Lessons from 35 years as a professional economist

Dr John Llewellyn, chief global economist at Lehman Brothers, has recently turned sixty. In the 7 August issue of The Observer he says this turning point led him to ask: "what, over the past 35 years as a professional economist, I have learnt that is of real use". Ten useful lessons for a sexagenarian is his answer. I summarise his ten points below:

1) Economic events - what economists call 'shocks' - seldom produce just one consequence. Usually the effects ripple on for years.
2) Good economic policies do not guarantee good economic performance; but bad economic policies inevitably result in bad performance.
3) It is structural, not demand-side, policies that most influence economic performance over the long term.
4) People respond powerfully to economic incentives.
5) Economic and social policies have to be considered as a whole.
6) Competition is one of the most powerful of forces that motivate the perpetual quest for more efficient ways of doing things.
7) History seldom, if ever, repeats itself precisely. Economies have the habit of producing new mixtures of circumstances that require new approaches.
8) Complicated economic policies whose rationale is hard to explain usually fail.
9) Some of the biggest, and most important, economic issues remain unresolved.
10) Just because professional economists don't always have a confident answer, it does not follow that all proffered solutions have equal validity. ...often the biggest contribution [they] ..can make is to demonstrate why the current fad or nostrum is wrong and will fail.

Remarkably, I find myself in agreement with all ten points.

Llewellyn considers the last of his ten points "perhaps the most important", but I would argue that points 4 (incentives) and 6 (competition) are the most powerful in explaining economic behaviour. To that I would add an additional point that most markets work well most of the time, subject to certain minimum conditions.

On the third point, structural reform, he is right on the money:

It is structural, not demand-side, policies that most influence economic performance over the long term. The experience of reforming economies as diverse as Australia, New Zealand, the Netherlands, and Poland is testimony to that. But structural policies take ages to produce effects. The initial consequence is usually a reduction in expenditure, which slows economic activity. It typically takes five years or more for positive effects to start to outweigh the negative. No surprise that politicians so seldom undertake reform. They know that the negative consequences will occur on their watch, while the benefits will accrue to their successors. Look at how Labour has benefited from the policies of Mrs Thatcher.

For a market economist, though, Llewellyn is surprisingly equivocal about US economic performance compared with Europe:

A major experiment in macroeconomic management is under way, with the US on the one hand and the continent of Europe on the other, following quite different philosophies. In the US the biggest fiscal and monetary boost to spending in the past 50 years has produced a strong economic recovery, but also two asset price booms/bubbles - first the stock market; now housing. Steadier polices in the euro area, by contrast, have largely avoided this. But economic growth has been slow, and risks becoming self-perpetuating. Whether activist US policy, or the steady-as-she goes European approach will produce the better outcome over the economic cycle as a whole is not yet clear: this is a two-act play, and so far we have seen only the first.

I highly recommend reading the whole article.

Comments

[ashish]

But structural policies take ages to produce effects. The initial consequence is usually a reduction in expenditure, which slows economic activity. It typically takes five years or more for positive effects to start to outweigh the negative. No surprise that politicians so seldom undertake reform. They know that the negative consequences will occur on their watch, while the benefits will accrue to their successors. Look at how Labour has benefited from the policies of Mrs Thatcher.

May we need to give politicians incentives to do long-term beneficial reforms.

[foo]

I do not think you would find much argumanet that points 4 and 6 are very important. However, point 7 is one that has to be considered carefully:

7) History seldom, if ever, repeats itself precisely. Economies have the habit of producing new mixtures of circumstances that require new approaches.

You'd here no argument from Keynes, but how many modern economists who hang their hats on the ergodicity assumption would agree (or even know that they are disagreeing)?