New ideas are needed in economics, but not the tired old statist ones

The annual Institute for New Economic Thinking (INET) conference was held in Toronto earlier this month. INET was created by George Soros in the autumn of 2009 in response to the economic crisis. Mainstream economics bears a heavy responsibility for creating the intellectual climate prior to the crash that the problems of boom and bust had been solved forever. New ideas were needed. Certainly, INET has funded lots of interesting projects which orthodox funding bodies would have rejected.

But a striking feature of the discussions, both formal and informal, at the Toronto meeting was a mood of pessimism. The recovery since the recession has been too weak, and more expansionary policies are required. The state needs to take a more active role in promoting prosperity. A similar note was struck just over a year ago when Olivier Blanchard, the chief economist at the IMF, visited the UK. Unless austerity was abandoned, he warned, the UK faced a triple dip recession. Since then, of course, the British economy has recovered strongly through the efforts not of the public sector, but of the private sector.

The same story describes the progress of the economy in America since 2009. The facts are in direct contradiction to the tone of the Toronto meeting. The latest economic data now suggest that the peak level of GDP in the US prior to the crash was reached in the fourth quarter of 2007. Output the fell steadily until the second quarter of 2009. In the final quarter of 2013, the latest date for which we have GDP data, it had risen by no less than 11 per cent since the trough, and was 6.3 per cent above its previous peak.

The American recovery has been driven by the private sector. Since early 2009, for example, government spending, both federal and local, has fallen by over 7 per cent in real terms. In contrast, capital expenditure by companies has risen by 25 per cent.

The same theme is reflected in the employment statistics. As is usually the case in recessions, employment continued to fall after GDP had started to rise again. For a period during a slump, firms are not sure that the drop in output has stopped, and continue to lay people off. The low point was reached in December 2009. By March 2014, total employment had grown to a level almost 8 million higher. But in the public sector, employment had fallen by 640,000. The private sector in the US has created the best part of 9 million new jobs.

Of course, public policy has played an important role in the recovery. But this has emphatically not been of the interventionist, naive Keynesian public spending kind. To repeat, the public sector has contracted. Rather, it has been expansionary monetary policy and quantitative easing which has created the framework in which recovery could take place. New thinking in economics is certainly needed. But it needs to be consistent with empirical evidence. More public spending and rising public debt are not the answer to recessions.

Paul Ormerod

As published in City AM on Wednesday 30th April 2014

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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

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Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.