Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 18 April 2015

Should economists rule?

Tim Harford in the FT talks to seven random mainstream economists about their radical ideas for economic policy. (Podcast, not pay walled, here.) Nick Stern wants green cities (with much greater economic autonomy), Jonathan Haskel wants more spent on research (because the returns are very high), Gemma Tetlow wants to merge income tax with national insurance, Diane Coyle wants to reduce boardroom pay, John van Reenen wants new institutions to promote infrastructure, Kate Barker wants changes to how housing is taxed, including capital gains on main residences, and Simon Wren-Lewis wants ‘democratic helicopter money’.

You can find more details about democratic helicopter money here. The democratic bit is that the central bank gives the created money to the government on condition that it is used for a stimulus package, but the form of the stimulus package would be the government’s choosing. I was impressed that Tim managed to turn a very pleasant chat over coffee (while taking few notes) into a coherent account of my argument. The only point I might have added is that my suggestion of turning helicopter money democratic is in part to avoid some of the political difficulties he alluded to.

The common strand in many of these suggestions, which Tim draws out, is a desire to replace direct political control by something more technocratic. Now you could say that this is simply a power grab by economists. However if you think about the examples here, they represent important and widely recognised policy mistakes which tend to be universal and persistent: failure to deal with climate change, failure to invest enough in R&D, unnecessary complications in the tax system, runaway boardroom pay, failure to invest in infrastructure even when borrowing is ultra cheap, a broken housing sector and procyclical fiscal policy. It is not as if the status quo is doing just fine.

I would add just two observations. First, the argument is often not about ‘losing democratic control’, but instead about advice being open and transparent. The alternative to some advisory body, whose deliberations should be publicly available and subject to scrutiny, is often secret advice from the civil service, or worse still from policy entrepreneurs. Second, what is thought political infeasible today may relatively quickly become commonly accepted.

I was quite surprised that Tim thought democratic helicopter money was particularly radical and politically infeasible. But then I remembered fiscal councils. My first published piece advocating (advisory) fiscal councils was in 1996, and for more than a decade this was considered the impractical idea of a few ‘out of touch’ economists, who were obviously anti-democratic. Then, little more than a decade later, the idea very quickly became acceptable. Nowadays, it seems like fiscal councils are everywhere. So the one part of Tim’s piece that I would not take too seriously are his scores for political feasibility and radicalism. Today’s supposedly radical idea can quite quickly become received wisdom.


  1. "I was quite surprised that Tim thought democratic helicopter money was particularly radical and politically infeasible."

    I wasn't. Because both are true.

    Philosopher Kings favour rule by Philosopher Kings.

    What else would anyone expect?

    In a few weeks time we will see one of the glories of human achievement: a peaceful handover of power from one set of rulers to another following the mass casting of votes. If we weren't so used to it, we would recognise it for what it is: one of the most wonderful and miraculous achievements of humanity after millenia of struggle.

    If some economists cannot understand how precious this is, so much the worse for them

    1. Once again, read the post - see my first observation.

    2. Once again, I did.

    3. So why is making advice more transparent a threat to democracy? Why is putting advice in the hands of experts, rather than civil servants, a threat to democracy? Why is making that advice transparent rather than secret a threat to democracy?

    4. Central banks are already given certain powers by governments; they certainly can grant the BoE the right to parcel out helicopter money if they so choose. And, of course, the government can revoke that right.

    5. Transparency arguably improves the dempcratic process. If it is publicly known that some policy is costlier when done in period A versus period B, it becomes harder for politicians to make a good selling pitch where BS reigns supreme. Many politicians sell their policies arguing it "creates jobs" or improves "efficiency." As a matter of fact, these statements are often mutually contradictory or outright inconsistent with otherwise simpe observations. If a credible and reliable agency steps in every time to point out the problem, you've just provided a better check on nonsense and the discussion might shift away from BS and instead would have to focus on trully political questions like arbitrage between the looses and gains of different groups or setting goals for our future.

    6. "So why is making advice more transparent a threat to democracy? Why is putting advice in the hands of experts, rather than civil servants, a threat to democracy? Why is making that advice transparent rather than secret a threat to democracy?"

      Because your 'democratic helicopter money' suggestion isn't that at all.

      Your suggestion is that the Central Bank should decide whether and how much 'helicopter money' there should be. The government's role would be in deciding how any distribution is made. . I had thought that its 'defining feature' was that it is initiated by the Central Bank.(If I have this wrong, I apologise).

      This is undemocratic. The decision whether and how much is not being taken by a democratically elected government.

      The two answers usually proffered to this basic democratic deficit problem are.

      First, Central Banks are already independent in setting interest rates, how is this worse?

      That is not an answer at all. That we have 'technocrats' like Blanchflower or Sentance, who are in reality political partisans with little credibility, making these decisions is a disgrace in democratic terms. Do I want more power to be given to people like Blanchflower and Sentance? (Sorry to personalise this, but it makes the point more concrete.)

      Second that setting up the rules would be decided by democratically elected Parliaments. So why the problem?

      This is just a more diluted form of the argument made to justify Hitler's dictatorship. The democratic process under which he was elected, and which chose to do away with decisions made using democratic elections was itself impeccable.

      Important decisions like this should be made through democratic process.Even if we don't like the results.

    7. OK, so you do not like independent central banks. But obviously most people do, because more and more democratic countries have chosen to have them. So why is central bank independence anti-democratic?

