2013 Staff Student Football Match - Final score Staff 2-17 Students

The students promised to give the staff a lesson in football and what a lesson it was. They smashed the previous record score held by the student team of 2011 who beat the staff 7-3 and have taken the aggregate score after 5 years to Staff 12-28 Students.

Every student player put in a great performance with every outfield player scoring!!! Craig Rankin was top scorer with 4, there was a hat- trick from Michael Smith and we should also mention captain Thomas Thomson who was solid in defence and organised his team brilliantly and goalie George Lerner who was excellent. There was also some inspired goal keeping on the staff team. In fact, the highlight of the match was when Steven Dieterle made a quadruple save at close range. The score could have been much worse!!!

You can be sure that we have made extensive notes from this lesson but we will put them to one side for now and will revise from them the day before the game next year.

Man of the match: Michael Smith for his many goals and assists and intricate skills.

Photos to follow....

A very European Christmas

A few months ago a short film called A very European break up took the web by storm with its hilarious take on the European crisis, transformed in a couple crisis between Germaine and Greco. The film laughed at all the stereotypes thrown by media and politicians during the turmoil of August-September by recasting it in a different light. But above all other considerations A very European break up was a very funny piece.

Now its writer and director, Bob Denham, has launched a sequel that puts all European partners in the same Christmas table. All types of funny confusions and mishaps happen before a conclusion that sends a message that everybody should take seriously: We must look for a coordinated and fair solution to the very difficult times Europe is facing.

IFS Annual Lecture

Slides and audio are now available from this year's Institute for Fiscal Studies annual lecture. This year's lecture, Numbers and public policy: the power of official statistics and statistical communication in public policy-making, was given by Andrew Dilnot CBE. Andrew is Chair of the UK Statistics Authority, as well as Warden of Nuffield College, Oxford and recent chair of the Commission on Funding of Care and Support, which published its report Fairer Care Funding in July 2011. Andrew was director of IFS between 1991 and 2002. You can download the full slideshow and audio recording from the IFS website: http://www.ifs.org.uk/publications/6433

It's structural change, stupid!

Last Monday November 5th, Nobel Laureate Joseph Stiglitz gave the inaugural lecture of the Barcelona Graduate School of Economics. You can for information on the lecture here. But let me highlights two things on it, one that Stiglitz mentioned and one that he didn't. Among the very interesting aspects he touched upon, Stiglitz mentioned that the current crisis is above everything else the result of a structural transformation. In the same way, he said, in which the Great Depression marked the transition from an agricultural economy to an industrial economy, right now we are experiencing the consequences of a transition from an industrial economy to one based on services. In that light, the crisis is not financial in its origin; the financial side of it is less a cause than a consequence of a much larger phenomenon. For Stiglitz, thus, governments are making a huge mistake pursuing austerity measures. They should rather help and foster the transition to the new period.

The second aspect, the one which Stiglitz did not mention, was political economy considerations. It is typical of him to say without ambiguity how bad economic policy has been, how many wrong measure have been taken, how income inequalities and irresponsible deregulation has been permitted,and even how bad advising  many macroeconomists have provided. But he seldom provides any reason for that, and for sure no political economy angle, which I sorely miss from his analyses. I understand that Stiglitz does not need these explanation to help him to convey his message but in my view, any explanation that neglects those aspects is incomplete and ultimately unsatisfactory.

For instance, you can find a nice political economy-esque explanation for the explosion of debt in this post by documentary filmmaker Adam Curtis.

More on Spain

As promised, here is my brief appearance in BBC News Channel last Thursday on Spain's general strike and incoming austerity measures. A quite "domestic" appearance full with the *muick muicks* typical of Skype.
Just a disclaimer, when I say that Spanish debt is above the Italian I really meant the spread. It live TV!

