July 2015 newsletter – 2015 Annual Conference Report

The Society’s Annual Conference took place at the University of Manchester from 30th March to 1st April. This report comes from Mark Thoma, professor of economics at the University of Oregon and blogger at Economist’s View.1

What role do economics journals play in economics, and how has that role changed over time? That question was prompted by this year’s Royal Economic Society meetings held at the University of Manchester from March 30 through April 1, 2015 commemorating the 125th anniversary of the Economic Journal and the Royal Economic Society. In addition to an excellent selection of keynote lectures, special sessions, and regular sessions, the conference included eight sessions highlighting some of the most important work to appear in the EJ since its inception. A special edition of the EJreleased during the conference featured reprints of thirteen seminal articles, including the eight highlighted in the anniversary sessions, along with commentary from distinguished economists detailing how the work has evolved over time and how it has shaped current research efforts.

125 years of the EJ
When the Economic Journal was first conceived, its goal, as noted in the superb discussion of its history in the anniversary edition of the EJ, was ‘to support the development of young economists,’ ‘to encourage debate at the highest academic level,’ and to ‘incorporate diverse viewpoints for the benefit of the country at large.’ Editor Francis Ysidro Edgeworth emphasized this last point in the very first edition of the journal. He was emphatic that ‘The most opposite doctrines may meet here as on a fair field. Thus the difficulties of Socialism will be considered in the first number; the difficulties of Individualism in the second. Opposing theories of currency will be represented with equal impartiality. Nor will it be attempted to prescribe the method, any more than the result, of scientific investigation.’

The motivation for the EJ was also an attempt to keep up with what was happening in the US. The Quarterly Journal of Economics was established in 1886, four years before the inaugural edition of the EJ. At this time there was, of course, no Internet, and long-distance communication was very slow. The UK needed its own journal, and the EJ fulfilled this role admirably.

In the past, journals such as the EJ played an important role as a source of information on cutting edge research, as a source of policy analysis of the most important issues of the day, and as a way to recognize economists for important contributions to the field. Today, the role of journals as sources of information has faded. If an academic waits until research is published in journals, he or she will be many years behind. Working papers posted on websites, academic conferences, seminars, economics blogs, and so on are the main way that new research and policy analysis spread through the economics community today. However, journals still play an important role in validating research — the peer review process stamps articles with their place within the research hierarchy — and in determining whether the work of particular economists is sufficient to grant them tenure at their academic institutions. Journals are also important repositories of academic research. Websites come and go, link addresses can change, but journals provide a place where a particular paper can be reliably located years, decades, or in the case of the EJ over a century, after it is written. For these reasons, reports of the death of journals are premature.

The list of papers in the special issue of the EJ is impressive. The first paper, ‘The measurement of the inequality of incomes’ by Hugh Dalton was the subject of one of the special anniversary sessions at the conference. This paper first appeared in 1920, and Dalton’s work, along with work by Arthur Cecil Pigou, provided a welfare basis for the measurement of income inequality, a topic of considerable importance today. Participants in the special session ‘(Almost) A century since Dalton (and Gini): where is inequality analysis going?’ discussed this important paper along with further developments in research on inequality such as the distinction between income and consumption inequality, the decline in income inequality across countries, inequality dynamics over time, and the assessment of inequality using multidimensional measures.

A second anniversary session on the opening day of the conference, ‘Harrod and Ramsey on Growth,’ drew its inspiration from two important papers in growth theory, Frank P Ramsey’s ‘Mathematical theory of saving’ (1928) and Roy Harrod’s ‘Essay in dynamic theory’ (1939). Both of these papers played a large role in shaping theories of growth and saving. The session discussed how these papers paved the way for subsequent research on growth and savings such as equilibrium models of growth and life-cycle consumption models, more recent research in these areas, and where this research is headed in the future. One interesting note in the discussion of Ramsey’s work by Orazio Attanasio in the special edition of the EJ is that ‘Ramsey’s article refers explicitly to conversations with John Maynard Keynes, who was Ramsey’s colleague at Cambridge and the Economic Journal’s editor, in formulating part of the main proposition. And yet, in his General Theory, Keynes (1936) used a much more simplistic and stylised theory of consumption, which had profound implications for the working of his model of the macroeconomy.’

