July 2018 newsletter – Conference Report 2018

The Society’s Annual Conference was held at the University of Sussex, 26-28 March. Ben Chu of The Independent, reports his impressions.

This year’s Royal Economic Society conference was held somewhat off the beaten track. Sussex University's Falmer campus is a ten minute train journey out of Brighton, sitting atop the gently undulating South Downs.

As I disembarked from the train at Falmer station and strolled under the A27 underpass in the direction of Sir Basil Spence’s 1960s brutalist fastness, I couldn’t help thinking that this isolation might be something of a relief for the 500-odd economists who had gathered for three day of lectures, seminars, dinners, drinks, debate and digressions.

In recent months, the profession has been on the receiving end of a fusillade of complaints. Practitioners are routinely written off as neoclassical-model worshipping ideologues, neoliberal shills, financial crash-missing incompetents, and physics-envying, arrogant, jargon-spouting, poltroons. And that’s just the abuse from other economists. Non-economists have been even less appreciative.

So if many attendees felt pleased to be protected from the angry mob at the gates of the profession’s citadel, who could really blame them? Don't we all need a ‘safe space’ sometimes?

Talking better
Safe space or not, some of the attendees were willing to take a constructively critical view of the profession

One of the well-attended special sessions on the first day of the conference was on ‘economics communication’. Diane Coyle, of Cambridge University, made the argument that the discipline’s reputational problems are, in part, sociological, remarking that the subject is far more likely to be taught in private schools than state schools. This, to her mind, helped to create an academic profession dominated by those from better off backgrounds. And that not only makes it difficult for economists to speak to the general public, but can influence the subjects deemed appropriate for study. ‘We need to be less unrepresentative,’ she urged. Diversity is an argument that we’ve become used to hearing in relation to gender, unsurprisingly given economics’ heavily male skew, but less so in relation to social class.

Another frustration for Coyle is the maddeningly vague way economists often use jargon. She highlighted that ‘capital’ can mean a variety of different things depending on which researcher is speaking. Sometimes it’s money, at other times it’s machinery. And then there’s the endless menu of human capital, social capital, environmental capital etc — all very different concepts.

‘We need to be careful about language,’ Coyle pleaded, noting that economists often end up confusing themselves, never mind the general public. It’s hard to disagree, yet given this semantic ambiguity over the meaning of capital dates back all the way back to Adam Smith one holds out little hope of it changing soon.

On the subject of reform, Tiago Mata, an economic historian from University College London, contributing to the same special session, dropped the bombshell revelation on delegates that ‘journalists can be formidable intellectuals’.

That was comforting for this journalist to hear. But Mata’s broader argument was that economists shouldn’t be sniffy about collaborating with us hacks since we’re, apparently, often closer to the public than ivory towers researchers. Why? Because journalists have to produce work that is directly relevant to their readerships every day, in a way that academic economists don’t.

I wasn’t entirely convinced. But Mata had some nice case studies. He cited a thermometer that appeared on the cover of the popular US magazine Business Week (now owned by the giant financial news provider Bloomberg) between the 1930s and 1960s which served as a basic indicator of the changing level of American economic activity. This was long before economists developed their own survey-based sentiment indicators. And, he noted it was the Economist editor Walter Bagheot who first started collecting and publishing data on the balance sheets of London banks.

Mata might have also mentioned the FTSE Index, named after the Financial Times, or the Dow Jones Industrial Average, created by the Wall Street Journal founder Charles Dow, as examples of journalistic economic innovation. But the takeaway message was clear: ‘Newsrooms produce knowledge too’.

The theme of economic communication returned on the third day of the conference, but this time we got a policymaker's perspective. Gareth Ramsay, the new executive communications director of the Bank of England, flying the flag for Threadneedle Street at the RES, talked us through what the Bank calls its ‘layered content’.

These are a series of graphics with text explaining to a non-specialist reader, in extremely simple terms, the latest decision on interest rates made by Bank’s Monetary Policy Committee and why it was made. They are aimed at busy people who, as Ramsay put it, ‘would rather watch puppies on YouTube’, 

In contrast to Mata’s plea for economists to collaborate with journalists, Ramsay said the Bank's goal was actually to cut out what the Bank sees as an increasingly sensationalist and unreliable mainstream media ( ‘Their agenda is not our agenda’). and to communicate directly with the public via social media.

