Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 2 January 2014

On city economists and the FT survey

Tony Yates believes the claim that the 2013 UK recovery vindicates austerity is “twaddle”. It is a politically motivated claim that makes no sense in terms of basic macroeconomics. Yet today we have the results of the FT’s survey of economists, which among other things asked “Has George Osborne’s “plan A” been vindicated by the recovery?”. Chris Giles and Claire Jones report that “A thin majority of 42 to 38 said the chancellor was “vindicated””. (All the FT’s questions and my replies are below.) Confused?

The first point to make is that of the economists surveyed, many gave equivocal replies. For example many pointed out, quite rightly, that Plan A had been put on hold in 2012. So there is a lot of interpretation involved to get that 42/38 split. Second, only little more than a dozen of the economists surveyed were academics: there were far more city economists, plus others from organisations ranging from the Institute of Economic Affairs to the TUC.

So what if we just looked at the replies from academics. Here I counted just two clear Yes responses, from Patrick Minford and Mike Wickens. There were ten clear Nos, and only a few equivocating.

For the much larger number of city economists surveyed, I actually thought the split was more even: as many No as Yes replies, and a large number of neither. Yet that still means that at least a dozen city economists gave a clear Yes.

So this sample clearly suggests a divide in the views of city versus academic economists. Where does this divide come from? Here are some possible answers, with some brief remarks. Sensitive city economists should look away now.

(1) Academics live in ivory towers, whereas city economists work with real data in real time.

(2) City economists are obsessed with short term forecasting, and so find it difficult to take a more considered, analytical view. They may also be more subject to outcome bias.

Remark: I’m biased, but here is a quote from one response: “Certainly, the hysteria among unreconstructed Keynesians about the consequences of “plan A” have been shown to be ridiculous.” And here is the data:

(3) A few city economists may be hired more for their ability to talk rather than for their knowledge of macroeconomics.

Remark: Please note the ‘A few’ in this sentence. Here is another quote: “The return of growth in 2013 … [is] an invalidation of the new [sic] Keynesian assertion that growth could not return during fiscal consolidation.” which would fail in any exam anywhere. A kinder way of making the same point would be that some city economists learnt their trade when RBC models were taken more seriously.

(4) City economists are influenced by the ideology that pervades the city. That ideology says that the financial sector is invariably a force for good, and government generally a force for bad. Advocating austerity fits with that ideology, and also has the advantage of distracting attention away from what caused the recession in the first place, and the massive bail out that the city received.

(5) One idea behind austerity, which is that the markets are poised to punish excessive debt, suits those who ‘are close to the market’ and can therefore interpret its moods.

Here are the FT questions and my replies.

1. Economy To what extent will the UK maintain its recent pace of economic growth in 2014? Will households start to feel better off?

Do not have a clue, and if they are honest neither does anyone else. Consumption, and the associated demand for credit, is the key, and we have very little evidence on this. Whether households 'feel' better off will depend on whether they are better off, which mainly depends on Q5.

2. Sustainability Is the recovery set fair, or will this upswing end in tears? Why?

If by tears you mean hitting supply constraints and inflation rising as a result, I would be surprised if this happens in 2014. My instinct is that there is scope for a substantial recovery.

3. Monetary Policy Will the Bank of England change its forward guidance in the coming year? Should it?

The MPC will change its forward guidance if there is a useful message it wants to get across. If at 7% unemployment there are still no signs of overheating in the labour market, they could well lower this threshold to 6.5% or less.

4. Fiscal policy Has George Osborne’s “plan A” been vindicated by the recovery in 2013 and should the planned pace of deficit reduction continue unaltered?

The economy was always going to recover at some point, so how can a recovery that occurred 4 years after the recession vindicate Plan A? And then there is the fact that the data appears to show Plan A was put on hold in 2012. This is basic economics and data guys - why are you even asking the question? Perhaps you have made the mistake of reading your own newspaper's leaders! 

The second part of the question should therefore be: should policy revert to Plan A now that the recovery has begun? The answer is no, because another dose of austerity will slow the recovery for sure (ask the OBR, the IMF, and pretty well any academic macroeconomist.) As long as interest rates are at the zero lower bound, and there is no problem selling debt, austerity is a major mistake. In 2010 they had Greece as an excuse - what is the excuse now?

5. Labour market and productivity By the end of next year, what are we most likely to be saying about the productivity puzzle?

I hope we will have some more clues about the puzzle, which is really THE issue at the moment. If the suspicions of many in the Bank and elsewhere are correct that this has a lot to do with bank lending to SMEs, we should be asking how we avoid SMEs being so dependent on a few large UK banks in the future.

6. Housing. To what extent does the housing market need to be restrained? If so, what policies might work?

Yes. There are plenty of instruments (but interest rates are not one of them), but a very simple thing both the Bank and the government could do is say that - as the government intends to substantially increase the supply of housing and the MPC will raise interest rates at some point - a large decline in house prices is quite likely over the next decade.

7. Scotland How would a yes vote for independence affect the Scottish economy and the rest of the UK in 2014?

On fiscal matters the negotiating position of an independent Scotland is weak, and as a result arrangements if they keep Sterling will be tough. I would not be surprised if we ended up with a new Scottish currency if Scotland votes for independence. I suspect the SNP know this, but want to avoid admitting it before the vote.


