ADDRESSING CHALLENGES OF A NEW ERA: AGAINST RULE-OF-THUMB ECONOMICS

[John Short]

Interesting article in IMF's Finance and Development  Magazine March  2024


Better economics must start from the premise that our existing policy models are inadequate for the range and magnitude of challenges we face, writes Harvard's Dani Rodrik in the forthcoming March issue of IMF Finance & Development magazine.
Economists will have to address these challenges imaginatively, applying the tools of their trade in a way that takes into account differences in economic and political context in different parts of the world, he writes.
"Economics can help only if it expands our collective imagination instead of reining it in."

Full article from:

https://www.imf.org/en/Publications/fandd/issues/2024/03/Point-of-view-addressing-challenges-of-a-new-era-Dani-Rodrick?utm_medium=email&utm_source=govdelivery


Reading it I don't think the baby is being thrown out with the bathwater but perhaps politicians should apply the underlying principles of economics to their own circumstances rather than follow a political mantra that does not take account of reality!

[John Short]

Another related article

A PLACE FOR POLITICS
JEFFRY FRIEDEN
MARCH 2024

"Politics is often messy, but it’s how society puts a value on things economists can’t measure."

"Economics is good at identifying policies that could raise aggregate social welfare. One such policy is free trade. Virtually all economists believe that most economies could be improved by removing barriers to trade. No sensible economist or policymaker pretends that this is costless: while consumers and exporters may benefit, firms and industries that have trouble competing with imports are likely to suffer.

There is a simple economic solution. If a social-welfare-improving policy creates losers, the benefits it generates for society can be used to compensate those harmed. The government can tax those advantaged by trade liberalization—exporters, consumers—to help those disadvantaged, autoworkers for instance. Since by definition the policy increases social welfare, spreading the gains will still leave society better-off, only in a more equitable fashion than if we simply left newly unemployed autoworkers to fend for themselves."

https://www.imf.org/en/Publications/fandd/issues/2024/03/A-Place-for-Politics-Jeffry-Frieden?utm_medium=email&utm_source=govdelivery


Economics: How should it change? 

From financial crises to climate change to technological innovation, the global economy has evolved drastically in recent decades, yet economics as a discipline is much slower to adapt.

In the March issue of Finance & Development we ask, Economics: How should it change?

“Extensive professional soul-searching since the global financial crisis of 2008 has focused on how economics can better integrate social sciences and elevate welfare and distributional issues,” writes F&D editor-in-chief, Gita Bhatt.
“There has been much rethinking of macroeconomics and the design of policy approaches. And there is a growing consensus that the profession must be open to new ideas and frameworks if it hopes to solve the world’s biggest problems.”
This issue of F&D takes a fresh look at the discipline. We invited leading economists and other eminent thinkers to share their views on how economics must change to better address the challenges of the 21st century.

Leading with our symposium, How Economics Must Change, we ask six prominent economists to contemplate how the profession can improve:
•   Rethinking My Economics | Questioning one’s views as circumstances evolve can be a good thing | Angus Deaton
•   Why and How Economics Must Change | Economics needs greater humility, a better sense of history, and more diversity | Jayati Ghosh
•   Renewing Economics | Fundamental economic changes require a departure from simplistic economics | Diane Coyle
•   How Inflation Radically Changes Economic Ideas | Inflation teaches us that supply, not demand, constrains our economies, and government borrowing is limited | John H. Cochrane
•   Breaking the Debt Supercycle | Dependence on credit to boost demand imperils the world economy—we must correct the underlying imbalances | Atif Mian
•   Economics and Innovation | Economists can play a crucial role in the development of innovations for serving social, environmental, and other human needs | Michael Kremer

[John Short]

As applied to the UK in
https://www.instituteforgovernment.org.uk/publication/strengthening-uk-fiscal-framework
Strengthening the UK’s fiscal framework Putting fiscal rules in their place
by GEMMA TETLOW OLLY BARTRUM THOMAS POPE

Fiscal policy making in the UK has been far from perfect. Problems like short-termism, policy churn and gaming of the system are often blamed on fiscal rules. This report examines whether that
is fair, or whether these issues are rooted more deeply in the underlying fiscal framework and makes recommendations for strengthening fiscal policy making.
https://www.instituteforgovernment.org.uk/sites/default/files/2024-02/strengthening-uk-fiscal-framework.pdf

The UK’s fiscal framework, including a flawed set of rules, is incentivising bad policy decisions shaped by short-termism and fictional spending plans – and does little to promote fiscal sustainability.

