money don’t follow news report as you are listening to an echo chamber. About the only relevant thing you have mentioned is ‘ Time for more QE, by Andrew Lilico.’ Do you know why he makes that claim? Money is too tight just as it was in 2008 when the BoE screwed up to put us in this mess in the first place. Oh, and productivity is falling because unemployment has not risen as fast as expected. Have a nice day.

@ Sunny

I agree that that’s an extreme abbreviation of Balls’ views (but this is a blog-comment), but I was just referring to the OP’s dismissal of “full-blown Ballsian opposition to the cuts.” Feel free to just insert [whatever Chris Dillow takes Balls’ position on the cuts to be] in place of my paraphrase.

The debate in question is simply between Balls’ “full-blown opposition to the cuts” and “merely [warning]… that he was cutting too fast.” The crucial point is that taking the more moderate, latter position doesn’t guarantee more support, even though it’s closer (ex hypothesi) to more people’s views. Rather, a clearly defined opposition to the cuts as “heartless and wrong-headed” may well gain more acceptance than arguing that the cuts are “merely… too fast.” As you yourself frequently argue, the force of the narrative is often more significant than the details of positions: clearly expressed opposition to the cuts may well be more attractive and concede less ground to the Tories than reservations about the speed of cuts when most people aren’t aware of the precise plans anyway.

I’m afraid I have to disagree here. Inevitably there will come times when, if Labour get into power & Mr Johnson becomes Chancellor, he will have to choose between differing viewpoints of experts in economics. If he has no expertise in the subject area then it will come down to who is the most persuasive rather than who has the best grasp of the facts & the economic forces at work. If this is the case, you might get better results from random selection between experts. Gather them in a room, spin a bottle & see who the bottle stops on. The buck is supposed to stop with the chancellor, but if he’s in power it risks becoming a case of “Well, don’t look at me – I said I knew nothing about it!” – this is why you need someone with a good grounding in economics at the top. As Sun Tsu said, leave war to the generals, and politics to the politicians. I’d refine that further: leave economics to those that know what they’re doing. It’s too important to trust to amateurs.

@Richard W: “Money is too tight just as it was in 2008 when the BoE screwed up to put us in this mess in the first place. Oh, and productivity is falling because unemployment has not risen as fast as expected. Have a nice day.”

That’s all complete rubbish.

– How come with supposedly tight money the FT ran a headline on 28 June 2006 – a year before the financial crisis broke: “Fears over surge in high risk mortgages”
http://www.ft.com/cms/s/0/e8f9d3b2-060e-11db-9dde-0000779e2340.html

– How come with tight money that we developed a consumer debt mountain of £1.4 trillion by autumn 2008?

– If the financial crisis 2007/8 was all due to the Bank of England, how come American investment banks, like Goldman Sachs, JP Morgan and others, were clocking up horrendous losses running into USD billions each? How come the recessions in Germany and France?

– Britain’s relatively low productivity compared with peer group countries has been a perennial policy issue for decades. Try the ESRC Seminar: The UK’s Productivity Gap:
http://www.esrcsocietytoday.ac.uk/ESRCInfoCentre/Images/The%20UK's%20productivity%20gap_tcm6-4842.pdf

Paul Krugman: Productivity isn’t everything, but in the long run it is almost everything.

“Certainly neither of those two believed the business/credit cycle had been abolished.”

If they were in the business of winning elections they’d have a massive incentive to claim it was possible, and then massive pressures to adopt policies that would indicate they believed they had abolished it.

More on Britain’s perennial productivity gap:

Stephen Broadberry and Mary O’Mahoney: Britain’s Productivity Gap with the United States and Europe: A historical perspective (2004)
http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/broadberry/wp/niesr9.pdf

” if Labour get into power & Mr Johnson becomes Chancellor, he will have to choose between differing viewpoints of experts in economics. If he has no expertise in the subject area then it will come down to who is the most persuasive rather than who has the best grasp of the facts & the economic forces at work.”

Most Conservative chancellors had no academic education in economics.

Anthony Barber, Nigel Lawson and Norman Lamont – previous chancellors in various Conservative governments – had PPE degrees from Oxford, like Chris Dillow here – but Winston Churchill, Neville Chamberlain, RAB Butler, Harold Macmillan, Thorneycroft, Selwyn Lloyd, Heathcoat-Amory, Geoffrey Howe, John Major and Kenneth Clarke, all Conservative chancellors, had no prior education in economics and relied on briefing from Treasury advisers and their reading of the press. Churchill, chancellor in the early 1920s, complained of his experience that he had to rely on what he read in the press for briefing about money policy decisions by the then privately owned and completely independent Bank of England, including changes in bank rate.

