Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 2 June 2016

When finance ministries no longer need many macroeconomists

Years ago, when I worked at H.M.Treasury, there was a large team of macroeconomists. My first three jobs involved forecasting, and my last looked at the economic effects of the budget, a pattern that was fairly typical at that time. Since central bank independence in 1997, and particularly the creation of the OBR in 2010, that requirement for a large team of macroeconomists to be working at the Treasury has gone.

If all macroeconomic decisions had been delegated to these two external bodies then this would not present any problems. But of course that has not happened. The remit for the Monetary Policy Committee is, quite rightly in my view, set by the Treasury. The Treasury still decides on the fiscal policy rule that governs all the of detailed micro measures we see in the Budget. And occasionally big decisions that have important macroeconomic aspects have to be made, and the Treasury is required to provide the evidence on those. Brexit is just the latest example.

The problem with this set up is that the need for macroeconomists within the Treasury is periodic. Fiscal and monetary rules are reconsidered at intervals involving a number of years. We have seen two crucial referenda quite recently, but I hope that will not become a regular feature. That creates a resourcing problem. While we insist that there is always the electricity generating capacity available to deal with peak loads, the idea that civil servants are spending time with little to do for large periods is an anathema for the public.

The danger is clear. Because a large team of macroeconomists are not needed all the time there is a tendency to cut back. As a result, when they are really needed to help make important decisions they are overstretched. Alternatively economists with expertise elsewhere might make badly informed macro decisions. More speculatively, with a small mass macroeconomists will have less influence over key decisions than, say, those charged with controlling public spending.

An interesting and I think important question is what you do about this. Do you separate out the macroeconomists into their own (rather small) ministry? Can you mobilise some kind of reserve army in academia or elsewhere, to be brought in when big decisions have to be made? I would be very interested in (sensible) solutions to this problem. (There is an incentive: if it is a good idea it might acquire some legs.)


  1. The actuarial profession has faced some big peaks in specialist demand (pensions misselling, Equitas and latterly Solvency II). A contract market has sprung up to meet the requirements. I don't see why it need be different for economists. If the Treasury offers macroeconomists say £1000 a day to work on a project for six months I think they will get many appropriate candidates.

  2. [The financial crisis is worse than thought …]

    James Hacker: Bernard, Humphrey should have seen this coming and warned me.

    Bernard Woolley: I don’t think Sir Humphrey understands economics, Prime Minister; he did read Classics, you know.

    James Hacker: What about Sir Frank? He’s head of the Treasury!

    Bernard Woolley: Well I’m afraid he’s at an even greater disadvantage in understanding economics: he’s an economist.

    – Yes Prime Minister, A Real Partnership

  3. The 'obvious' solution is to buy in the expertise - from academia or consultancies - when needed. However, this presupposes two conditions: that the expertise is there to be bought and that there is sufficient knowledge in-house to define the needs and select the supplier.

    In my experience the expertise, in the sense of people skilled in manipulating the relevant equations and data, will usually exist but the knowhow required to present meaningful results and relevant options to the decision-makers is rarely found in the same groups. This means that there is no substitute for a kernel of expertise within the commissioning institution. Frankly, if the UK Treasury, and Ministries of Finance elsewhere, do not have at least some high quality macroeconomists one has to ask oneself what they do have!

    So my suggestion is that there should be a small, high-powered, team of economists, including specialist macro, which will provide near-daily updates on the economics behind issues confronting the government. This team will contain in it sufficient expertise to commission and assess specialist work in, for example, modelling and forecasting when required.

    For all I know (I have never worked in UK institutions) this is what exists.

  4. Simon- I started my career at HMT in 2009, before leaving in 2012 to do a masters degree. Decided not to return so I could run for parliament in 2015. Will shortly be starting a new job at the BoE.

