Monthly Archives: November 2014

Policy pickles redux

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History repeats itself, with variations; as the famous Reinhart and Rogoff book on sovereign debt crises argues, [amazon_link id=”0691152640″ target=”_blank” ]This Time is Different[/amazon_link] – not! I’ve just been reading a fascinating book by Bill Allen on UK macro policy history, [amazon_link id=”113738381X” target=”_blank” ]Monetary Policy and Financial Repression in Britain, 1951-59[/amazon_link]. The 1950s were preceded by a period remarkably like today’s context in important ways. The Bank rate – the key policy rate of the period – had been kept at 2% for nearly two decades, to combat the Depression, finance the war, and keep the economy growing in the post-war years. With a new government in 1951, monetary policy was ‘reactivated’.

[amazon_image id=”113738381X” link=”true” target=”_blank” size=”medium” ]Monetary Policy and Financial Repression in Britain, 1951 – 59 (Palgrave Studies in Economic History Series)[/amazon_image]

The author – formerly a senior Bank of England director and now at Cass Business School – argues that the 1950s have highly relevant lessons for today. The Bank’s key rate has been at 0.5% for more than five years and will stay there for some time longer. With short-term government debt outstanding amounting to £342bn at the time he wrote (just over 20% of GDP), “This means that any increase in short-term interest rates would entail an immediate and substantial increase in government expenditure.” Yet, he continues, it is inconceivable that interest rates can stay so low for ever. The only way is up.

What possible paths are there out of this situation? Either higher interest rates will lead to a big increase in the fiscal deficit or (much) more austerity; or nominal GDP will have to rise substantially either via real growth or higher inflation to reduce the fiscal impact of higher interest rates; or banks will have to be forced to bear some of the cost of rising interest rates – as in the 1950s – by a requirement to hold very large non-interest bearing deposits at the Bank of England. The first option is unappealing, the second unlikely given present economic trends. “One fine day there will have to be a new reactivation of monetary policy, and the authorities will have to manage exactly the same problem that faced their predecessors.”

There are of course some very important differences between now and the 1950s, including the fact that the amount of private debt outstanding now is so much greater (141% of GDP vs 16% of GDP in 1951, the much lower liquidity ratios of banks now). Still, the parallels make this history extremely interesting. The bulk of the book consists of a chronological account of monetary policy and description of the techniques used and decisions made over the decade. The final chapters cover four themes: monetary policy tools, financial repression, power and influence, and an overall assessment of the monetary policy chosen.

The power and influence chapter is especially interesting. This was long before Bank of England independence so the Chancellor of the Exchequer took the policy decisions and was in principle answerable to the House of Commons. In practice, secrecy prevailed, and there was almost no communication about policy – quite a contrast to today’s situation of ample, and perhaps even excessive to the point of confusion, communication. The book places the blame for the prevailing secrecy on the dire state of Britain’s financial problems both in the 1930s and again after the war. “Formal post-war default by the UK would have been technically possible but politically poisonous.” Commentators on policy had to apply guesswork to figure out what the Bank of England had already done, never mind what its future actions might be – the book uses archive material to fill in the blanks.

One result was that academic discussions diverged from practice, a damaging divorce. For those who understood the institutional reality of money and those who developed theories about monetary policy on the whole stopped speaking to each other – something we arguably paid the price for in the recent crisis, by which time the non-institutionally grounded theories had reversed themselves into central bank thinking too. (I find the institutional detail explained in this book far more interesting than the abstractions of macroeconomic models, I must say. It brought back to me memories of reading parts of the Radcliffe Committee Report in my undergraduate days, and being intrigued by the practicalities of monetary policy – an interest thoroughly destroyed by subsequent exposure to real business cycle theories and representative agent models.)

My sole criticism of this fascinating account of the reality of a decisive decade in UK monetary history is that it’s priced for institutional libraries (£70); but anybody at all interested in how we might find a way out of the present policy pickle would do well to borrow a copy.

Forbidden places

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Bradley [amazon_link id=”1781685576″ target=”_blank” ]Garrett’s Explore Everything: place-hacking the city [/amazon_link] is an ethnographer’s account of his time as a member of a loose group of urban explorers, based in London but making forays into Paris and the US. Urban exploration means going into places you’re meant to keep out of – ruined buildings boarded up at the tame end, through construction sites, the roofs of skyscrapers, and the Underground and sewers at the more dangerous end. And it is dangerous. A few people die. There are arrests – especially in London, where surveillance is so extensive and official paranoia runs far higher than elsewhere. (This closure of urban space is the subject of Anna Minton’s [amazon_link id=”0241960908″ target=”_blank” ]Ground Control.[/amazon_link])

Now, there is nothing I’d like to do less than climbing out onto the arm of a crane at the top of a building like the Shard while it’s under construction – I am, after all, a middle aged economist with vertigo, not a young urban explorer. However, I found this book very interesting and understand the itch the activists have to ‘hack’ these forbidden places. It’s partly the comtrariness aroused by being told not to do something, partly the serious politics of challenging the authoritarian tendencies that have been installing CCTV all over and privatising urban public space.