Harold Macmillan, to his everlasting credit, wrote a book: The Middle Way, published in 1938, which was evidently a vain attempt to bring his political colleagues up to speed on the policy prescriptions of Keynesian economics for depressed or stagnant economies.

@ 44. Bob B

I say money is too tight TODAY and you quote to me an FT headline from 2006. Do you realise that makes you look a bit dim.? I don’t have the time and can’t be bothered to explain all this to you but loose credit is not loose money. Monetary policy and as a consequence money was too tight in 2008, with the ECB, BoE and Fed. In other words they screwed up and turned a mild banking crisis into almost a global depression. Now money is too tight again and the key thing is what are they going to do about it. That is why Andrew Lilico is rightly calling for more QE.

I started on this thread by mentioning that there are very few contemporary economist who reach a wide audience. You bombard with unrelated links including saying that the BoE MPC publish minutes of their meetings. Well zippee do dah. You would be lucky to find 1 in 200 of the general public who even know what the BoE do. Almost none of them read the minutes.

You mention UK productivity. I tell you why it is falling. You bombard with links to give me a history lesson on British productivity. I don’t need the history lesson.

@Richard W: “I say money is too tight TODAY and you quote to me an FT headline from 2006”

I couldn’t really believe that you meant anything quite as silly as “TODAY– and btw you weren’t specific about the time period you were referring to in your post –when BoE current interest rates for its lending to banks is currently set at 0.5%.

With interest rates already as low as that the only scope for softer monetary policy at present is more Quantitative Easing.

The BoE – and the US Fed – appear willing to consider that option but for the BoE to just buy more government bonds doesn’t guarantee that the extra funds in the money market will induce the commercial and investment banks to increase their lending to business.

The extra money in the system from QE may simply get added to bank reserves or otherwise hoarded unitl the economy picks up for other reasons. That possibility has already prompted some economists to press for tighter monetary policy now to curb latent monetary capacity in the system to fund future inflation, which is probably why the Monetary Policy Committee is being cautious about authorising another round of QE. And note that the latest reported inflation rate of 3.1% is well above the BoE target of 2%.

49. Bob B

@Richard W: “I say money is too tight TODAY and you quote to me an FT headline from 2006?

‘ I couldn’t really believe that you meant anything quite as silly as “TODAY– and btw you weren’t specific about the time period you were referring to in your post –when BoE current interest rates for its lending to banks is currently set at 0.5%. ‘

Oh dear, Bob. You can’t assume money is easy from the nominal interest rate as that would tell you it was loose when it was tight and tight when it was loose. You are suffering from the ‘ interest rate fallacy ‘. Here is an old Friedman quote pointing out the fallacy.

‘ Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die. ‘
http://www.hoover.org/publications/hoover-digest/article/6549

It does not matter what they buy with the new money. They can buy bonds, shares, Liverpool football club anything they want. The purpose of QE is not to induce new lending that would be a side benefit. The point of monetary stimulus is to pump enough money into the economy to allow NGDP to grow. Raise the price level and reduce the real interest rate.

@Richard W

Never mind Friedman, who died some years ago.

Banks are manifestly reluctant to lend at present claiming either that demand for loans is low or that lending risk is often too high. The systemic consequence of low lending, whatever the reason, is that this depresses the economy somewhat (NGDP) and that increases the collective lending risk of the banks. We have the problem of self-fulfilling prophecy.

It’s not at all evident that the BoE is responsible for any reluctance on the part of the banks to lend to business. The banks say that they are being pressed to increase their reserves for macroprudential reasons, which they are, and that is what the banks are doing.

This is why QE has come back into the picture as a policy option in Britain and America but it’s far from certain more QE would induce the banks to boost lending (or spending) here and now. The worry is that the banks will wait until the economy has picked up for other reasons and the extra liquidity in the system from QE then becomes a hazard because it could fuel a surge in inflation.

Some economists are already saying that monetary policy needs tightening now because of the future inflation risk – and we can note that that the latest reported UK inflation rate of 3.1% is well above the BoE’s target of 2%. On recent evidence so far, it’s something of an act of faith to claim that the inflation rate will shortly be coming down to meet the target.