On the budget cuts in Spain

Yesterday, Spain announced an unprecedent tax cut of £22bn in order to meet the deficit target imposed by the UE. I have been asked by the BBC to comment on the current economic situation in Spain and its prospects. On Thursday I appeared on BBC News Channel and this morning on BBC5 radio. I will try to post the video of the former, but in the meantime you can listen to my mumblings (too early for a Satuday morning) about 1h14m. Just follow this link. It will be available for a week.

School of Economics Football 2012 - the movie!

School of Economics annual staff vs senior honours students football result

Staff 3-0 Students

It was not a good day for the students but what a performance from the staff team.

The first important decision the students had to make was who would be the substitute. I am afraid that they did not cover themselves in glory when they automatically chose the only girl on the team, Catherine Adley. I am happy to report that there was no such bias in the staff team and the only girl on the team, Andy Snell, played the entire game.

It was clear that it was not going to be the students’ day when from a corner, the staff team decided to fire the ball into the box in the hope that after a few ricochets it would end up in the net. The improbable odds against this working are 2²⁷⁶⁷⁰⁹ to one. It worked.

The highlight of the match came when David (the tank) Comerford was marauding down the left wing and Catherine (the boys finally let her play) came across and took him out. It was a perfectly legitimate American football tackle but as the School of Economics is sensitive to cultural differences, the referee decided not to call a foul. Some other redeeming features of the student team were Alistair Dean who was brilliant in defence (although he got the only yellow card of the game for a spectacular dive) and Jared Anderson who showed some neat skills.

The staff team had a scare when from a staff throw-in, Ed threw the ball back towards the keeper. Sevi had taken over in goal (this was because, as he described it, after a bit of running he felt like his insides were about to fall out) and was turned the other way, looking up at the sky. Jupiter and Venus appeared to be very close together and he was contemplating the connection between this and the fact that the staff team were winning. Fortunately, Andy Snell who orchestrates things (without ever shouting or swearing) saw the danger and simply told Sevi to turn around. Sevi then nonchalantly picked the ball up just before it went over the line. This was the closest the students came to scoring.

The students did show commendable grace in defeat and not once did any one of them suggest that there should be a rematch. They truly understood that it is the taking part that counts.

Some consolation for students, after four years it is 2 wins each but the aggregate score is Staff 10-11 Students. Will the class of 2013 keep the students ahead? Tune in next year to find out.

Man of the match: Nick Vikander for running the equivalent of 7 marathons in less than an hour.

~Match review written by referee/player/match organiser Ahmed Anwar~

Launch of Volume 2, Issue 1 of Insight

Insight is the economics magazine produced by our students and these photos show the launch of the latest issue.

You can read the magazine online at: www.edeconsoc.co.uk






This issue is themed 'unions', covering Greece and the eurozone, the aftermath of the London riots and the modern family.

Staff/Senior Honours Students Christmas meal

We had a great evening out yesterday with staff and Senior Honours students. We started off in Khushis restaurant - a huge banquet with more than 50 students and staff. The food was wonderful and the conversations were animated and amusing - to say nothing of the sharing of gossip!




After that, many of us went to the Pear Tree and continued the animated conversations.





After that, some of the group went clubbing - no photos of that, sorry!

It was a great evening!

Steve Jobs and the belief in a just world

When Steve Jobs died last October 5th my Facebook news feed was flooded with posts to his speech at Stanford University in 2005. These posts were just part of the overwhelming wave of tributes and praise that followed to his death. I have to confess that I was surprised and slightly puzzled by that phenomenon. In the end, Jobs was a (very) smart entrepreneur but he was not a messiah or genius inventor. (Wilson Greatbatch, the inventor of the pacemaker, died last week; helped to save many lives and received an infinitesimal fraction of Jobs' praise). At that point I just thought that probably a similar crazyness developed when Elvis Presley died back in 1977,

