Tim Harford is an economist, author and columnist at the Financial Times. His most recent book, The Undercover Economist Strikes Back: How to Run or Ruin an Economy, brought him to the LSE for a public lecture. In this conversation, he gives his views on a range of topics, from the role of central banks, to the actions of the European Central Bank during the Eurozone crisis, and his distinction between different types of recession.
Central banks have been successful as independent, technocratic institutions fighting inflation. Should we expand technocratic policymaking to other areas?
There are certain things that we want to try to leave to technocrats. We don’t want people to vote on exactly how the fire system works. We want them to figure out how to dispatch the fire engines and just do it. Apparently we want to vote on how the police system works. I don’t know why that’s a good idea. There are just certain things you want to let the technocrats deal with and I think that monetary policy is one of them.
You could make the argument that we should do climate change policy like that or that we should do fiscal policy like that. I think it gets really tricky and the reason it gets really tricky is because we get to a situation where there are so many possible policy levers, there are so many possible policy objectives. But it is perfectly legitimate for someone to say I would rather cope with a change in climate than pay higher energy bills. I disagree with that, but it’s not an outrageous political view for someone to express. It starts to get very tricky to give more lists of what is essentially contested stuff out to technocrats
For monetary policy there are areas where it becomes contested, areas where it becomes redistributive, but essentially we have a situation where the government says we want stable low inflation, everyone agrees that that’s a good idea and central banks deliver. We have had extraordinary times recently but generally people are not arguing about it.
In the context of Europe, could the European Central Bank have done more to help solve the Eurozone crisis?
I think the ECB should have done more, but the German folk memory of hyperinflation is very powerful. It just got to a situation where the Greeks and other peripheral economies tied themselves irrevocably to Germany and said “lend us money”, “we won’t print money because we’re tied to Germany”. And of course the political system wasn’t up to the necessary standard. The money was wasted and squandered by elites.
Now they’re in a situation where they’ve suddenly realised that they really did tie themselves to Germany, the credible commitment worked, and that they’re in serious trouble.
In your book you distinguish between a Classical and Keynesian type of recession using a POW camp and babysitting co-op as illustrative examples. What is the distinction and how can you tell what kind of recession is afflicting an economy? What kind of recession has the UK suffered from, for example?
A POW camp recession being basically something went wrong with the supply – something exogenously hit the economy. A Keynesian babysitting co-op recession is some kind of internal malfunction which a government can do something to fix. There’s no hard and fast way to tell one from the other. One of the things to look at is whether there is spare capacity in the economy. Have we lost supply capacity or have we just lost demand and we can maybe stimulate it? I would also look at certain patterns in unemployment, at the trend, and surveys of business – do they think they’re operating at capacity or under capacity? There are various indicators but they’re mixed.
Regarding the UK, even though an external shock was involved the downturn has been so sharp that there must be some Keynesian element in it. There must be some degree in which it’s just the economy failing to adjust, and the economy could be encouraged to adjust with help from policy. So I would say that there’s enough Keynesianism in this recession to warrant a Keynesian response. Although we are getting to the point where it’s almost too late.
What are your thoughts on the US government shutdown and potential default?
It’s a total disaster. It’s very strange that US politics has frozen up to such an extent that instead of passing legislation the regular way, a minority – or rather a majority in a single house – is able to shut the government down and seems willing to do that over any particular piece of legislation they want. That is a political system that is in a very strange place and the consequences are potentially quite serious. The consequences of the US repudiating its debt even for a few minutes are reasonably serious, it would trigger all kinds of weird contracts. So we better hope that, as in all previous occasions, they do not repudiate the debt.
It’s one thing to shut down parts of the US government, it’s another to blow up international financial markets.
A version of this interview originally appeared on our sister site, British Politics and Policy at LSE
Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
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Tim Harford is an economist, journalist and broadcaster. He is the author of “The Undercover Economist Strikes Back” and the million-selling “The Undercover Economist”, a senior columnist at the Financial Times, and the presenter of Radio 4′s “More or Less” and “Pop Up Ideas”. Tim has spoken at TED, PopTech and the Sydney Opera House and is a visiting fellow of Nuffield College, Oxford.