Tag Archives: political economy

The case for militantly moderate incrementalism

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I’ve started on [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often (and how it can do better)[/amazon_link] by Peter Schuck.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

He argues for ‘melioristic realism’ – modest practical improvements in outcomes – which are nevertheless ‘militantly moderate’ given the usual assumption in much policy debate that change must be sweeping and radical. “Policy makers have at best severely limited knowledge of the opaque, complex, social world that they seek to change, and meager tools for changing it.” There is a ‘remorseless’ law of unintended consequences. Incrementalism is therefore the only wise and honourable approach, Schuck argues. Indeed, it’s the only approach that increasingly cynical and distrustful voters will now accept, he thinks.

The book describes what he calls ‘moral hazard’, which is far wider than the usual definition of risk-taking behaviour in financial or insurance markets induced by the fact that somebody else bears the cost. Schuck extends it to all kinds of behaviour whose cost is partly borne by somebody else (i.e. taxpayers) – hence also welfare “dependency”, or crop subsidies, or corporate welfare dependency in sectors such as aerospace and defence sector.

I’ll review it properly when I’ve finished. It’s a US-focused book – here is the Boston Globe and an article by Peter Schuck on the Huffington Post site.

Global governance by stealth

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Last night I attended the Dimbleby Lecture given by IMF Managing Director Christine Lagarde – it will be broadcast tonight on BBC1. Her theme was reinventing multilateralism for the 21st century. What global governance structures will ensure the international system delivers mutually beneficial co-operation rather than zero-sum competition, in the face of technologies that are creating an ever-denser web of decentralised connections, significant demographic change and long-term and other environmental challenges? She also underlined the serious challenge to stability posed by the current degree of income inequality. I think all reasonable people would agree with that, but how interesting to hear the head of the International Monetary Fund speak about it in such strong terms:

“Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on economic growth, on the size of the pie rather than its distribution. Today, we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.”

Her focus on reform of global governance is understandable when the US Congress recently made America pretty much the only country in the world that has failed to ratify a first step IMF funding proposal. As Mohamed El-Erian wrote for Project Syndicate:

“This is an unfortunate and regrettable outcome for both the IMF and the international community as a whole. Congressional obstinacy is forcing the Fund to miss out on an opportunity to strengthen its finances at a time when most other countries have already approved the initiative. It is also being held back from addressing, albeit modestly, governance and representation deficits that have steadily eroded the integrity, credibility, and effectiveness of this important multilateral institution.”
Nobody I know of believes global institutions do not need reform. Apart from the challenges described by Mme Lagarde, the large, growing economies – the BRICs and then the MINTs – urgently need to have a voice that reflects the weight they already have in the world economy, as Jim O’Neill has argued in his book The [amazon_link id=”1907994130″ target=”_blank” ]BRIC Road to Growth[/amazon_link]. A forthcoming (May)  book by Ian Goldin, [amazon_link id=”0691154708″ target=”_blank” ]The Butterfly Defect[/amazon_link], looks specifically at how to manage the serious new systemic risks posed by global interconnectedness, such as pandemics or new financial catastrophes. These are just two of a whole sub-genre.
[amazon_image id=”0691154708″ link=”true” target=”_blank” size=”medium” ]The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It: How Globalization Creates Systemic Risks, and What ot Do about it[/amazon_image]
So the need is clear. But how to get from here to there? I’ve not yet heard or read about the specifics. My hunch is that if the minor reform of existing institutions is impossible, given the almost-everywhere increasingly dysfunctional politics of different nation states, we need to look at building new institutions that can perhaps start under the radar. It could be global governance reform by stealth or not at all.

Implementation, implementation, implementation

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Over the years I’ve spent a lot of time in different non-executive public service jobs, and so have experience of two interfaces. One is between politics and non-political public service decisions, all at the technocratic end in my case. The other is between non-executive and executive action, as all of the non-exec roles have obviously relied on a full time staff to implement decisions.

Almost all of the people I’ve come across in all of these categories have felt a strong sense of public service. But it is extremely difficult going from a political choice validated (more or less) by accountability to voters to the effective implementation of those choices with accountability that is often not clear although often addressed by ‘transparency’. These categories of actors have different time scales  – from the electoral cycle to the life-long career – and constraints –  from media and electoral demands to the risk of judicial review. (The piggy in the middle position is not the most comfortable, either!) As the Duke of Wellington famously said of his first cabinet meeting, “An extraordinary affair. I gave them their orders and they wanted to stay and discuss them.” (Or as one of my favourite t-shirts, long since gone, put it: “Be reasonable. Do it my way.”)

Recently I read [amazon_link id=”1780742665″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe, an excellent and very readable account of many specific failures, along with an analysis of why failure occurs so often. They attribute chaotic government (this is in the UK) to a mixture of human errors and system errors.