    8. "But obviously most people do, because more and more democratic countries have chosen to have them."

      This is simply a restatement of your usual 'Hitler was a democrat" argument.

      That a democratic institution decides, using unimpeachable democratic process, to hand over power to another non-democratic institution doesn't make that institution's decisions democratically acceptable.

      The reason governments do this is not because it is democratic (it just isn't). They do it because the markets will charge a premium for any country where the politicians set the rates. They aren't trusted, whilst the technocrats are (or at least are a bit more). That is why Labour handed over this power to the Bank of England in 1997.

      Do these technocrats always get it right? Obviously not. In 2011 the ECB's decision to raise rates was unbelievably stupid. Prior to 2008, the BofE had allowed rates to be too low for too long (in my view - a harder case).

      How do we vote out the people who made these stupid decisions? I can accept someone like Osborne making decisions of this kind that I disapprove of because he has democratic legitimacy. Someone like Blanchflower had no such legitimacy. The idea that he was just a neutral cog in the machine voting impartially on the basis of whatever the numbers told him doesn't strike me as being very likely.

      I draw exactly the opposite lesson of the post-crash years from you. The largest failure of economic policy, by far, has not been in the UK but in the ez. In many countries (France, Greece, Italy) governments have been elected that would, if they were free, abandon the stupid policies that have plunged the area into near permanent slump. Why haven't they done so?

      Because of the stupid supra-national anti-democratic structures that have been put in place to restrict the democratic governments' freedom of action.

      The technocrats, the Philosopher Kings, are to blame.

      I want them to have less, not more, power.

    9. the governments giveth and have the right to taketh away. If Greece leaves the ECB and recovers, other governments will also jump ship.

    10. Do you really expect Parliament or our House and Senate to decide what monetary targets for the next month? That is well beyod what is possible for the House and Senate in the US.

    11. No.

      But I do think this should be the job of the government (ie not the legislative branch).

    12. Independent central banks do focus far too much on inflation than output. The ECB's recent history should have taught us that we need less power in the hand of pseud-technocrats.
      I wouldn't mind rule by technocrats but there are no benevolent technocrats just like there are no benevolent dictators. And given the many hawks that sit on central bank boards I hesitate to call these institutions technocratic.

      More democratic pressure would actually do these institutions some good.

  2. Simon, keep up the good work.

    I think that eventually, they will have to do it because of the persistent deficiency in demand. But the sooner the better. And the more you discuss it, the less radical it will sound.

    It is ridiculous, in my opinion, that we have reached a consensus that banks creating money for mortgages is fine, but government creating money for stimulating economic growth is seen as too radical.

    1. You Brits seem to be reasonably happy with a persistent deficiency in demand; on the other side of the pond, Americans may be less sophisticated about economics but quicker to hold our leaders accountable.

    2. That may have something to do with the fact that your elections come every 2 years whereas ours are every 5.

  3. Simon-

    Democratic helicopter money is called deficit spending appropriated by the elected legislature. Central banks dont dictate to Congress, Congress (parliament) are the boss, Central banks must do their bidding.

  4. A better version of democratic heli money is if we make the central bank democratic by making its leaders elected. The central bank has no budget constraint so it would more effectively conduct stimulus and be able to avoid negotiating with politicians.

  5. Just as an aside, at the end of 2008, when we in Australia thought (wrongly) that the global financial crisis was about to hit us hard, the government responded very rapidly with (amongst other things) a virtually unqualified cash giveaway to every taxpayer - pure helicopter money.

    Anybody who had paid income tax in the previous financial year received $1,000. Parents also received $1,000 for each child, single pensioners got $1,400, pensioner couples got $2,100 and carers were given $1,000 for each person cared for.

    Seemed to work quite well, although some form of 'reverse' means test would been more sensible.

    As far as I can recall, nobody at the time thought it was terribly radical.

  6. A world run by experts is indeed theoretically attractive. See the Simpsons episode 10/22 when Mensa rules Springfield, however, for how such a world can go terribly wrong.

    Surprised, as something of an economist myself, that nobody mentioned my own obsession, massively expanding housing supply (unless Kate Barker's tax changes were aimed in this direction). Perhaps all the economists surveyed were middle-aged homeowners wanting to protect the value of their main investments?

  7. A professor of mine once said that, as long ad we're talking to each other, we find ourselves pretty convincing and good as economists. What is tricky is to convince a muggle. Try making a presentation in front of sociologists or historians. If you manage to get a few on board with your claim, you're an exceptional economist. Most likely, they'll look at your work and will find it unsuited to its purpose -- I can't blame them because it really does take peculiar people to make economists.

    Work hard, professor. Find the words not to convince me, but to convince someone who is far from sharing your framework or approaching your ideas with some intellectual proximity. It's not easy, but it's necessary.

  8. Simon,
    Shouldn't you be objecting to democratic heli money? Reason is that you favour using interest rate adjustments to adjust demand other than at the ZLB, whereas the advocates of democratic heli money (as I understand it) advocate that as the best way of adjusting demand REGARDLESS of whether we’re at the ZLB.

  9. People have differing values and conflicting interests. The politics must decide, "What do we want our economic policy to do?" Economists can propose policies to address those values and outcomes.

    Many economists propose policies without clearly stating the effects on differing outcomes. Most policies are pro-growth but all effect other outcomes. Values are important and need more discussion.
    -jonny bakho

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