In short, there is no solid, unequivocal case for claiming that the economy is being depressed because the monetary policy of the BoE is too stringent and that further relaxing monetary policy has no significant downside risks. I’m not surprised that the BoE’s Monetary Policy Committee is being cautious about more QE.

But what has all this to do with whether Alan Johnson needs tutorials in economics? His immediate political concern is whether the public spending cuts in the Comprehensive Spending Review, due out on 20 October, will: (a) push the economy back into recession or a significantly lower real GDP growth path? (b) inflict unacceptable social duress?

Trying to blame all this on the BoE won’t wash,

Btw this current news report in the FT about global currency fights really stresses understanding of international macroeoconomic issues: G20 currency fist fight rolls into town
http://www.ft.com/cms/s/0/ca286028-d550-11df-8e86-00144feabdc0.html?ftcamp=rss

I wonder how many politicians are up to speed on whether China is a “currency manipulator” and, if so, what should be done about it?

The headline sums up the state of our politics. Making a good impression is the best we can hope for? God, I’m depressed!

Bob, it is pointless to go any further with this because it is quite clear that you do not understand monetary policy. Just to point out some of your elementary errors.

Credit is not money.

Bank lending is a side effect of QE not its main purpose.

Commercial banks do not lend based on reserves. Their lending decisions are based on their capital. QE boosts asset prices and as a consequence their capital.

How do we know money was too tight 2008?

The money supply plunged in the UK, Europe and US.

NGDP plunged everywhere.

Stock markets plunged.

Commodity prices plunged.

Government bond prices soared.

The dollar soared.

Why did all those things happen? The demand to hold money especially in the US was greater than the supply of money.

How do we know money is too tight now in the US and ECB area and slightly less so in the UK? NGDP is growing at a suboptimal rate.

The reason why there are looming currency wars is because the dollar is too strong. Hmm, I wonder if that has something to do with monetary policy. As Martin Wolf pointed out in his most recent column there will only be one winner in that battle. One can’t fight the Fed the most powerful institution in the world who have infinite dollars. The Fed will pick them off one by one. When the Fed eases the BoE will be forced to ease otherwise the effective sterling exchange rate will appreciate too much.

@Richard W

IMO you really are rather clueless about what’s going on so I agree that there is no point in continuing our discussion on this or other economics issues but let me explain why for the benefit of (any) other readers:

You have said several times, for example, that was no house-price bubble whereas I note that house prises are, in fact, falling and, in the news recently:

“The International Monetary Fund raised the prospect of a double dip in Britain’s property market today when it said house prices were overvalued and vulnerable to a fall.”
http://www.guardian.co.uk/business/2010/oct/06/uk-housing-market-set-for-fall-imf

NGDP has been growing slowly because economies have been recessed so real GDP has been down or growing slowly until the last two quarters.

Increasing bank credit increases bank deposits, which are part of the M3 money supply, through the usual credit multiplier process but, in the news:

“Lending to business contracted yet again in August, although at a slightly slower pace than in recent months, while the number of loans approved for home purchases fell to the lowest level since April 2009, industry figures show.

“The British Bankers’ Association said lending to private non-financial companies – the businesses which make up the bulk of the UK economy – fell by £1bn in August, less than the £2.4bn contraction seen in July and less then the monthly average drop of £1.3bn in the six months before August.”
http://www.ft.com/cms/s/0/ae7661a0-c6f9-11df-a806-00144feab49a.html

Contraction in the money supply or little expansion is not surprising with bank lending contracting. The BoE is also complaining that the commercial banks have not been passing on the cuts in the BoE’s base rate:

“High Street banks have not been passing on base rate cuts in full to household borrowers, a report has found.

“The interest rate charged on some loans has risen, the article in the Bank of England’s quarterly bulletin found.

“Much of the divergence was due to the borrowing cost of banks themselves – which has not fallen as steeply as base rates – and higher charges because of higher default risk.

“However, a large part could be down to banks pricing in fatter profit margins.”
http://www.bbc.co.uk/news/business-11369237

In America, the US FED is reportedly considering more QE, as I mentioned above:

“The minutes of the Fed’s September policy meeting, released on Tuesday, appeared to confirm that the US central bank would soon embark on a fresh round of quantitative easing – widely known as ‘QE2′.

“’QE2 in November is all but certain and the only debate stands over the details of implementation,’ said Jeffrey Rosenberg, credit strategist at BofA-Merrill Lynch.