The pictures in the book are amazing – vertigo-inducing in themselves, the socisl science jargon that creeps in only mildly irritating. Urban explorers are obviously people whose politics and experiences put them in a minority – which makes it all the more interesting to have a window into their attitudes and experiences. And it’s well worth reflecting on what the shutting away of so much space is going to do to our cities over the years.

As a fan of Victorian infrastructure, I especially enjoyed reading about the forays into Joseph Bazalgette’s sewers. The book claims the cost was equivalent to £234 billion now. I haven’t checked, but if true, it’s hard to believe they would get built these days.

[amazon_image id=”1781685576″ link=”true” target=”_blank” size=”medium” ]Explore Everything[/amazon_image]

Thinking, fast, slow, and other tempos

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Any sentient economist these days is interested in how people make decisions, and how this differs in different contexts. It isn’t as simple as saying the old rationality assumptions are false and the new ‘behavioural’ rules of thumb apply.

For example, Paul Dolan of the LSE (whose new book is [amazon_link id=”0241003105″ target=”_blank” ]Happiness By Design[/amazon_link]) reports a trial to see what kinds of intervention were effective in getting consumers to reduce their electricity usage. A social comparison ‘nudge’ in the shape of a letter (but not an email) about what similar households were paying was very effective, but so was a financial incentive in the shape of money off the bill if certain target reductions were achieved. But the social nudge and the financial incentive when combined led to – zero reduction. So like all supposed silver bullets, nudge policies need to be fired with care and a single shot will rarely hit its target.

Anyway, the ur-books about the psychology behind how people make decisions are Daniel Kahneman’s [amazon_link id=”0141033576″ target=”_blank” ]Thinking Fast and Slow[/amazon_link] (thinking slow being rational calculation and thinking fast being mainly what we do), and Gerd Gigerenzer’s [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings: Short Cuts To Better Decision Making[/amazon_link] – the latter arguing that ‘thinking fast’ is actually rational because it economizes on energy- and effort-intensive calculation.

[amazon_image id=”0241003105″ link=”true” target=”_blank” size=”medium” ]Happiness by Design: Finding Pleasure and Purpose in Everyday Life[/amazon_image]  [amazon_image id=”0141033576″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]  [amazon_image id=”0141015918″ link=”true” target=”_blank” size=”medium” ]Gut Feelings: Short Cuts to Better Decision Making[/amazon_image]

I just read another two books underlining how hard people find thinking. One is Ben Goldacre’s [amazon_link id=”000728487X” target=”_blank” ]Bad Science[/amazon_link], which I found on my iPad recently and clearly downloaded ages ago. It’s a terrific book for teaching some mildly numerate critical thinking, and very funny. It’s as good as my previous favourite in this category, Jamie Whyte’s [amazon_link id=”0954325532″ target=”_blank” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_link].

[amazon_image id=”000728487X” link=”true” target=”_blank” size=”medium” ]Bad Science[/amazon_image]  [amazon_image id=”0954325532″ link=”true” target=”_blank” size=”medium” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_image]  [amazon_image id=”006124189X” link=”true” target=”_blank” size=”medium” ]Influence: The Psychology of Persuasion[/amazon_image]

The other is the huge airport bestseller [amazon_link id=”006124189X” target=”_blank” ]Influence: The Psychology of Persuasion[/amazon_link] by Robert Cialdini. This irritated me enormously, partly because it drags out a long article to book length, with a mildly patronising tone throughout; and partly because it poses as a guide to empowering the reader to avoid being manipulated by salesmen but is actually clearly a handbook of sales techniques. Despite having been irritated by it, however, it does convincingly illustrate six psychological characteristics that make people open to persuasion: the compulsion to reciprocate, the desire to be consistent, the power of social ‘proof’ in the form of other people’s choices, the deference to authority, the urge to grab hold of anything in short supply, and our willingness to do things for people we like.

One especially powerful example in the ‘consistency’ for the world of policy, I thought, was that people whose self-image was made into one of ‘public spirited citizen’ through one experimental intervention then continued to act in a public spirited way in other contexts. While salesmen want to exploit quick thinking, so too might policy makers. And as Gigerenzer argues persuasively, thinking ‘slowly’ all the time would be inefficient. Maybe the thinking ideal is, like dancing a good foxtrot, getting a good mix of fast and slow.

