A (very) short history of UK fiscal rules

Earlier this week the UK Government announced its new fiscal rule, which defines the fiscal envelope. For those of you who aren’t British, the deficit exceeded 10% of GDP during the recession and fiscal sustainability has become an important political issue, even for people who aren’t econ junkies! Unfortunately, this new rule is unlikely to encourage the sort of sustainability that the Government is hoping for. To understand why, I’m going to write a short series of posts on fiscal rules. This first post will briefly review the history of fiscal rules in the UK. For people who love technical details, this paper by Simon Wren-Lewis and Jonathan Portes is a great review and I’ll be coming back to it later.

A fiscal rule is simply a set of objectives that guide and constrain the Government as it makes policy. The rule usually comprises targets for debt and the deficit, with many variations in the details. Rules were introduced to the UK in 1997 by the then-Chancellor, Gordon Brown. Since then they have had a rocky history, as the chart shows:

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Common sense, economics, and beliefs

I see Scott Sumner has come out saying that we shouldn’t necessarily judge economic outcomes on whether they meet a “common sense” test, giving the example of an individual looking at social security.  Bryan Caplan has criticised this, claiming the common sense is the foundation of all reason and stating that in the example Scott gives by stating the Scott is only making the argument by making the assumptions sound more plausible.

I’m not going to come down the middle in this, I’m going to disagree with both of them.  The focus on an individual decision regarding something that effects only the individual (superannuation) misses the point of common sense beliefs – and isn’t the best way for Scott to make his claim regarding the difference between “truth” and “plausibility”.  Remember, beliefs include our beliefs about others – and how this corresponds to (and can be valued as) aggregate action.

I’ve written about common sense and economics before. To quote wikipedia.

Common sense is a basic ability to perceiveunderstand, and judge things which is shared by (“common to”) nearly all people, and can be reasonably expected of nearly all people without any need for debate

As a result, common sense is a theory of belief formation – not just beliefs regarding your own actions, but beliefs regarding the actions of those around you.

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‘Communist’ isn’t the cat call it used to be

I see Kiwiblog cat calling the Labour party as Communist, because it wants to have a bunch of policy settings that are seen as either common or at least admissible nowadays – but were revolutionary in the mid-nineteenth century.

I honestly don’t see the point in doing this.  The Cold War is over now, and both social and physical scientists are finally getting free of the constraints inherited from that period.  To say that the Cold War constrained and influenced the debate on what to research, and the rhetoric to use, would be an understatement.  Just read a biography on scientists during the period (eg Lakatos), or listen to an interview where Piketty talks about his willingness to discuss trends in capital to output ratios – with the Cold War open we can have a more open and honest discussion on trade-offs.

Honestly, calling someone out as Communist nowadays means as much as calling them Nazi, I can’t help but ignore whatever is being said.  This is a pity, as inherent in the extremes of Nazism and Communism were negative attributes that can easily be underplayed in policy – ignoring the agency, and value, of the individual.  Instead of cat calling, it is probably better to make arguments along this line ;)

Here  I am not trying to say we can’t disagree with social policies, I’m just saying it is possible to do so on merit.  This is why the discussions about trade-offs, and the limits to knowledge, are what matters.  Furthermore, collectivist thinking is not solely the domain of obvious social policy, but other views that may seem right of centre.  Thinking about trade-offs makes this clearer.

Now, my impression is that social scientists and economists had it a bit better than physical scientists – a lot of economists had Communist sympathies, and fell in love with the managerialist command and control nature of policy.  Furthermore, they saw themselves as these (high status) managers.  This would be a trend that is of genuine concern as it would involve managerialism and valuing the individual as a unit (or production or health), rather than through their capability to live a good life.  These arguments deserve thought, not cheeky political gamesmanship!

General Equilibrium and factor shares

Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there :)

I was surprised that there was a chapter focused solely in general equilibrium – and not GE in general, but competitive, neo-classical, GE.  I was especially surprised as such a model isn’t really “built” for distributional analysis – economists often say we need a different framework to do distributional work!

It is a neat chapter though, so let’s pop it in here :) Read more

Neo-Ricardian factor shares

Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there :)

Last time I said I thought Neo-Ricardian was Post-Keynesian – it seems like they have similar authors, but the essays focus on different “important elements”.  Furthermore, the direct issues with “neo-classical factor models” are indeed clearer here!  However, the focus seems much more on short-term, and in some ways monetary policy, issues rather than long-term trends in factor shares.  That is ok, but it is important to note that some of the Post-Keynesian models in these chapters are discussing different questions than the questions the earlier part of the book was based on. Read more