Finance: Research, Policy and Anecdotes

I read several very interesting books over the summer, among them two books on the challenges for post-GFC and post-pandemic economics and economic policy. The Global Financial Crisis, the Eurodebt crisis and the long-drawn out recovery processes have undermined trust in many long-standing economic concepts and policy prescriptions and are also one important factor in the rise of populist movements across the globe, including Brexit and the Trump election. As shown by Thiemo Fetzer, David Cameron’s and George Osborne’s mistaken austerity policies were a big driver for Brexit support. If economists have learned one important lesson over the past decade, it is that we cannot treat policy solutions independent of their distributional and political implications.  This is the topic of Martin Sandbu’s The Economics of Belonging and Angrynomics by Eric Lonergan and Mark Blyth. Both books were written pre-COVID but their analysis will be as if not even more relevant to address the economic fallout from the current crisis.

Martin Sandbu provides a comprehensive overview of the problems and offers an array of solutions.  He is certainly not the first one to do so (and he makes lots of references to previous work), but ties together lots of different analyses and policy discussions, starting with the distributional and political consequences of 30 years of market-oriented (“neo-liberal”) economic policies.  This includes the changing bargaining equilibrium between labour and capital as results of the decline of unions and the negative consequences of austerity mentioned above.  He makes the strong case that the rise of populism is really a result of economic fault lines rather than cultural trends. Even more important than the diagnosis are policy solutions: First, minimum wages can serve as substitute for collective bargaining, to avoid low productivity jobs persisting, but compression from the top is also needed through progressive income, net wealth and corporate taxation. Interestingly enough, I have used the national living wage (introduced by the same Cameron/Osborne government that forced austerity on the UK) as group assignment topic in my MBA economics class over the past years, requiring students to think beyond the simple demand-supply implications of a price floor. Second, the time of universal basic income might have come as one tool to address economic uncertainty and volatility caused by the move to the gig economy (there are some parallels here to the concept of flexicurity, combining flexible labour markets with income security). Third, policies to counter the trend towards monopolisation, as for example in the digital economy (there might an interesting historic parallel here to anti-trust policies by Theodore Roosevelt in the early 20th century).  Martin also has a very interesting discussion on “left behind places”: while a reversal by attracting big investors is certainly not feasible as strategy for everyone, increasing connectivity of the geographic areas and increasing the attractiveness of such places for investors (through human capital investment) can work; a policy idea very similar to the levelling up agenda in the UK (which unfortunately and as so often is currently only an empty slogan). Finally, on the macroeconomic level, asymmetric aggregate demand policies are critical to avoid hysteresis, i.e., persistent unemployment that results in part of the labour force left behind. While the analysis and policy ideas are the results of the post-Global Financial Crisis, they will be as if not even more important in the post-pandemic discussion. Take the discussion on how to pay for the economic losses of the pandemic – future government spending cuts, taxation or debt?

Angrynomics is not as exciting and satisfactory, at least not for someone who has followed the debate closely over the past decade.  The style is an interesting one – in form of a dialogue between the two authors, though sometimes it reads a bit artificial. The book includes a nice explanation of how the wide-spread anger about recent economic developments came about and how it is correlated with economic thinking (i.e., the move from full employment in the 1960s and 70s as policy goal to inflation targeting), including a discussion on personal distress about rapid changes as source of anger.  The authors also include a nice discussion on the increase in intergenerational inequality over the last decade (a challenge that will only be exacerbated post-Covid-19). The policy discussions, however, are a bit superficial and focus a bit too much, for my taste, on macroeconomic policies and sovereign wealth funds (which can work in the right institutional environment and with the right governance structure), without discussing possible government failures (one of my pet peeves during the Corbyn years was that he was never really forced to explain why the failed UK economic policies of the 1970s would suddenly work in the 2010s). And while I agree on the assessment of Canada and Australia as having escaped the worst of the Global Financial Crisis due to their market and regulatory structure, one has to acknowledge that Australia has also been benefitting over the past 20 years from commodity price boom and increasing economic interlinkages with China.

On the downside, the book is written rather sloppily: for example, in 2004 Ben Bernanke when first referring to the Great Moderation was governor of the Federal Reserve, not Chair (he became Chair 2006) – minor issue, but given that it is early on in the book, one becomes suspicious. Or gems like this one: “the euro crisis… was reprehensible” – well, which crisis is not? Followed by a call to take “policy makers to court and trying them at a human rights tribunal”. Yes, lots of mistakes were made during the euro crisis, but sweeping generalisations like this one are not helpful.   Or simply stupid statements like this one: “centrist politicians, like Emmanuel Macron in France, can only win election because no one turns out to vote”, well, 75% of eligible voters in France who turned out in 2017 beg to differ! Unfortunately, this style might match the title of Angrynomics, but does not foster the necessary calm and evidence-based policy discussion we need!

These are only two out of many books that question economic orthodoxy – Raghu Rajan’s book on the importance of local community comes to mind, even though I have only read about it so far. In summary, there is an important discussion to be had, a discussion that cuts across micro- and macroeconomic and across different social sciences. In terms of politics, Martin’s book also provides an interesting agenda for a new centrist radicalism. It might also serve as interesting starting point for new political agendas, such as for social democratic parties across Europe who seems to have lost their mojo over the past decade.

Overview