Thinking, made simple

Read this book!

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On the train yesterday I devoured [amazon_link id=”178022592X” target=”_blank” ]Do No Harm: Stories of Life, Death and Brain Surgery[/amazon_link] by Henry Marsh. I can’t recommend it highly enough. It is the author’s retrospective take on his career in neurosurgery, as he approaches retirement. From the start you share his sense of the strangeness of taking surgical instruments to people’s thoughts and emotions, memories and reason – as he puts it, too strange to think about really. He gets on with the delving into the jelly of the brain. This is a fascinating and utterly humane book.

[amazon_image id=”178022592X” link=”true” target=”_blank” size=”medium” ]Do No Harm: Stories of Life, Death and Brain Surgery[/amazon_image]

It does illustrate – as so many others have done – the strains on the NHS, due to demand growing faster than resources, but even more due to the madness of mediocre bureaucracy and constant reorganisation.

But the overwhelming message I took was the importance of the counterfactual in medicine. Marsh writes that as he grew more experienced as a surgeon, and older himself, the urge to operate always – because it’s what families and patients expect, and what surgeons do – began to ebb. Increasingly often, he concluded that the choice his patients often faced was between two different ways of dying, one of them involving painful and sometimes brutal surgery that gave false hope, a short extension of life at best. Given the strains on the NHS, the ageing population, the continuing advances in technology that make new interventions possible, this is going to be an important debate.

Anyway, as I get older too, getting the counterfactual right increasingly seems the key issue in any context. And one that it’s very hard for people to get to grips with, because seeing the realistic alternative course of events requires reason, experience, judgement and imagination.

On the medical theme, I’m also keen to read Atul Gawande’s [amazon_link id=”1846685818″ target=”_blank” ]Being Mortal: Illness, Medicine and What Matters in the End[/amazon_link]. I loved the other books by him I’ve read, [amazon_link id=”1846681324″ target=”_blank” ]Complications: A Surgeon’s Notes on an Imperfect Science[/amazon_link] and [amazon_link id=”1861976577″ target=”_blank” ]Better: A Surgeon’s Notes on Performance[/amazon_link].

[amazon_image id=”1846685818″ link=”true” target=”_blank” size=”medium” ]Being Mortal: Illness, Medicine and What Matters in the End[/amazon_image]

World cities

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Notice of a new title to join the literature on the economies of cities, [amazon_link id=”1118609743″ target=”_blank” ]The Making of A World City: London 1991 to 2021 by Greg Clark[/amazon_link]. He writes:

“In [amazon_link id=”1118609743″ target=”_blank” ]The Making of a World City: London 1991 – 2021[/amazon_link] I have sought to draw on over 25 years of experience working within London policy and economic development organisations, and on interviews with around 100 leading thinkers about the past, present and future of London, including commentators and leaders in New York, Tokyo, Hong Kong, Paris, Singapore, and São Paulo.

London’s path to becoming a leading world city is not well understood. The assumption is that the Big Bang, London Docklands, the EU, or global finance is the key explanatory factor. The reality is richer and more surprising. The book sets out in clear detail both the catalysts that have enabled London to succeed and also the qualities and underlying values that are at play: London’s open-ness and self-confidence, its inventiveness, influence, and its entrepreneurial zeal. London’s organic, unplanned, incremental character, without a ruling design code or guiding master plan proves to be more flexible than any planned city can be.”

[amazon_image id=”1118609743″ link=”true” target=”_blank” size=”medium” ]The Making of a World City: London 1991 to 2021[/amazon_image]

I’m looking forward to reading it, especially having commissioned relatively recently Bridget Rosewell’s [amazon_link id=”1907994149″ target=”_blank” ]Reinventing London[/amazon_link].

[amazon_image id=”1907994149″ link=”true” target=”_blank” size=”medium” ]Reinventing London (Perspectives)[/amazon_image]

A while ago I posted a list of books on urban economics, and this literature keeps growing (no doubt there were many omissions from the list too). It is a subject whose time has come – the politics is slowly catching up with the economics. Recent days have brought news of an impending significant devolution of powers from Whitehall/Westminster to Manchester. It’s a first step in decentralising one of the most centralised OECD economies, and part of the global relocation of economic activity as a network around key urban hubs. Perhaps I’m biased, but among all the UK cities other than London, I think Manchester has the best shot at growing into a world city.

A couple of sessions at the upcoming Festival of Economics in Bristol touch on this broad theme – as do other Festival of Ideas events this autumn.