The final anniversary session on the first day of the conference, ‘On and beyond regret theory,’ centred on an important paper in behavioural economics, ‘Regret theory: an alternative theory of rational choice under uncertainty,’ by Graham Loomes and Robert Sugden. This important research provided an explanation for experimental studies during the 1960s and 1970s that undermined expected utility as a theory of rational choice in the face of risk. Essentially, regret theory says just what its name implies, that the anticipation that a choice may be regretted causes agents to incorporate this into the decisions that they make. It can provide an explanation for choices in the face of risk that other theories such as prospect theory — the prevailing theory in 1982 when the paper was published — could not. The session featured Robert Sugden explaining how he and Graham Loomes developed their theory, followed by a roundtable discussion of subsequent developments in this field.

The Sargan lecture
As a macroeconomist, my attention was caught by the Sargan Lecture ‘Labour supply: estimating the roles of human capital and the extensive margin’ given by Michael Keane. One of the big problems in the current strain of macroeconomic models is that estimated labour supply elasticities are not large enough to explain variations in employment observed in real world data. This has proved to be a difficult problem to overcome theoretically. This paper shows that including human capital in the life-cycle labour supply model gives labour supply elasticities that are much larger than in previous work — large enough to explain the variation observed in the data. Professor Keane also explained why labour supply might respond more to permanent changes in taxes than to temporary changes, a finding that has important implications for tax policy.

There were many other interesting general and special sessions on the opening day, too many to discuss here, covering a wide range of areas such as development, econometrics, economic methodology, economic theory, experimental and behavioural economics, finance, industrial organization, international economics, labour economics, macroeconomics, political economy, and public economics.

Secular stagnation
One of the special sessions, ‘Secular stagnation,’ focused on a topic that has generated considerable discussion recently within economics and in the media. Secular stagnation, proposed by Alvin Hansen in 1938 and revived recently by Larry Summers, is the idea that the economy can become stuck in a low growth state for a considerable time period. The conference session featured four papers on this topic. The first, ‘A model of secular stagnation’ by Gauti Eggertsson and Neil Mehrotra provides something that is very much needed in the debate over secular stagnation, a coherent model explaining how it can arise. The second paper, ‘Why are real interest rates so low? Secular stagnation and the relative price of investment goods’ by Gregory Thwaites also provides a theoretical explanation for secular stagnation, and attempts to explain how interest rates can get stuck at very low levels — such as we have now — for an extended period of time. The third, ‘What explains Japan’s persistent deflation?’ by Carlos Carvalho and Andrea Ferrero looks at the possibility that the failure of monetary policymakers to fully account for Japan’s demographic transition could result in deflationary pressure of the type observed in Japan’s economy. With the US facing similar demographic trends in the years to come, there are lessons here for the Fed.

The first day ended with a reception at the Museum of Science and Industry. In addition to the wonderful hospitality, I particularly enjoyed the exhibits illustrating how Manchester became a leader in science and technology. The story of cotton, the industry that made Manchester the world’s first industrial city, was quite interesting. This is one of the things that set this conference apart from other conferences I have attended, having the evening venues at interesting sites around town.