Still, I watched the Stanford speech in order to find out what was so special about it. What I found, in my view, was just the usual number of common places surrounding the concept of the American Dream: The idea that if you work hard enough, that if you "stay hungry" your effort will be rewarded and good things will come to you. Nothing really new. Still, the resucitation of this speech seemed very telling because right now many within the ranks of the middle classes are turning their rage from the rich bankers to the underclasses because the latter allegedly commit massive benefit fraud and do not work hard enough. Anyway, that is another story. The important thing is that the ideas in Jobs' speech seem to be backed by the received wisdom that says that in America social mobility is so high that the son of an immigrant from Kenya can become President. Jobs himself was a very successful person with a middle-class background, and that fact added even more plausibility to the ideas he wanted to convey.

But me being an skeptic means that I have to question any received wisdom. And given that I am also European (and being an skeptic and being European seem to go hand in hand) I have an even stronger tendency to question the received wisdom that comes from America. To start with, survey results show that in the US most people hold what I will call the Jobs' view and believe that effort rather than luck determines personal income. In Europe the majority believes the opposite. Similarly, in the US there is the extended belief that the poor are poor because they "are lazy and lack willpower". Still, the reality is that social mobility is NOT higher in the US than in Europe and that people in the lowest income quintile on the two sides of the Atlantic work a fairly similar amount of hours. Then why is it that the Jobs' view is so persistent and widespread?

These questions made me remember I very nice article by professors Roland Benabou and Jean Tirole entitled Belief in a just world and redistributive politics, published in the Quarterly Journal of Economics in 2006. The authors propose a nice theory to account for the prevalence of the Jobs' view but also why it is so different from the standard, and opposite, European view: Individuals can choose to believe in the idea that the world is a just place where effort is rewarded and people get what they deserve. Even though daily evidence may run against this belief they will strive to reduce this dissonance and, also importantly, will try to shield their children from this evidence. In the end that belief leads to low tax rates and high effort, partially because the lower taxation but also because people genuinely belief that effort pays. In the other equilibrium, people hold "European beliefs" and do not expect effort to bring high rewards. Then they vote for high taxes and exert lower effort.

In the end, people under the Jobs' view may be wrong but they welfare may be higher even if the psychological cost of maintaining false beliefs is included. The poor though are very likely to end up worse off: Both because they receive less transfers and also because since the prevalent belief is that effort pays, they will be more likely to be stigmatized and labelled as "lazy". And they will stay hungry.

25 Economics blogs

Follow this link to find 25 Economics Blogs Anyone Can Appreciate. An interesting and comprehensive list with the usual suspects and interesting lesser known sites. In any case, do not stop reading our Edinburgh Economics Blog!

Report from Lindau: Day 3

I am writing from St Gallen University in Switzerland, where the closing ceremony of the Lindau meetings is taking place. The ceremony includes a panel of economists who will discuss the origins of the financial crisis. Similarly ambitious topics were covered yesterday in the third day of the meetings.

Roger Myerson provided a model of moral hazard in the banking sector where bankers have career concerns and used it to explain financial bubbles. This way of integrating micro and macro considerations is much needed if better models of the economy are to be build. Daniel McFadden also tackled the important issue of government intervention in the health insurance markets when there exist frail consumers. Unfortunately, both talks were not well constructed, were technical and much of their message was lost.

Ed Phelps gave a more descriptive talk and denounced the rise of "corporatism", a way of conducting economic policy that goes back to Mussolini and that consists on a strong intervention of the state in favor of the interests of private enterprises. Phelps argued that corporatism was prevalent in Tunisia and Egypt, and led to corruption, nepotism and inefficiencies, but also in the US where corporatism has precluded the less well off from enjoying the benefits from the last episode of economic growth.