Fair enough. But is the new content actually any good? I confess I’d not even made time to inspect these graphics when were produced for the first time last year by the Bank. But a presentation by Michael McMahon, formerly of the Bank and now at Oxford University, has persuaded me to take them seriously.

McMahon presented survey evidence showing that people exposed to the Bank’s new layered content reported a greater understanding of its decisions relative to those that didn’t. A bonus is that people exposed to the graphics reported higher trust in the Bank. Improved public communication seems to be a high returning investment.

But is anyone listening?
As far as the economic research actually presented at RES 2018 was concerned, if one had to pick a persistent theme it would be trade — appropriate enough given that, as the conference took place, headlines screamed of Donald Trump’s tariff sabre-rattling and the ongoing headache of Brexit.

Dave Donaldson, winner of the 2017 John Bates Clark medal for best US-based economist under age 40, gave the Sargan Lecture on day one. He began by looking at new techniques to squeeze counterfactual predictions (for example: what would have happened if China hadn’t joined the global economy in the 1980s?) out of neoclassical international trade models. All very technical, though important if economists are too give decent policy advice on trade. He then moved on to evaluating domestic industrial policies. The estimated gains from Donald Trump's ‘America First’ agenda? Around 0.1 per cent of GDP to US, according to the Donaldson. ‘I don't know whether you think that’s big or small,’ he offered. We were allowed to draw our own conclusions.

On the second day of the conference, speaking on a special panel on the view on Brexit from abroad, Sussex University’s own trade expert, Alan Winters, offered a blast of home truth to those who insist that leaving the European Union will restore our national sovereignty. The mistake here, argued Winters, is ignoring the fact that we need some level of regulatory harmonisation on product standards, through the EU’s single market, to trade freely and efficiently with our European neighbours.

‘Sure, you can develop your own standards, but if you can’t trade with the rest of the world you effectively have little sovereignty anyway,’ he pointed out.

Winters also stressed that the single market for services goes hand in hand with freedom of movement for EU labour. The idea that one can neatly divorce the two is another fallacy. He pointed out that conferences, like the RES’s, still attract flesh and blood audiences, despite the fact that technology, in the form of high-speed broadband and webcasts, in theory allows people to participate remotely. ‘You are proving that face-to-face contact for services is important,’ he observed.

Nick Crafts of Warwick, one of the UK’s most eminent economic historians, was speaking at a National Institute of Social and Economic Research session on that toughest of economic nuts, the UK’s productivity puzzle.

But Crafts framed his contribution through the prism of Brexit. Is the EU to blame for our dire productivity performance? He asked. It was a question to which the answer turned out to be no. EU accession in 1973, said Crafts, boosted domestic competition, helped rid us of failing corporate managements and was, actually, a crucial element of the Thatcher revolution of the 1980s. What a pity so many nominally Thatcherite Tory MPs today seem to have forgotten that. And this history, according to Crafts, pointed to an under-appreciated future danger for the UK: ‘A hard Brexit risks a return to the 1970s’.

In a separate session, Michela Vecchi of Middlesex University addressed a different, but equally persistent, economic puzzle, namely that the share of national income going to labour, as opposed to capital, seems to have been declining for many years across the rich world.

She noted a plethora of hypotheses, from robotisation, to globalisation, to the rise of superstar firms, to de-unionisation, to monopoly power. But, in the spirit of Diane Coyle’s presentation, she turned things around and asked what we actually mean by the ‘capital share’ of national income? Is capital really homogeneous, as the standard analysis of this question tends to assume? Vecchi’s research pointed to a positive relationship between investments in ‘knowledge capital’ (such as company R&D programmes) and workers’ wages.

‘The concept of capital has changed. We cannot rely on a single estimate of the capital stock to explain the labour share,’ she said. The implication of all this, as Vecchi pointed out, is that Trump-style industrial protectionism is very unlikely to help struggling US manual workers. ‘It’s more likely to make robotisation even faster because firms cannot rely on globalisation,’ she warned.

