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Q: Are you surprised that the financial crisis has not prompted wider debates within the economics profession?
A: I’m not sure that’s true. It takes a while for these things to filter through. There’s certainly no consensus in academia, policymaking circles or among commentators over how the financial crisis arose, what the responses should be and what the consequences are for economics. I’m not a historian of economic thought but I would assume that if you went back to 1929 the situation was very similar. We think of the Keynesian consensus as being a post-war phenomenon so you’re talking of over a decade of intellect ferment. What will economics look like in 10 years after the dust has settled? I don’t know. But I think certainly macroeconomic modelling, forecasting and analysis is very much up in the air in a way that it wasn’t 10 years ago. Whether it will stay up in the air or come down where it started I don’t know.
Q: Do you view the “Great Moderation” as a period where debates surrounding macroeconomics impact on policy were effectively silenced?
A: I think that’s true. The Great Moderation was effectively a period – from a policymaking point of view – where people thought macroeconomics was dead. The received wisdom was that macroeconomics was over as a policymaking problem and hence academic macroeconomics wandered off into areas that had almost nothing to do with policy.
Q: Do you think that sense of complacency has been shaken?
A: It’s clear that we are in a position where we really have much less consensus on the impact of policy tools. You have quite wide divergences in forecasts. I think if you looked at the policy debates seven or eight years ago at the Monetary Policy Committee basically people were arguing about whether you should pay attention to this labour market indicator or that business confidence indicator. The basic view was that if the economy looked too hot you put interest rates up and if it looked to cold you put them down. Now, however, there are quite fundamental debates going on for example about what do we think the consequences of deleveraging will be on demand, what channels that could work through and what policies can be undertaken to counter it. Within these you have big differences of opinion with some people arguing that QE is completely ineffective and that monetary policy is impotent, while other people believe that monetary policy just hasn’t been tried hard enough. These are serious and fundamental debates about how the economy works and what the relationship is between finance, money and the real economy.
Q: What do you make of criticisms over the policy responses of the Bank of England?
A: There is a lot going on in central banks at the moment. It’s amazing how quickly you get this new convention wisdom – people are already talking about quantitative easing as if it was old hand and you read articles by serious commentators talking about “standard quantitative easing”. Well quantitative easing is not standard. I was in the Cabinet Office when we were first talking about it and this was really radical stuff. No-one was saying that this was anything remotely normal and it’s certainly not standard in the sense that neither our macro model nor any other conventional macro model has any particularly rigorous of a) calibrating the impact of quantitative easing and b) measuring the impact or advising on policy relating to its withdrawal. We are nowhere near knowing what quantitative easing does let alone some of the other things around expectations management or NGDP targeting that are being discussed.
Q: Do you think that at this point there is growing evidence that monetary policy can struggle to offset the impact of deficit reduction policies?
A: I think that’s the case. There’s two ways of looking at it: One is to say that with interest rates at the zero lower bound monetary policy is ineffective. In Simon Wren-Lewis’ model that is the case but other people’s models still suggest there are other things that central banks can do to stimulate demand. Another way of looking at it is from a more practical viewpoint. Where I differ policymaking-wise from people like Adam Posen, who would say that we should be doing more QE and eventually it will work, is that I think that if you are so uncertain about the impacts of asset purchases then just as a practical matter it is pretty difficult to make policy. Under those conditions I would be worried about overshooting. Due to this I tend to regard fiscal policy as the conservative side of macroeconomic policy management because we do sort of know how to calibrate it. This is why I find the Financial Times editorial line completely bizarre as for a some time now they have argued that we should take the “helicopter money” idea seriously while supporting the government’s fiscal plans on the grounds of credibility. It seems to me the idea that you risk the government’s credibility by borrowing an extra couple of percent of GDP for investment but there would be no risk to credibility by doing something which nobody in modern times in an advanced developed country has ever tried and that is generally considered to be last ditch strategy is an odd conclusion.
Q: What could the UK government do to aid the economy through the downturn without worsening the long-term outlook for public finances?