The lectures by Eric Maskin and George Akerloff were much better structured and clear. Maskin gave a talk on Condorcet and Borda voting rules that was almost identical to the one he gave in Edinburgh four years ago. Akerloff gave an introduction to the use of the concept of identity in Economics and its explanatory power. The talk, that was also a way of publicizing his recent book with Rachel Kranton, said nothing new to those have been reading his work with attention but it was of interest to those unfamiliar with his ideas. It is quite remarkable that when Akerloff first mentioned these concepts around fifteen years ago the profession received them with profound skepticism. Fortunately, thanks partially to the behavioral revolution, his work has received the appreciation it deserves.

But the big star of the day was, unsurprisingly, Joseph Stiglitz. It was amazing how Stiglitz managed to compress so many ideas in just 30 minutes. He started with his by saying that macroeconomics has failed as a science because it failed to predict the crisis and as an example mentioned the facts that the models used by central banks do not actually include a banking sector. But his two main ideas where that globalization has made the system less stable rather than in the other way: Financial integration helps contagion and exacerbate risks. The other idea was that the recent crisis, provoked by staggering inequality according to him, was a manifestation of a structural change . In the same way as the crash in 29 represented the transition from an economy based on agriculture to one based in manufacturing, the 08 crisis has marked the transition from a manufacturing based economy to a service based economy. Given this structural change, models and data from the previous "era" are of little use in the new one.

In the afternoon, I attended the parallel discussion session in which Stiglitz answered questions from a big crowd of young economists. He elaborated on some of these ideas and discussed how also with globalization the Pareto optimality of free trade gets severely undermined: With international prices of agricultural products, bad harvests mean that local farmers receive lower revenues for sure. He insisted in blaming, quite rightly, Alan Greenspan for the dire situation of the US economy who thanks to the Iraq war and the tax cuts transformed a superavit into a unmanageable debt.

Now is time to go on a boat trip at Lake Konstanz. So that's all from Lindau, folks!

Report from Lindau: Day 2

Disappointing. This is probably the word that best describes the second day of the Lindau Nobel Meetings, where panel and discussions revolved mostly around two issues, the reasons behind the financial crisis in 2008 and the foundations of economic behavior.

The morning did not start well. In a rather uninspiring lecture, William Sharpe did a very bad service to the profession when he showed a graph depicting the utility of financial traders in his model and said "I do not know whether traders have these utility functions, but does not this graph look really beautiful?". With this he gave more arguments to those who say that economists are completely detached from reality.

Sharpe was followed by John Nash who proved once again that he should not participate in scientific conferences. Sir John Mirrlees raised standards a bit with his talk on poverty and food markets. His most provokative idea was that rising food prices may actually help people in developing food-producing countries to leave poverty rather than actually impoverishing them even more.

After the break, Ed Prescott took the stage to shake the audience once more. He explicitly associated tax cuts and tax increases with booms and recessions respectively. He further argued that the financial crisis of 2008 did not lead to the subsequent economic crisis we are still in, the so-called Great Recession that, he said, after checking the newly revised economic data does not look like a big recession any more. Robert Mundell provided his own explanation to the crisis. For him it was big swing in exchange rates what precipitated the last crisis, as in many other cases in the past. He also argued in favor of a world currency, the eurodollar. This proposal was a big surprise, to say the least, coming from someone who received the Nobel prize for pointing out that single currency areas may not be a very good idea.

The set of lectures finished with Robert Aumann (in the photo), surely the most passionate and enthusiastic of all the laureates who spoke during the day. In his talk, Aumann discussed under which conditions strategic behavior can be analyzed as one-person decisions problems. Unfortunately, the lecture was not well pitched the audience got lost about half way.

Aumann played also an active role in the plenary session in the afternoon, a panel on "behavioral economics", in which he heatedly debated with Reinhard Selten. Aumann argued that the deviations from standard economic predictions uncovered in experiments are due to the unfamiliar nature of the decisions and that these deviations are much less frequent in decisions that are important or often repeated. He mentioned the concept of "rule-based rationality" by which people are not necessarily rational in their decisions but choose to use rules that usually lead them to take rational choices. Selten argued against the existence of such rules or, at least, against the idea that these rules are chosen or adjusted. He even suggested that utility functions not even exist and promised to elaborate more on his lecture in day 3. This comment acted as an ironic echo to Sharpe´s remark on utility functions in his morning lecture.