  1. On Q5 I would emphasise the lower cost of labour as key to understanding the puzzle. For various reasons wages have been depressed while the cost of capital has remained high. Firms switch from capital to labour which lowers the productivity of each worker. Might be worth looking at capital investment as a solution for much of the productivity stagnation

  2. Herd instinct.

    Academics and those in the City are just in different herds.

  3. A question about your reply to Q7 (on Scottish Independence). The SNP have intimated that they'll "refuse" to take on their share of UK Gvt debt if the Rest of the UK doesn't allow them into a "sterling-zone" type arrangement (with lax fiscal rules and a Scottish seat on the MPC). Doesn't this give them actually quite a lot of bargaining power?

    1. No, because the UK government could simply confiscate a proportion of Scottish assets (e.g. North Sea Oil revenue) equal to the value of that debt.

    2. I suspect that you're correct in the main post, Simon. The UK financial establishment will hold all of the cards, there will be some "negotiations", and then a new Scottish pound amid much finger pointing.

      If they're not looking at the Eurozone to appreciate what happens when you don't have full control of your currency, then they are fools.

      gastro george

    3. @Mainly Macro
      "[...] the UK government could simply confiscate a proportion of Scottish assets (e.g. North Sea Oil revenue) equal to the value of that debt."

      1. But on what legal basis? The UK issued the debt.
      2. If relations deteriorated to the extent that the Scots thought the UK might confiscate, say, North Sea Oil revenues wouldn't they have contingency plans - e.g. taking physical control of the oil pipeline(s)?

  4. Perhaps city economists' concerns are much more narrowly defined than academic economists - the former having seen the FTSE soaring these past few years...hence for many of them, when asked, George Osborne's policies have obviously been very successful.
    In contrast, the latter invariably takes into consideration the impact on the wider economy and society in general- prolonged depressed growth (as shown by graph above),unemployment, falling incomes, falling living standards and poverty, to name a few. Hence, for this group, George Osborne's policies have obviously been very unsuccessful.

  5. If you look at the BBC - there to educate, inform, and entertain - there have been two systems in the last decade or so it needed to challenge though its commentary.

    The first is/was neo-conservatism (in its UK form) that said WMDs were in Iraq (its US form said Bin Laden was in league with the Iraqi regime), which the BBC contested and was proved right, despite public opinion and the press largely backing the Iraq war on those grounds.

    The second system of thought has been neo-liberalism, which said that as long as inflation was kept low and steady the economy of a country would be kept stable. That hit the fan in 2008. But the BBC has kept going with the neoliberal system, not providing dissenting commentary.


  6. "A few city economists may be hired more for their ability to talk rather than for their knowledge of macroeconomics." Well yes, though this applies more to chief economists whose primary function, in many cases, is to (a) do a turn at executive/board meetings, (b) be the warm-up act at sales meetings and (c) get the brand in the press as when a company buys an off the shelf economics survey (preferably one quoted in MPC minutes), attaches its name to it, then issues a quarterly press release and some quotes the BBC/newspapers can cut and paste to make an article ([c] also applies to economic consultancies and trade association economists).

    Beyond a basic level of competency (and I mean basic), all of these functions are almost entirely about the "ability to talk", a quick sanity check being whether a private sector economist is part of a finance function (i.e. is involved in business planning i.e. is serious) or corporate comms/pr i.e. is PR i.e. may not be especially serious.

    As for those attached to specific investment bank product markets, their remit is frequently so narrow and so tied up with yesterday's "newsfeed" about tomorrow's data releases as to render them oblivious to anything beyond a superficial notion of what's happening elsewhere.

    There are exceptions of course, I know because I've met a few, but it does appear to be the case that for every say Stephen King there's an Andrew Sentance. More generally,(a) if city economist analysis is so good why is it usually given away for free and (b) if failing to spot the credit crunch as a criticism really applies to anyone its city economists.

  7. What is the basic training and education of a 'city economist'?

    Is it rigorous in the way one would expect of an academic economist?

    Answer: probably not, to judge from the responses so far.

    Since I have been reading mainlymacro, Paul Krugman blog and others related e.g. Chris Dillow, I have noticed a great disconnect between these and those of the city bloggers (sounds like a wine bar - The City Blogger - perhaps that's where they get most of their 'real data in real time'!) across all the media channels e.g. City AM.

    Needless to say, by comparison the majority of city bloggers' opinions appear to be a mix of the opportunistic, tendentious, volatile, plain wrong and sometimes pompous.

    Or am I being too harsh?

    1. "Is it rigorous" - No. Its primarily via sitting next to nelly with what feels like a growing reliance on recruiting fresh meat from "blue chip" recruiters e.g. Bod A gets a decent undergrad degree and Msc from a good university, gets taken on as a fast track civil service economist or Bank of England graduate recruit, then after a couple of years - the BoE seems to operate on an up or out basis - leaves for a better paying job in a bank in an area only ever coincidentally related to their academic or professional experience (those are typically the better ones).

      I think the notion of academic economists as having a rigorous training is a red herring though given its focus is on being very good at sums. Its not so much the training as the peer reviewed scrutiny of academic output and scope for "objectivity" that matters give or take this being more than a bit skewed by academic politics and networks.


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