    Treasury had remarkably few macro-economists when I joined in 2009, and the vast majority of its economists were working on microeconomic issues. The macro directorate were relatively small and insular- one thing that was clear was that those who chose to make a career in macroeconomics at the Treasury were relatively restricted and found it harder to take the jobs that were seen as essential stepping stones to promotion (i.e. private office and GEP- general expenditure policy). So not only did we have relatively few macroeconomists at HMT, but I don't think they were particularly incentivised to stay- especially given pay at Bank of England, private sector, etc.

    The problem is fundamentally that the Treasury only seems to really need serious macroeconomic capacity periodically- the crisis is one example, ERM another. Perhaps more macro heft in the run-up to the crisis. But for long periods of time, it is not clear what you would do with serious macro capacity, especially as macro objectives are fundamentally political, and so set by ministers from on high.

    In terms of solutions- I would like to see macroeconomists to be better paid, more highly regarded and for better career structures within the Treasury so that they can be quickly brought to bear on the big issues. The problem with the "reserve army" of academics approach that you mention is that (a) it is much less quickly deployed in times of crisis, and that's when time really matters and (b) there is a enormous cultural gap between policy and academia in terms of working style. Of course you need a bit of both, and people can learn and transition between them, but it adds to the time-gap that I mentioned. I also sometimes feel that academics don't pay sufficient regard to the mechanics of policy levers, and their potential uses.

    The other point is that the Treasury has weight because of its political influence, and its ability to finance- but the intellectual credibility it has to bear must also match up to that. If the Treasury loses its best macroeconomists to academia and the BoE, why should those organisations in turn respect the Treasury's macro view/arguments? That has perhaps putting it a bit strongly- but I do think that at a working level, the Treasury's internal capability has to be able to engage in the high-level debate with others, not just accept the view that is presented to them.

  5. Can you not hire economic consultants for exactly this sort of occasional economic work? I know lots of them are specialised in micro but is there really not a decent independent supply of macro economists the treasury can hire? I thought outsourcing like this was meant to be efficient!

  6. This is compensated for by the BOE which has become an econometrics factory with about 200 research economists largely from elsewhere in the EU playing around with their models.

    I am not sure this has delivered a massive welfare gain to the general population. Interestingly Yellen has made interesting remarks in public of a need for diversity at the FED - that probably means less of the sort of people you want.

  7. I am not sure how Treasury in the UK is organised. However, if it is anything like the Australian Treasury, I think you could improve the utilisation of the macro team by having a matrix structure and more project focus. Most issues have a macro component which could be analysed by macro team members and add to the quality of the work. e.g. get the macro team to look at the growth and countercyclical fiscal policy with the team that is looking at infrastructure. I think a revolving door between policy and academia would benefit both; and much healthier than the door between banking and policy.

  8. Are you sure these are the people we want? The IMF has just admitted that neo-liberalism causes inequality. Blanchard now says that economists need to consider the financial sector (although his answer to dealing with it should send off alarm bells). Really you have to hand it to heterodox economists, who have been way ahead of the game on these issues.

    1. Macroeconomics =/= neoliberalism

  9. well I am sure you are familiar with the US Council of Economic Advisors. But you want an entity "less political." Maybe how the US National Academies of Sciences is set up and how it convenes expert panels on various topics, but instead you have a standing committee on UK macroeconomy.

  10. Even if there are macroeconomists, will anyone listen to them? In France Arnaud Montebourg had a team of macroeconomists working in his ministry. They rightly predicted that austerity would do no good and Montebourg sent several notes to Hollande. Hollande, who as you know, didn't want to offend anybody in Brussels and Berlin ignored all the notes. Eventually Montebourg left the government. The whole story was reported by Mediapart but found very little echo in the rest of the press.

    Look at Nougayrede, who oddly enough now write op-eds for th Guardian. She's not the least bit interested in that kind of stuff, she's only busy repeating the dogma that we should cut public spending.

    So I don't want to sound too pessimistic but it seems like no matter where macroeconomists work, in universities or directly in the government, nobody is interested anyway, neither politicians nor journalists.


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