Unfortunately, apart from this debate, the panel on behavioral economics was rather confusing and basic. The discussions left out many aspects like reciprocity or social preferences. Let´s hope that tomorrow will be better.

Report from Lindau: Day 1

The opening ceremony of the Lindau Meetings started with an address by the German Federal President Mr Christian Wulff. His address covered many of the issues raised after the financial crisis in Europe and tried to be quite consensual. He mentioned the unfairness of taxpayers funding rescue packages whilst CEOs still enjoy milliionaire bonuses. He acknowledged that financial markets are very important drivers of economic policy these days and that politicians are often too eager and not toughtful enough when respondind to them. But he also insisted in the German official rethoric where irresponsible spending by the Southern European countries is deemed as the main culprit of the situation. The response, Mr Wulff said, is that spending cuts and austerity must be enforced if the crisis is to be overcome.

The panel on "sustainability" that followed started with Roger Myerson thanking macroeconomic theories for improving standards of living since 1929. It continued with the rather inane interventions of two young economists. Then McFadden put his farming cap on and used agricultural methapors to describe the world economy. The last turn was for Joseph Stiglitz's. His words were probably the highlight of the day. He started by contradicting both Mr Wulff and Myerson by saying that spending cuts are leading countries to disaster as Medieval doctors' use of leeches were drove weak patients to death. Then he continued arguing that precisely macroeconomic theories led us to the crisis in the first place. Finally, he talked about the euro, doomed for disaster from the outset according to him, but still worth saving.

After the break Peter Diamond reminded central bankers that there is no clear reason why an inflation target of 2% is better than 3% and that price control, although important, should not become an obsession. On the other hand, Chris Pissarides addressed the gap in work hours between the US and Europe and highlighted two reasons: First, that activities such us health care, cooking or cleaning that in the US are "marketized" in Europe are performed by families, mostly because taxes are higher. And second, and more worrisome for Europeans, because public employment in education and health have increased considerably in the US compared to Europe.

Finally, the panel discussion on democgraphic change generetaed a very interesting debate between Prescott and Peter Diamond, especially regarding taxation of savings. Predictably, Prescott (in the phote) argued for no taxation on savings and actually went further and advocated the abolition of income taxation, that should be replaced by consumption taxation. Diamond on the contrary argued that no taxation of capital was not a good idea, as suggested by the negligible effect on savings after they were partially declared tax-free by Mrs Thatcher.

What has become evident after this first day of sessions is that there is a heated and healthy debate within the discipline. Huge names in Economics hugely disagree on huge issues. So let's keep on discussing.

Report from Lindau: Day 0

I am right now at Lindau, Germany, where the 4^th Lindau Meeting on Economic Sciences will take place during this week. Since 2004, Nobel Laureates and selected young researchers from all over the world meet in this beautiful island in the middle of Lake Konstanz to discuss their ideas and interact. In this edition, the Lindau Foundation has gathered 18 laureates and more than 370 young economists from more than 60 countries (although from my first impressions I would say that more than Germans dominate over all other nationalities).

Given the scientific potential of the meeting and the interesting discussions and plenary sessions in the programme I thought it would be a good idea to act as an improvised reporter for the Edinburgh Economics Blog and write a daily report on what will be going on here in Lindau.

Today we will have Nobel Laureates McFadden, Myerson and Stiglitz talking about sustainability and growth whereas Peter Diamond, Chris Pissarides and Dale Mortensen will talk about the future of employment in Europe (grim, I guess) and demographic change. I will report on the highlights of these discussions tomorrow.

