Performance pay for the public sector?

In December last year The Work Foundation released a comprehensive review of performance-related pay in the public sector:

PRP schemes can be effective in improving outcomes across the three public services for which evidence is available (health, education and the civil service), although the central conclusion is that the outcomes from PRP are mixed, which much dependent upon organisational and occupational context and scheme design and implementation. Where positive effects have been found, effect sizes are sometimes small and may also be short-lived. As well as evidence gaps across much of the public services, the weight of evidence also varies, with the more robust evidence coming from education and health rather than the civil service. Cost-effectiveness data to assess the value for money of PRP interventions is also rare.

The implication is that performance-related pay isn’t a quick fix: it requires careful development to fit it to the context, and organisations might take a while to adapt to it and see benefits. Without more examples in the public sector it isn’t possible to say whether it will prove cost-effective.

Alesina on austerity: round 2

Alberto Alesina has returned to the fray with a new paper that shows how tax rises are far more damaging than tax cuts. With a new dataset covering the recessionary years, this is the most up-to-date evidence on fiscal consolidation available. Importantly, they are unable to discern evidence that the ZLB caused the effects of fiscal policy to be greater. Of course, this isn’t the final word and it’s only one piece of evidence, but I’ll be reading it closely over the next few days.

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

The Economist’s misguided lecture to macroeconomists

In a bizarre leader article The Economist praises microeconomists for their use of data to better predict people’s behaviour and recommend macroeconomists do the same:

Macroeconomists are puritans, creating theoretical models before testing them against data. The new breed [of microeconomists] ignore the whiteboard, chucking numbers together and letting computers spot the patterns. And macroeconomists should get out more. The success of micro is its magpie approach, stealing ideas from psychology to artificial intelligence. If macroeconomists mimic some of this they might get some cool back. They might even make better predictions.

I’m tempted to label this as obvious baiting but the misunderstanding is deeper than that. Read more

Fiscal rules, growth and the ZLB

Yesterday I wrote that the consequence of a fiscal rule with a short horizon has been austerity, which delayed the UK’s economic recovery. Of course, that analysis misses a very important element of the recent recession, which is that the UK’s monetary policy was at the ZLB. That greatly increased the effect of fiscal policy on GDP in a way that wouldn’t happen in normal times. It’s also why Portes and Wren-Lewis recommend that any fiscal rule be suspended during periods where monetary policy is at the ZLB. So why am I really worried about a growth cost that is only realised in very unusual circumstances?

If the ideas about secular stagnation turn out to hold water then we may be hitting the ZLB far more often in the coming decades. Even if that doesn’t eventuate, real interest rates have been trending down for a long time, which has led some people to recommend a higher inflation target to avoid the ZLB in future. The upshot is that, unless there are changes to the standard monetary policy regime–flexible targeting of 2 per cent inflation–high fiscal multipliers and fiscal activism may become a regular occurrence. If it does then the government’s fiscal rule had better work during those times, too.