Yet a sad sense of futility clung to such advice. The UK cabinet contains ministers who have famously ‘had enough of experts’. And Trump? This is someone who boasts that ‘my primary consultant is myself’. Economists don’t just feel under siege, but ignored too.

On the subject of advice, the RES held an event, open to the public, on: ‘Is university worth it?’. The panel of experts cited lots of individual benefits of attending higher education, from greater employability, to higher lifetime earnings. We were even told that going to university makes you live longer. And amid ongoing student disgruntlement about high tuition fees, the income-contingent student debt repayment regime was emphasised.

Yet, disappointingly, the panel didn’t directly engage with the key counterfactual outlined recently in a book by the US economist Bryan Caplan, namely: would society simply be better of if we had a radically smaller higher education sector? Might we have locked ourselves into an educational arms race, where everyone has to have an expensive degree to get a job, not because the job truly requires the skills conferred by a degree, but simply because everyone else has one and to lack one marks you out to many employers as somehow deficient?

The members of the public who had come up to the Falmer campus were less interested in counterfactuals than in practical answers to the question of whether to send their own children to university or not. One audience member revealed that she had recently had her student loan wiped out by the government because she had never earned enough to be asked to pay it in and the 30 expiration had now kicked in. It was unclear whether this was cause for congratulations or commiserations, or indeed whether it supported the pro-university arguments of the panel, or contradicted them.

Drinking problem
This was a conference, like most others, mainly powered by coffee. But fizzier beverages were on the minds of some delegates. For as the RES conference convened, the UK government’s long-awaited tax on sugary soft drinks was about to land.

And Rachel Griffith, a research director of the Institute for Fiscal Studies, who will be the first female president of the RES next year, presented new IFS work showing that this is a pretty ‘well-targeted’ tax as far as targeting the health externalities created by excessive sugar consumption goes.

Why not just tax sugar? As Griffith explained, historic data on demand elasticities suggest that targeting all sugars through a new levy would not do much to shift overall buying behaviour. But taxing soda alone tends to hit young people, who are the main guzzlers of the stuff. And this age cohort seems to be pretty price sensitive. There are always social trade offs of course. Middle aged builders, whose soft drink consumption seems very price inelastic, will be made worse off by the new tax.

It’s pleasing to see policymaking that’s backed by some solid evidence, although it's not clear whether this happened in the case of the sugar tax by accident or design.

Should we go further though? Panagiotis Margaris of Manchester University made the case for removing the VAT exemption on food in order to tackle obesity, estimating that this could save the NHS around £200m a year by curbing excessive eating. Yet, observing the data and arguments presented, I couldn’t help feeling that there might a danger of placing rather too much confidence in econometrics as a predictor of how people will react to new taxes. People’s behaviour can change. As fund managers used to tell their investors, the past is no guarantee of the future.

The lecture by the outgoing RES president, Andrew Chesher, struck a similar note of caution, warning econometricians against presenting a spurious degree of precision in their results. ‘We should be wary of choosing models because they deliver point identification of the objects of interest,’ he said. And, echoing Edward Leamer’s famous cry, Chesher urged: ‘Let’s take the con out of econometrics’.

But econometrics gave way to pure theory in the Hahn lecture, delivered by Botond Koszegi of Hungary’s Central European University. Though this theory came with a twist. Koszegi presented evidence that more regulation can actually help markets to function better.

His subject was markets where a range of firms offer complicated offers, such as mobile phone contracts with variable data download tariffs. Botond’s model suggests that if consumers can do less ‘study’ (defined as ploughing through the small print of a particular contract) they can spend more time ‘browsing’ for better headline offers, thus increasing effective competition.

They key is to regulate the ‘secondary features’ of contracts, such as capping the charges for additional data in that mobile contract. This enables all consumers to be reasonably confident that they are not going to be ripped off, even if they study less.

Koszegi argued this was consistent with a host of markets where people on low incomes seem to end up getting a raw deal relative to better off people who shop around more. High street banking and domestic energy here in the UK spring to mind.