For the time being let me tell you about the first thing related to meetings that I encountered at my arrival to Lindau: the banners you can see in the photo above. They were hung in front of the Conference Centre by ATTAC, Real Democracy Now and other organizations whose German names I cannot translate. As you can see, they ask economists to drop “neoliberal” ideas and to introduce ethics in Economics. The “Heterodox” economic views endorsed by these banners deserve more than one post, so let me just mention that they made me think about two ideas related to the Lindau meetings. First, how wrong these views are. They portrait Economics as a monolithic discipline, populated by Machiavellian and perverse scientists who are leading the world to chaos. To the very least, that vision is wrong because participants in the Lindau meetings include Nobel Laureates with such disparate thoughts as Akerlof and Stiglitz on the one side, and Scholes and Prescott on the other. If there is something absent in Economics at this moment is consensus (and that is a good thing).

Second, these protests highlight how badly we as economists have managed public perceptions of Economics (or how little we have cared about them), and also the extent to which this is due to the fact that for too long the discipline has been rowing in the direction of interested parties (as Nick Stern pointed out already two years ago). I will never get tired of repeating that the rational model of behaviour that we economists handle is descriptive rather than prescriptive and that it does not rule out other motivations. But I am not naïf enough to ignore that Economics has often treated selfishness (which is not equal to self-interest) as an all-encompassing view of human beings. Still, if anything, one of the causes of the present crisis is that the relentless force of selfishness has been underestimated.

Nobel Laureates and young economists will see these banners every day at the start and end of the sessions. I hope they will not ignore them. These banners represent both a reminder of our failures and a challenge for the future.

World without the risk-free bench mark…

Last week’s S&P’s downgrade of US debt undoubtedly marked a new chapter in the history of the recent crisis. Double-dip recession is no longer a mere possibility, but a sad reality. Extensive use of fiscal and monetary policies, otherwise known as Quantitative Easing, was implemented by the Fed and ECB to battle against the meltdown of the financial system in 2008. But, by driving the interest rates to near to zero levels, the developed world locked itself in the liquidity trap, while soaring debt levels stripped the governments of the ability to use fiscal policy if the recession returned. The Debt crisis became a new malaise in the developed world, which caused a fall of investors’ confidence in the strength of political institutions and their ability to deliver quick and much needed anti-recession solutions. S&P used weakening of political leadership as their main reason for the US downgrade, an event which caused massive market sell offs last week.

So what effect might the US downgrade have on the economy, other than from the need to rewrite hundreds of thousands of economic text books to correct for the absence of the risk-free bench mark? Market uncertainty and increased volatility had already been reflected in recent panics which caused share sell offs all around the world. As for the average consumer, a cut in debt rating usually results in higher interest rates paid on mortgages, car loans etc, as they are linked in the short term. However, some suggest that a mistake in S&P calculations by almost $2 trillion(!), and their worries about the US political strength and not the country’s creditworthiness will make investors even more unsure who to believe. Thus the most immediate effect is the increase in the uncertainty premium needed to compensate investors for holding US Treasuries. We should really start getting worried if the other two major rating agencies (Moody’s and Fitch) follow the steps of S&P, which will only make the panic worse. But for now, what S&P did goes against vital economic assumption- they deprived investors of beloved ‘risk-free’ assets, leaving them hanging without a safety net.

Written by Daria Rusanova - 4th year MA (Hons) Economics and Economic History

The long run starts now!

What should the government do about the disappointing growth in the UK economy? To traditional Keynesians, the answer is obvious: spend, and spend hard. The big problem is not the deficit or the national debt; these will come good if the economy grows and tax revenues rise, and a little bit of inflation wouldn’t do much harm either. That’s how we dealt with the debt we had built up after World War II.

The Coalition Government has taken the opposite view: we need to cut, and cut hard. Unless we can get our debt under control, then markets will lose confidence and we will go the way of Greece, Portugal and Ireland. And by reducing the size of government, we allow room for the private sector to grow.

