What should economists and policy makers learn from the financial crisis?

Ben Bernanke, Mervyn King, Larry Summers, Olivier Blanchard and Axel A. Weber talk at the LSE about the lessons of the crash.

They packed us in like late boarders on a budget flight. I shuffled shoulder-to-shoulder down the narrow passage between the rows of folding chairs in the LSE’s Old Theatre, where in an hour’s time Mervyn King would take the stage with Ben Bernanke, Larry Summers, Olivier Blanchard and Axel A. Weber to discuss the financial crisis.

A returns queue stretched out the door and back into the main lobby where students camped with blankets. I took my seat beside a young man clutching the syllabus of his development economics course while another, to my left, texted Chinese characters. Mobile phones and open laptops flickered like moths in the lamplight as the audience waited.

Anticipation hung in the air and it wasn’t surprising. Since the UK Budget and the crisis in Cyprus it seems that “policy makers” have grown complacent to inflicting pain and, when faced with protests, comfortable with popping in their earplugs. Although the US has embraced stimulus, the country has accrued debt in exchange for small boosts in growth, while some figures point towards the bank bailout (over which Bernanke presided) costing the country 20 times as much as it did in the UK.

Would the outgoing governor of the Bank of England (King), the Chairman of the Federal Reserve (Bernanke), the chief economist of the IMF (Blanchard) a foremost central banker (Weber) and a former US Treasurer (Summers) offer optimism to a jilted audience?  It was hardly Question Time, but there was a sense that we deserved some answers.

The esteemed panel didn’t offer much in the way of revolutionary talk, but humility and an openness to change both arrived as common themes. Each offered filial praise to King, who will step down as BOE governor in June. (Summers credited him with both the industry's most formidable intellect and elegant accent).

For Ben Bernanke, who spoke first, this financial crisis was “a classic” but also “novel” in the complexity of its aftermath. Bernanke’s pet project is the Great Depression and he drew insight from looking back to the other American-born crisis that left the world reeling, and the subsequent currency fluctuations associated with the dropping of the gold standard, which Britain abandoned in 1931. As head of the Fed during the Wall Street crash, Bernanke has been criticised for buying up the troubled assets of AIG and Merrill Lynch. While a lesson in economic histories is fascinating, I couldn’t help feeling he’d shirked the more riveting contemporary account many were hoping for.

The closest he came to outlining an actionable “policy” was an encouragement of “domestic objectives” achieved through “domestic tools”, discouraging emerging markets which rely too heavily on exports.  Fair point: as we’ve seen, demand is less an abundant meadow so much as a grassy cliff on the other side of which lies a self-sufficiency void. It’s wise to be sceptical of heavy capital investment in export processing zones, inherently vulnerable to demand bubbles, but is that really possible in a globalised world? It’s hard to imagine corporations pulling back from cheap labour, or the governments of sweatshop nations turning them away. Export-based economies are often touted as the cure-all investment for third world poverty (think of Bangladesh and post-quake Haiti) and foolish as that may be, until economists put forward a real alternative it seems unlikely to change.

Olivier Blanchard, speaking next, managed to charm with his five take-away lessons to be learned from the crisis: 1. Humility (economists got it wrong); 2. The importance of detail (the minutia of financial systems matter); 3. Interconnectedness (the world is one big economic family); 4. Macroprudential reform (better risk management) 5. The re-examination of central banking (how free should they be to set their own rates?).

Such decent and technical points will surely keep the generation of future economists filling the seats beside me busy – but the most important sting was the first. Blanchard spoke eloquently on the myth of progress (some people already knew) and the myriad problems associated with a rhetoric of upward ascension. It is true and terrifying that economists often forget we aren’t just getting better and better at doing things – and that history often repeats itself.

General conclusions drawn by all were that the crisis will force a reconstruction of macroeconomics and redefine the role of central banks. Though none seemed keen to embrace the policies of frugality (and implicitly backed a Keynesian approached to recovery), the evening lacked the damning tone towards austerity which would have pleased many listeners.

It was left to a nasal Larry Summers to do most of the plain talking; speaking in lofty, maple syrup-coated sentences. While the panel debated how they would each reconstruct macroeconomics, Summers chipped in:

I think there’s a central question: do we define macroeconomics as being about... cyclical fluctuations around something that was determined someplace else, where the goal – if you were successful – was to reduce their amplitude, or as tragic accidents where millions more are unemployed at costs of trillions of dollars that are avoidable with more satisfactory economic arrangements?

Until we adopt the second vision I think we are missing our principal opportunity to achieve human betterment. And as long as this question is conceptualised as ‘what new friction should we insert into the existing model’ I don’t think we’re gonna get to the kind of perspective that I’m advocating.