The behaviour of real wages
The second day of the conference featured three more anniversary sessions. The first, ‘The cyclical variation of real wages,’ discussed a topic that is still important today. The session was based upon a series of papers published in the late 1930s when John Maynard Keynes was the editor of the EJ.Papers by Dunlop, Richardson, and Tarshis challenged Keynes’ assertion that real wages move countercyclically as implied by both Keynesian and Classical models, and that wages are stickier than prices. The Dunlop-Tarshis observation has been particularly troublesome. The empirical evidence that has accumulated since these important papers were published suggests either a mildly positive correlation between real wages and output, or in some cases no correlation at all, but not the negative correlation that the theoretical models imply. The problem is that in standard macroeconomic models a positive demand shock increases the quantity of labour employed, and that reduces the marginal product of labour and lowers the real wage. Thus, these models predict a countercyclical movement in real wages. Models where fluctuations are driven by productivity shocks, e.g. Real Business Cycle models, can explain the positive correlation observed in the data, but those models have other problems, e.g. generating the correct correlations between money, prices, and output.

The session began with a fascinating discussion of how this debate has unfolded over time by John Pencavel, followed by presentations of modern research on this issue. Lawrence Christiano presented an interesting paper jointly written with Martin Eichenbaum and Mathias Trabandt that can account for labour market correlations with only a moderate degree of price rigidity, no wage rigidity at all, and a binding zero bound constraint for the nominal interest rate. In addition, they can explain the small drop in inflation during the Great Recession through an increase in the cost of working capital and a fall in total factor productivity. What makes this interesting is that downward wage rigidity — the usual explanation for the downward stickiness in inflation, but one they doubt — is not needed. The second paper was by Christopher Huckfeldt, Antonella Trigari, and Mark Gertler. This paper notes that the wage flexibility of new hires is larger than for workers that are already employed, and works out the implications for cyclical movements in unemployment. The final paper by Benjamin Johannsen, Lawrence Christiano, and Martin Eichenbaum looks at multiple equilibria in New Keynesian models. These equilibria have very different implications for government spending multipliers at the zero lower bound. One of the equilibria in the model has large multipliers, the other small, and the paper shows how stability under learning selects the equilibrium with large multipliers. Thus, this paper adds to the growing theoretical and empirical support for large government spending multipliers in severe recessions.

Savings and time
A second anniversary panel on day two of the conference, ‘The taxation of savings,’ featured Anthony Atkinson and Agnar Sandmo’s important paper ‘Welfare Implications of the Taxation of Savings’. This paper, which was published in the Economic Journal in 1980, uses an overlapping generations model to analyze optimal dynamic taxation of capital and labour and welfare gains across generations. Alan Auerbach and Mikhail Golosov discussed further developments in this area, and Richard Blundell led a broader discussion of these issues.

The third and final anniversary session on day two of the conference was ‘50 Years of home production and the allocation of time.’ The starting point for this session was Gary Becker’s very important paper ‘A theory of the allocation of time’ published in the EJ approximately 50 years ago (hence the title of the session). This paper provided the analytical basis for studying home production and the allocation of time within households. It spawned an enormous literature in the decades after it was published, and influenced research in a large number of fields outside of labour and family economics. The session began with four presentations of Becker’s research, including the ways in which his work has been modified over time and nagging problems within the theory, followed by a panel discussion on the impact of Becker’s work.

Day two of the conference also featured the Economic Journal Lecture given by Philippe Aghion, ‘Innovation, income inequality and social mobility.’ Professor Aghion, in an interesting, lively, and entertaining session presented his work on the relationship between innovation and top income inequality in the United States. He finds evidence of causality running from innovation to inequality, and that innovativeness is correlated with social mobility. Overall, the results ‘vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction.’ This work will be an important contribution to the debate over why income inequality has been growing, and what can be done about it.

As with day one there were also numerous interesting general sessions, too many to cover in detail, in a large number of areas within macroeconomics, microeconomics, and econometrics.

Day two ended with the Conference Dinner held at Old Trafford, the home of Lancashire County Cricket Club. It was my first trip to a cricket club, so I found it fascinating, and it was clear that everyone had a great time. The highlight of the night was a very entertaining speech by the incoming president of the RES, John Moore, who replaces Charles Bean.