“But he was sceptical about its effectiveness and its impact on risky assets. . . ”
http://www.ft.com/cms/s/0/ae7661a0-c6f9-11df-a806-00144feab49a.html

The BoE MPC is also to review the possibility of more QE but, as I’ve suggested above, there are solid reasons for being cautious. The latest inflation rate is still way above the BoE’s target of 2% and the additional central bank money put into the system through QE may be added to the reserves of the banks, otherwise hoarded or may boost capital inflows into emerging market economies, which is what several of their governments are complaining about.

Misguidedly stringent monetary policy can certainly depress an economy but benign monetary policy is not a particularly effective policy tool for addressing recessions. As Keynes put it decades ago, using monetary policy to boost economies out of depressions is like pushing on a piece of string.

54. Bob B

@Richard W

‘ IMO you really are rather clueless about what’s going on so I agree that there is no point in continuing our discussion on this or other economics issues but let me explain why for the benefit of (any) other readers: ‘

I love this bit from the man who does not know the difference between money and credit. The man who thinks low base rates mean easy money. The man who does not know the difference between bank capital and bank reserves. Bob you read an assortment of news reports but are unable to connect them and understand what they all mean. Going by your naive comments on this thread you certainly know nothing about monetary economics, banking or financial markets. Your opinion is the opinion of the last person you read but you invariably misunderstand. I refer you to the Prof Sumner blog an academic who does understand tight money. He has been right since 2008 and his ideas are getting increasing recognition.
http://www.themoneyillusion.com/

‘ You have said several times, for example, that was no house-price bubble whereas I note that house prises are, in fact, falling and, in the news recently: ‘

Nice way of irrelevant diversion, Bob. I said there was no general national ‘ bubble ‘. That does not mean some prices will not fall. Some will fall and some will continue to rise because of local supply factors. Here is a little insight for you Bob. House prices do not rise and fall it is land prices. Good luck in increasing its supply, but I think you will find its supply has been fixed since the world was created. Prices will certainly fall with tight money. You are looking at a national index and applying it to all houses. That is what is known as a ‘ fallacy of composition ‘.

‘ NGDP has been growing slowly because economies have been recessed so real GDP has been down or growing slowly until the last two quarters.’

No comment. I will leave it to you to see if you can work out how dumb this sentence reads.

‘ Increasing bank credit increases bank deposits, which are part of the M3 money supply, through the usual credit multiplier process ‘

Err, there is no M3 in the UK.

Panoply of quotes about banks cutting lending.

Hmm, I wonder if that has something to do with tight money.

I love the way you provide quotes about the deliberation of the Fed as if you think you are telling me something I did not know. Moreover, it is not if they ease but by how much. Expectations means financial markets are forward looking and the fact of Fed QE2 is already priced in. You have noticed the dollar depreciating, commodity prices rising and stock markets soaring in recent weeks?

‘ Misguidedly stringent monetary policy can certainly depress an economy…’

Apart from the oil shocks nearly all recessions are caused by tight money. Why do you think the UK economy started to grow fast in the 1930s when Britain came off the gold standard and sterling depreciated by a quarter.

‘ …but benign monetary policy is not a particularly effective policy tool for addressing recessions. ‘

LOL, well clearly if policy was benign it would not be very effective. We want aggressive monetary policy not benign.

‘ As Keynes put it decades ago, using monetary policy to boost economies out of depressions is like pushing on a piece of string. ‘

Of course absolutely nothing has been learnt since Keynes writing in the 1930s. If monetary policy was ‘ pushing on a piece of string ‘ it would be totally ineffective. To quote fears about monetary easing being inflationary and then quoting ‘ pushing on a piece of string ‘ is known as contradicting yourself. If it was inflationary it would not be pushing on a piece of string, would it?

Why do you think the likes of Paul Krugman who is a Keynesian has been for months calling on the Fed to do more? He clearly does not believe it is pushing on a piece of string. His view is it lacks effectiveness because central bankers are inherently too conservative to do enough.


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  1. Liberal Conspiracy

    Johnson doesn't need economic expertise, just the right tone http://bit.ly/9vxYRC

  2. Thomas Berlin

    Johnson doesn't need economic expertise, just the right tone … http://tinyurl.com/22v7tw2 #Economics

  3. blogs of the world

    Politics is not about economics tutorials. Political journalists can't or won't understand… http://reduce.li/ubpd3u #economic

  4. Gareth Jones

    http://tinyurl.com/2uoxgxy More left wing idiocy- economics ministers "shouldn't be too smart" and "dont need expertise" – great plan





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