Both sides of this argument are wrong. Markets are more understanding if there is a good reason for building up debt. But under Labour the government was borrowing even when the economy was booming; when the crash came we had nothing to show for it except a structural deficit. We hadn’t won a war, or radically improved our infrastructure, or ensured that every child could read by the age of six. But we did have some good memories of foreign holidays. So why on earth should markets now believe that borrowing is going to be put to good use?

But the Government is trying. The problem is that the private sector is not doing its bit. Much of this is outside the Government’s control, whether it be Greece induced Euro jitters, or a dysfunctional constitution taking the US to the brink of default. But whatever the reason, for many firms this is not a good time to recruit or invest.

In my view, we need to think about where we want to be in 10 or 20 years time. What sort of Scotland do we want and what policies do we need to take us there? That means it’s not so much the level of government spending as its quality and composition that’s important. We need fewer wars and better trains, less bed blocking and more fibre optic cables; we need a regulatory environment that makes it easy to set up a business, employ young people, and keep the fruits of risk-taking. Crucially for Scotland, we need to address public sector reform. Are we really sure that we are getting good value in the way we organise our schools, hospitals and local services?

The longer view is often politically difficult; but it is economically essential, and much more likely to convince the markets that the UK is a good place to invest in.

The Dracula Effect

Why do we vote for politicians who propose protectionist trade policies when it is not in our interest to do so? In a seminar held by Giacomo Ponzetto at the Universitat Pompeu Fabra this summer a simple answer was proposed to me: we don’t know we’re doing it.

The argument goes like this:
An individual consumer (like you or I) has no incentive to inform themselves of a candidate’s trade policy since their chance of affecting the electoral outcome is effectively zero. Producers on the other hand, regardless of their ability to influence the election result, value information on trade policies because it allows them to forecast prices and make appropriate investments. Producers are in the know and consumers are oblivious.

Politicians will therefore propose protectionist policies since this will boost their popularity amongst producers whilst the uninformed consumer is none the wiser. This is a very interesting theory because it says that producers will be offered protection even without forming a lobby - the mere existence of information in their minds is enough to secure a political favour!

This set up is good for everyone. Except consumers. And unfortunately, consumers make up the majority of ‘everyone’. Producers get a nice little pay-off, politicians get extra votes without sacrificing uninformed consumer support and the consumer unwittingly picks up the bill through higher prices.

So what on earth does this have to do with Dracula?

Exposing a vampire to the harsh light of day is sufficient to reduce him/her to dust. The Dracula Effect says the same will occur to consumer-hostile policies when they are exposed to the harsh light of public attention. If consumers are just as informed as producers, the politician can no longer get away with his furtive bribe and those terrible tariffs turn to dust.

If you’re interested, see Ponzetto’s paper here for empirical evidence on the Dracula Effect

Post written by Stephen Devlin - 3rd year MA (Hons) Economics

Spending cuts, elections and the Great Recession

In a recent lecture at the Barcelona GSE, Prof. Alberto Alesina from Harvard University talked on the effect of fiscal policies on recovery from economic crisis and their effect on the electoral prospects of incumbent politicians. You can find the video of this very interesting lecture above these lines, but if you are to busy to watch it (and you trust me enough), I will summarize for you the two main points made by Prof. Alesina based on empirical data on previous economic crisis:

1. Spending cuts are less contractionary and lead to more stable adjustments of debt and deficits than tax increases.
2. Voters reward rather than punish governments who undertake fiscal reforms.

These findings have interesting implications on economic policy and political outcomes: Spending cuts probably are the right way to go and politicians have no reasons to be shortsighted; they should be brave and undertake deep economic adjustments and reforms. Good news for David Cameron, I guess. But Prof Alesina's results also open new questions and leave other unanswered. Spending cuts on what? Education? Health? Social Security? Are all of them equally virtuous? And secondly, what about tax evasion? In countries like the UK that may not be a big issue but in other like Spain or Italy it is. So, as we often say at the end of our academic papers, "further research is needed."