The impact of high tax rates
The third day of the conference also had a dazzling array of general sessions, along with special sessions featuring lectures on the econometrics of matching, the top rate of income tax, the new entrepreneurial financing landscape, and social preferences over environmental policy. The session on the top rate of income tax was of particular interest to me, and I was not disappointed. In this session chaired by John Van Reenen, James Browne presented a paper coauthored with David Phillips, ‘The impact of the UK’s 50p tax rate,’ Henrik Kleven looked at ‘The Danish experience,’ Camille Landais examined ‘The French experience,’ and Alan Manning presented ‘The labour supply of the 1 per cent.’ The takeaway for me was that the work effort of those at the top of the income distribution does not change much when top tax rates are increased to levels we have seen in the past, but there is evidence that tax avoidance increases as rates are raised. This has obvious implications for current debates about how to close budget deficits, and how to narrow the inequality gap.

Innovation and growth
Day three of the conference also featured the final two anniversary sessions. The first, ‘Innovation and growth,’ was based upon the 1989 EJ paper ‘Innovation and learning: the two faces of R&D’ by Wes Cohen and Daniel Levinthal. This paper looks at two important issues, how firms are able to increase the technological frontier through their R&D efforts, and how firms are able to keep up with the frontier as it changes over time. The session showcased three papers on innovation and growth in the 21st century, and explained how the original Cohen and Levinthal paper provides important foundations for understanding issues in growth theory such as convergence, or lack of convergence across countries, the coordination of climate change policy across countries, and the relationship between openness and the production of ideas. The session also featured recent work on the nature of innovation and invention.

Climate change
The second anniversary session, ‘Climate change and economic growth’, was based upon the extremely important paper ‘To slow or not to slow’ by William Nordhaus. The paper, which appeared in the EJ in 1991 and generated a large subsequent literature, was the first paper on controlling greenhouse gas emissions. The session, which included William Nordhaus, Nicholas Stern, Simon Dietz, Rick van der Ploeg, and Ottmar Edenhofer, looked at the degree to which the Nordaus paper was the foundation for subsequent research on the dynamic modelling of economic growth and climate change policy, and some of the latest research on this topic.

The President’s Address
One of my favourite sessions of the conference, the Presidential Address by Charles Bean, ‘Living with low for long’, came on the afternoon of the final day. In this session, Professor Bean examined the issue of how much longer interest rates would stay at the low levels they are at today. He argued that the decline in interest rates began in the 1990s, which is well before the financial crisis and subsequent recession, and therefore that we shouldn’t expect interest rates to rebound now that the recovery is underway. He showed several other periods in history when interest rates remained low for long periods of time, but noted this period is unique in that it is also accompanied by low inflation. The reasons for the low interest rates are not entirely clear, and he cited aging of the population leading to higher savings, poor investment opportunities, less capital intensive production, secular stagnation, and post-crisis higher savings rates by households along with lack of business confidence as possible causes. He noted that there are substantial risks with prolonged low rates, e.g. he identified a ‘search for yield’ that can lead to excessive risk taking for one, and hence that central banks ought to be concerned with this development.

Finally, I would be remiss if I did not mention an important event at this year’s conference, the Inaugural Symposium of Junior Researchers, which took place on April 2, 2015 at the University of Manchester. The goal was to bring together PhD students at all stages of work on their doctoral theses, encourage discussion of what it takes to be a successful researcher, and to give students an opportunity to learn more about research in their primary area of interest. The Symposium, which was supported by the Royal Economic Society, took place concurrently with the RES Conference to maximize the ability of students to connect with one another and learn about the frontier of research in economics.

All in all it was a great conference. It was very well run and the hospitality was wonderful. There were important sessions highlighting the latest research in a broad swath of economics, there were sessions discussing the best work of the past, and it was a great opportunity to meet new people. It was also a great opportunity to learn about the first 125 years of the RES and the EJ. I have no idea what the next 125 years will bring in terms of scholarly communication, but I have no doubt that whatever is ahead the RES and the EJ will continue to play an essential role within the economics profession.

1. http://economistsview.typepad.com/; @MarkThoma