A: In the short term I think they should increase spending both through funding investment projects and through some tax cuts. The medium- to long-term problem for public finances is predominantly one of healthcare and pensions. To my mind, I actually believe that thinking of those as a fiscal problem is probably the wrong way to start. We are getting older and richer, which means that we will be spending a lot more on healthcare in 20 years time and that’s what we should be doing. There is no model you can write down of preferences under which that would not be the right thing to do. That has to be paid for and ultimately it has to be paid out of our pockets. And then there’s a choice over whether that funding comes from taxation, private insurance, some sort of social insurance or direct out-of-pocket payments. You have to come up with a system that is both politically acceptable and that has as much equity and efficiency you can achieve. It seems to me that the solution whereby we privatise the whole system and make everyone pay for it except for the poor is not particularly politically sensible, efficient or equitable. It seems equally unlikely, however, that a 1948- style centrally controlled National Health Service spending 15% of GDP is going to be either politically feasible or very efficient. By definition you are going to end up with some mixed system of private/public insurance with some sort of quasi-market for services.
The question of what trading arrangements the UK will have with the European Union, should we choose to leave the EU, is clearly central to evaluating the economic impacts of “Brexit”.
Leaving the EU might – or might not – increase our degrees of freedom in immigration policy. But it would be no magic bullet – difficult policy questions would still remain.
This article examines the Government’s immigration policy record, looking at each of the main immigration routes for those coming to this country from outside the European Economic Area.
We can’t be open for business and closed to immigration. For the good not just of the economy, but of the country as a whole, we must choose the former.
How far can the Coalition's policies be credited with Britain's "jobs miracle"?
Pieria interviews Jonathan Portes, director of NIESR, on the reasons behind the UK's recent economic performance.
The economy will grow by 2.9 per cent in 2014.
Does the UK recovery prove wrong those of us who argued that the Government's fiscal consolidation plan, announced in June 2010, was poorly designed and ignored some basic economic principles.
NIESR's Jonathan Portes on the Coalition's refusal to publish a new report on immigration
Growth prospects have improved in advanced economies, particularly in the US, but have deteriorated in a number of emerging market economies.
Jonathan Portes responds to Alistair Heath's recent claim that, "Free-marketeers were right on jobs - the left got it wrong".
In economics, trade and migration are likely, in theory, to have similar impacts. In both cases, the overall impact will be positive, but there will be distributional consequences.
The current government’s accounting for the finances of higher education has been consistently problematic since 2010.
The measures announced by the Prime Minister yesterday to deter "benefit tourists" are a "series of phantom measures to combat a phantom problem".
Even when taking tax credits into account, there is little evidence to suggest that "benefit tourism" is a significant issue.
Dan Hannan doesn't like admitting error. This would be less of a problem, says Jonathan Portes, if he didn't get so many things wrong.
Fiscal consolidation had a negative impact on growth up to 2013-14 and isn’t now; the fact that consolidation damaged growth earlier may be having a positive impact on the strength of growth now.
Ed Miliband is right to put training on the political agenda, but in pointing the finger at firms who recruit skilled migrants, he is attacking the wrong target.
Debt burden is central to Scotland’s currency choices, according to new research.
Matthew Parris had an interesting article about economists and economic forecasting in last week's Times. But, in his references to me and to NIESR's forecasts, he obviously hasn't done his homework.
Jeremy Warner has a remarkably evidence-free article arguing that "mass immigration" is the main driver of "Britain's dismal long term productivity performance", says Jonathan Portes.
If the benefits are significant, the downsides relatively small, and there is potential for future gains, why is free movement so controversial?
If we want to be "open for business", as the Prime Minister puts it, we cannot be closed to migration.
David Goodhart's talk of an “extraordinary mass exodus” of white Britons from London is not a sensible contribution to an important policy discussion; instead, it distorts the debate.
Jonathan Portes looks at the theory and the evidence for the contention that central banks can "offset" fiscal consolidation.
Jonathan Portes explains why the UK can (and should) ignore the European Commission's recommendations.
Jonathan Portes gives his shortlist of the top economists that people should be listening to.
"I don't see this as the product of a rift. I think it's a consequence of the economics starting to dominate the politics"Posted by Jonathan Portes on Apr 17th 2013
Jonathan Portes, Director of NIESR, talks to Pieria about the IMF's criticism of UK government policy and the challenge to Reinhart/Rogoff.
Jonathan Portes, Director of NIESR, talks to Pieria about the response to the crisis and where we go from here.
A discussion of the economic implications of immigration policy.
Economics is a toolkit that enables better understanding of how people live, and how societies work.
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