[amazon_image id=”1780742665″ link=”true” target=”_blank” size=”medium” ]The Blunders of Our Governments[/amazon_image]

Now I’m half way through a proof copy of [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails so Often and How It Can Do Better[/amazon_link] by Peter Schuck. (I’ll review it in April when it’s officially published.) This is a US-focused book, more academic in tone. Its analysis overlaps with King and Crewe. Like them, Schuck goes on to suggest some improvements that would ameliorate the dysfunctionality of government – and my goodness, the US system looks massively dysfunctional to a foreigner like me.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

The two books together are making me wonder what the prospects are for making government truly effective given our starting point, namely the accumulation of bad policies like encrusted barnacles making an old ship impossible to sail. A lot of economists are pinning their hopes on evidence-based policy, but this assumes that Mr Spock-style rationality will cut through the nexus of many people taking varied decisions for different reasons.

It’s better than not having the evidence base, but we economists need to pay more careful attention to the political economy issues (and, as I’ve argued before in last year’s Pro Bono Economics lecture, make sure we include ourselves in the analysis.)

Charles Dickens on economics

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In Household Weekly, 1850:

“Political economy is a mere skeleton unless it has a little human covering, and filling out, a little human bloom upon it and a little human warmth in it.”

Courtesy of Sylvia Nasar’s [amazon_link id=”1841154563″ target=”_blank” ]Grand Pursuit: The story of the people who made modern economics[/amazon_link], which I’m finally reading now it’s out in paperback.

[amazon_image id=”1841154563″ link=”true” target=”_blank” size=”medium” ]Grand Pursuit: The Story of the People Who Made Modern Economics: A Story of Economic Genius[/amazon_image]

In last Saturday’s FT John Sutherland opted for [amazon_link id=”1853262374″ target=”_blank” ]George Eliot[/amazon_link], rather than [amazon_link id=”014143967X” target=”_blank” ]Dickens,[/amazon_link] as the Victorian author with the most to say about poverty and wealth. I’d go for [amazon_link id=”046087781X” target=”_blank” ]George Gissing[/amazon_link] or [amazon_link id=”014043464X” target=”_blank” ]Mrs Gaskell[/amazon_link] or [amazon_link id=”0199538697″ target=”_blank” ]Zola[/amazon_link] or [amazon_link id=”0140444300″ target=”_blank” ]Victor Hugo[/amazon_link] above either.

The challenge of doing what’s obvious

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Naturally I was very interested when the LSE’s Growth Commission report on the UK economy was published back in September. I’ve just looked through the book of the report, [amazon_link id=”1909890022″ target=”_blank” ]Investing for Prosperity: A Manifesto for Growth[/amazon_link], edited by Tim Besley and John Van Reenen. It’s a very impressive publication, summing up concisely a vast amount of evidence on the long-term weaknesses of the UK economy.

[amazon_image id=”1909890022″ link=”true” target=”_blank” size=”medium” ]Investing for Prosperity: A Manifesto for Growth[/amazon_image]

As the preface underlines, the report is not about the demand side issues and short-term growth, but rather about the supply side and the UK’s long term potential. The problems are hardly unknown. The individual chapters cover three main areas: infrastructure, skills, and private investment and innovation. The policy recommendations correspond to these, including a shopping list of proposals to improve primary and secondary schooling; an independent infrastructure infrastructure – a strategy board, a planning commission to deliver the strategy and a bank to finance it; and measures to support investment in innovation by the private sector centred on increasing competition in the banking sector.The chapters give a very useful summary of the state of the evidence in each of these areas, very handy for students – there are terrific lists of references too.

The recommendations are all deeply sensible. However, I think the book serves to underline two problems with the task the Growth Commission set itself. One is that any policy measures to address an area of concern are either rather motherhood and apple pie – ‘improve standards of primary education’ – or extremely detailed, because once you get down to thinking about actual measures to implement, they have to be. The report is surely right on the big picture, but patchier on the detail – inevitably in a 300 page book. The infrastructure sections are the strongest, the education ones the least persuasive – but maybe that’s because I’ve been closely involved in primary education as a governor helping turn around a school.

The other problem is that the book does not, for me, meet the challenge it describes in the preface: ‘If your ideas are so good, why haven’t they already been done?’ It is excellent on the economic analysts but doesn’t really tackle the difficulties of political implementation of “structural reforms”.

Take transport infrastructure. We surely know the London area needs more airport capacity; but a political decision on location is needed. However, early on the current government kicked this can down the road beyond the next election to wait for a later government. Yet any decision taken now would be much better than further delay – so argues Bridget Rosewell persuasively in her book [amazon_link id=”1907994149″ target=”_blank” ]Reinventing London[/amazon_link], and she writes as a firm supporter of a new airport to the east of London.

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

Or take HS2. [amazon_link id=”1909890022″ target=”_blank” ]Investing for Prosperity[/amazon_link] does not have a view on this, perhaps because economists are divided on this issue as they are not on airport capacity. It’s not at all clear how an Infrastructure Strategy Board would navigate the politics of this project, although it’s plain as daylight that the amount of investment in infrastructure in general has been too low over a long period.

Still, it’s not the job of economists to deliver the politics, but rather to point out the uncomfortable realities. I ended the report feeling rather optimistic because, as it argues, the UK has a lot of assets that will support a stronger potential growth rate and future prosperity. The Commission argues for measuring progress in terms of median income rather than GDP per capita, to take account of the distribution of the gains, which seems entirely sensible. The economy’s problems may be long-standing but the counterpart of that is that we know what to concentrate our reform energies on.