With a week to go until Jeremy Hunt’s pre-election budget, this report warns that successive governments have gamed their fiscal rules: claiming to be adhering to fiscal discipline while frequently announcing short-term giveaways matched by longer-term tax rises or spending cuts that often do not materialise. While the chancellor will use his budget to insist he is working to the letter of the fiscal rules, the paper says he will not be adhering to the spirit of those rules.

Jeremy Hunt will only “meet” his fiscal rules through "worse than fiction" spending plans – plans that Labour is set to remain broadly signed up to – and immediate tax giveaways, as he and his predecessors have done in 85% of fiscal events since 2010. But these spending plans will almost certainly have to be revised, as they have been in nine out of 10 previous spending reviews. Despite this, the OBR will be obliged to say that the chancellor has met his fiscal targets because it has to take Hunt’s (fictional) word for it.

The report sets out why the current approach is no longer working – and provides a guide for this or future governments to reform the framework to enable them to make better choices. It calls on chancellors to set out a comprehensive fiscal strategy – working out the levels of taxation, expenditure and debt that are consistent with meeting government’s overarching objectives – from which a set of rules can follow.

With fiscal rules acting as an important signal to the financial markets and the public, and by providing a “commitment device” for government, the paper rejects calls to abolish them and instead sets out a new approach. Its recommendations include:

Committing to a single fiscal event per year to allow greater long-term strategic thinking 

Committing to a new regular cycle of spending reviews, with budgets covering five years and reviewed every three years

Redesigning fiscal rules so that they are consistent with government’s objectives, treating investment differently to current spending, binding in the third year of the forecast (rather than the fifth as the current rules do), and providing flexibility to respond to shocks

Giving the Office for Budget Responsibility the flexibility to assess whether government policy is consistent with meeting the government’s overarching fiscal objectives, rather than just the letter of specific rules.

[John Short]

Difficult to know which board to post this but it does relate to "against rule-of-thumb economics".


just been in Ireland (for the successful  defence of the 6 Nations) and a few articles in the papers were of interest.

The first related to a briefing on new European rules relating to fiscal policy which is going through formal EU legislation process and is expected to be in force in May.
Essentially it is setting out a 4 to 5 year framework rather than the one year many countries have (including Ireland which the article "McGrath to update Ministers in new fiscal rules" By Jack Horgan-Jones The Irish Times March 20 2024, mentions)

https://www.irishtimes.com/politics/2024/03/20/michael-mcgrath-to-update-ministers-on-new-fiscal-rules-currently-going-through-formal-eu-legislative-process/

The only webpage I can find  is
https://economy-finance.ec.europa.eu/economic-and-fiscal-governance/fiscal-frameworks-eu-member-states/fiscal-rules-eu-member-states_en
which is a bit dated.


On a more serious note there was an article in the Sunday Independent on St Patrick's day (the day after that game) by Tom Rowley entitled : A gaggle of economists walk into a pub in Castlebar and reckon they’re in Cascais.
https://m.independent.ie/life/tom-rowley-a-gaggle-of-economists-walk-into-a-pub-in-castlebar-and-reckon-theyre-in-cascais/a483953223.html

The first paragraph is:

"What is it about economists? They’re hard to live with a lot of the time, but it seems we can’t live without them. George Bernard Shaw wryly said that if all the economists were laid end to end, they’d never reach a conclusion. The Canadian educator Laurence J Peter reckoned “an economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today”. For me, British fashion designer Vivienne Westwood really hit the nail on the head when she concluded that “economists treat economics as if it’s a pure science divorced from the facts of life”.

It is an amusing read but I hope that the second article is not related to the first!

At least as Tom Rowley states "The economists loved the quaintness of the pub and the earthy, good humour of the regulars".  That is something I can relate to!