Some have criticised Koszegi’s approach for using a pretty dense mathematical model to explain what common sense tells us is true. Yet this seems to me to miss the point. Regulators and competition authorities, faced with market failures, tend to reflexively push for more consumer choice, rather than consider the case for more active regulation. What Koszegi provides is a new analytical tool for regulators and competition authorities to use when considering or justifying interventions.

If nothing else, Koszegi’s model is a useful rebuttal to the claim that mainstream economists are all neoliberal zealots, merrily inventing models to justify deregulation.

Chosen people
Another depressing political backdrop to the 2018 conference was a row over anti-Semitism in the Labour Party. Maristella Botticini’s Economic Journal lecture provided some economic context to that ancient bigotry.

There’s a mordant old joke, made in ‘Fiddler on the Roof’, about the Jews being God’s chosen people: ‘Once in a while can’t you choose someone else, God?’ Botticini, of Bocconi University, showed that a remarkable number of Jews once ‘unchose’ themselves.

There was a massive fall in the size of the Jewish population — from 4.5 million to 1.2 million — between the second and seventh centuries CE, which Botticini said was a result of voluntary conversions.

Why the exodus from the faith? According to Botticini’s research it was because one Jewish sect, the Pharisees, prevailed in an internal struggle with another, the Sadducees, in the wake of the Roman destruction of the Second Temple in Jerusalem in 70CE.

The Pharisees went on to impose a requirement on the Jewish population to educate their sons so they could read the Torah in Hebrew. This was so economically onerous that millions of Jews decided that they would rather convert to paganism or, more commonly, the burgeoning religion of Christianity.

Yet the fact that the remaining Jewish population was now well-educated gave them a huge comparative advantage in the developing urban economies of the Middle East, with hundreds of thousands using their skills to become merchants and money lenders.

It’s commonly assumed that Jews in Europe became merchants because they were prevented by discriminatory medieval laws from owning land or joining the traditional guilds, or that they took up money lending because Christians were prohibited from doing it. I confess I’d assumed this to be part of the story.

But not so according to Botticini. Not only is evidence of such discriminatory laws hard to find, but the idea that the Jews who migrated to Europe in the Middle Ages would have wanted to become farmers doesn’t make much sense.

‘If Jewish people wanted to be sharecroppers in France, or in Germany, or in Italy in the Middle Ages they could do,’ she said. ‘You come from either the Muslim empire or the Byzantine Near East. You’re a wealthy merchant. You want to go and plough the land in the middle of nowhere? Probably not. Once you start using economic thinking, you see that these restriction stories make no sense.’

Rather, they entered these professions simply because they had the skills to do them.

It was a brilliant, and convincing, piece of economic history. And it’s astonishing to think that an accident of history — the victory of one faction in a religious hierarchy — can have such huge consequences. This ought to be a textbook example of path dependency.

The theoretical implications might be important too. Economists have been on a quest for decades to establish a robust model to explain why some nations achieve economic take-off while others don't, with everything from natural resource endowments, to culture, to institutions, and even climate all favoured as explanations at one time or another. Botticini’s work is further evidence that the secret sauce might be investments in human capital.

What economists really do
#Whateconomistsreallydo has become the profession’s defensive hashtag on social media. And the evidence I saw at the RES conference is that most of those in attendance do relevant and high-quality research.

Lots of the smaller presentations dealt with practical and important questions, ranging from the economic factors behind rise of the far right in Europe, to the impact of immigration on training for native citizens, to the effectiveness of international aid, to evidence on whether tailored individual blood pressure warnings work or not.

The famous ‘empirical turn’ was greatly in evidence in most of the sessions I attended. One cannot be everywhere at once in a sprawling conference like this but I personally didn't see much evidence of the neoclassical dogmatism and unmoored theorising that critics so often denounce.

Yet, as my train pulled out of Falmer, one thing was clear in my mind: that a major challenge remains in communicating the best of this academic work to the general public and overturning the ingrained impression that all economists do is make dodgy macroeconomic forecasts.

The case, as others have urged, for the Royal Economic Society itself to speak up more readily on behalf of the profession when it’s traduced and to communicate the consensus view to policymakers, whether the subject be protectionism, Brexit, or the macroeconomic impact of public spending cuts, feels more pressing than ever.

Academic economists need to come out of the bunker. And the best form of defence, as they say, is attack.