Economics is perhaps the eeriest of sciences: a lingering, omnipresent force without big bangs or supernovas or medical breakthroughs, but rather a complex and continually shifting clockwork that occasional implodes and shakes the world to its foundation.

For all but the economically adroit (I include myself with the amateurs), a lecture such as this haemorrhages hope like a picked scab. The distance between the policy makers and the people, from their academic language to their casual in-jokes and lack of clear solutions, is troubling. Should it have been a grave affair? Perhaps not, but it would be nice to see someone look a little scared. Down here in the audience, things don’t feel so relaxed.

To hear a podcast or to watch a video of this lecture click here.

US Federal Reserve Chairman Ben Bernanke speaking at the LSE on 25 March, 2013. (Photo: Getty Images)

Charlotte Simmonds is a writer and blogger living in London. She was formerly an editorial assistant at the New Statesman. You can follow her on Twitter @thesmallgalleon.

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A small dose of facts could transform Britain's immigration debate

While "myth-busting" doesn't always work, there is an appetite for a better informed conversation than the one we're having now. 

For some time opinion polls have shown that the public sees immigration as one of the most important issues facing Britain. At the same time, public understanding of the economic and social impacts of immigration is poor and strongly influenced by the media: people consistently over-estimate the proportion of the population born outside the UK and know little about policy measures such as the cap on skilled non-EU migration. The public gets it wrong on other issues too - on teenage pregnancy, the Muslim population of the UK and benefit fraud to name just three. However, in the case of immigration, the strength of public opinion has led governments and political parties to reformulate policies and rules. Theresa May said she was cracking down on “health tourists” not because of any evidence they exist but because of public “feeling”. Immigration was of course a key factor in David Cameron’s decision to call a referendum on the UK’s membership with the EU and has been central to his current renegotiations.  

Do immigration facts always make us more stubborn and confused?

The question of how to both improve public understanding and raise the low quality of the immigration debate has been exercising the minds of those with a policy and research interest in the issue. Could the use of facts address misconceptions, improve the abysmally low quality of the debate and bring evidence to policy making? The respected think tank British Future rightly warns of the dangers associated with excessive reliance on statistical and economic evidence. Their own research finds that it leaves people hardened and confused. Where does that leave those of us who believe in informed debate and evidence based policy? Can a more limited use of facts help improve understandings and raise the quality of the debate?

My colleagues Jonathan Portes and Nathan Hudson-Sharp and I set out to look at whether attitudes towards immigration can be influenced by evidence, presented in a simple and straightforward way. We scripted a short video animation in a cartoon format conveying some statistics and simple messages taken from research findings on the economic and social impacts of immigration.

Targeted at a wide audience, we framed the video within a ‘cost-benefit’ narrative, showing the economic benefits through migrants’ skills and taxes and the (limited) impact on services. A pilot was shown to focus groups attended separately by the general public, school pupils studying ‘A’ level economics and employers.

Some statistics are useful

To some extent our findings confirm that the public is not very interested in big statistics, such as the number of migrants in the UK. But our respondents did find some statistics useful. These included rates of benefit claims among migrants, effects on wages, effects on jobs and the economic contribution of migrants through taxes. They also wanted more information from which to answer their own questions about immigration. These related to a number of current narratives around selective migration versus free movement, ‘welfare tourism’ and the idea that our services are under strain.

Our research suggests that statistics can play a useful role in the immigration debate when linked closely to specific issues that are of direct concern to the public. There is a role for careful and accurate explanation of the evidence, and indeed there is considerable demand for this among people who are interested in immigration but do not have strong preconceptions. At the same time, there was a clear message from the focus groups that statistics should be kept simple. Participants also wanted to be sure that the statistics they were given were from credible and unbiased sources.

The public is ready for a more sophisticated public debate on immigration

The appetite for facts and interest in having an informed debate was clear, but can views be changed through fact-based evidence? We found that when situated within a facts-based discussion, our participants questioned some common misconceptions about the impact of immigration on jobs, pay and services. Participants saw the ‘costs and benefits’ narrative of the video as meaningful, responding particularly to the message that immigrants contribute to their costs through paying taxes. They also talked of a range of other economic, social and cultural contributions. But they also felt that those impacts were not the full story. They were also concerned about the perceived impact of immigration on communities, where issues become more complex, subjective and intangible for statistics to be used in a meaningful way.

Opinion poll findings are often taken as proof that the public cannot have a sensible discussion on immigration and the debate is frequently described as ‘toxic’. But our research suggests that behind headline figures showing concern for its scale there may be both a more nuanced set of views and a real appetite for informed discussion. A small dose of statistics might just help to detoxify the debate. With immigration a deciding factor in how people cast their vote in the forthcoming referendum there can be no better time to try.