Sunday, 12 October 2008

What have we learnt?

It's obviously still early days to say what the events of the past few weeks will mean for the longer term. Personally I think the most important question is what do we learn from all this.

There's got to be a major impact on economic thinking amongst all politicos. I remember a few years ago a colleague at the TUC who was a bit older and considerably more well-informed than me remarked that there was no longer really an alternative Left view of economics. This was in marked contrast with the earlier history of the labour market. That has surely been proven to be right on the money by the fact that we have struggled to know how to respond. I suggested the other day, maybe the unions could try and recruit ex-City people to beef up their expertise, but more broadly this must be a time for lefties of all stripes to pick up those economics textbooks.

Robert Peston argues on his blog today that the decision to take stakes in the banks is one of the most significant economic developments for decades. He also suggests that it is the death knell for a least one element of Thatcherism. But what comes next? Certainly the idea that we just let the City do its thing and gratefully take the tax revenue has expired. De-regulation certainly seems to have played a role in the curremt crisis, but let's not oversell the ability of regulators to spot problems that the director sof the companies they regulate cannot.

More broadly this will not presage a significant shift back towards major state intervention in the economy. Perhaps there will be renewed interest in a state role in certain sectors (see the Tomorrow's Company report on ownership for example) but I think the main impact will be a more positive view of the role of the state in resolving economic problems, rather than as an owner itself. In the short-term I would not rule out seeing Government appointees on the boards of those firms taking public money. But as exciting a prospect as that might seem for lefties whose principal perspective on politics is the need to obtain positions of power, I would suggest that's actually amongst the least interesting areas of future policy work. If only it were as simple as getting 'our' people in the right places. What we need to be thinking about is how we get organisations to do the things they are supposed to effectively.

I also think there has to be recognition that asset price bubbles are a serious public policy issue. It's incredible when you think about it that we have witnessed within a decade the implosion of two bubbles - in the stockmarket and in housing - with relatively little comment. Let's learn the lesson this time. As I've blogged many times before, Robert Shiller is a great bloke to read on this stuff - not just to see how bubbles form, but also his description of the cultural and psychological effects of bubbles.

This might require some serious thinking about capital markets. Do all of them play a valuable role? If so is there a way we can make them behave less erratically and more reflective of economic reality. That might sound like a huge issue, but right now we have a window of opportunity to ask these really big questions. And don't forget that this feeds into other areas. The big falls in the stockmarkets recently have punched another hole in the funding of pensions. (we might also ask equities really suit the needs of pension provision effectively - bear in mind that pension funds haven't always had such large equity portfolios).

It's a truism that stockmarkets are driven by greed and fear, As such is there anything we can take from behavioural finance that can help us make tweaks to markets or design early warning systems? Equally can behavioural economics provide us with some ideas for how to structure remuneration? To date the idea that you provide extra pots of honey to incentivise certain types of behaviour doesn't seem to have worked very well. I think we should get the very clear message from this that some of our ideas about incentives don't really get on very well with human nature. Remuneration consultants will no doubt argue that we need even more complicated remuneration structures to make sure we really are incentivising the right kind of behaviour, but perhaps we should also take a look at whether a simplified system would be better.

And finally there's my own hobby horse - shareholders as owners. They haven't been doing a very good job have they? I think if we are going to keep the public company model alive we have to acknowledge the failure of ownership. I still think we should try and make it work, but the crisis should knock on the head once and for all the idea that ONLY shareholders should be involved in governance issues like pay. They are simply too weakly-incentivised to do the job properly and those that argue that pay is simply a matter for shareholders are in my opinion advocating a very dangerous governance model.

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