Budget 2009 Redux?

Image of Gerard O'Neill from Twitter
Image of Gerard O'Neill

Gerard thinks there will be another budget in early-to-mid 2009 to cope with the worsening economic downturn. I've got to agree with him, and I've got to say he's mostly right. Essentially the pension provisions for public sector workers are very high and represent a significant premium over those benefits enjoyed by workers in the private sector. Gerard makes three recommendations for the Minister:


  • Freeze the pensions of all public sector retirees so that we no longer have the insane situation of pensioners getting 'productivity' rises because they've been paid to those now doing the jobs they used to do.
  • For those public sector workers over 50 announce that their pension will be tied to their income upon retirement, but not rise thereafter (still a form of defined benefit pension).
  • For all public sector workers under 50 announce that their pensions will be defined contribution pensions, tied to the performance of the national pensions reserve fund.
  • Ensure that the pension contributions of all public sector workers are adequate to meet projected requirements.


I have to agree with the first two suggestions, nod slightly for the third, and disagree with the fourth---the contributions are already adequate from individual workers. What is not adequate is the provision from the government. 

I think Gerard is getting the cart before the horse here a little bit.

First, the `Public Sector' doesn't exist: you can't say a clerical worker in the Department of Transport faces the same economic choices or incentives as a Consultant Pediatrician, and you can't say either of them faces the same economic reality. Both will retire on nice pensions, yes, but really, we're talking chalk and cheese. 'The Public Sector' is a rhetorical device to slam workers with state-protected jobs on relatively fixed incomes with good pension entitlements. But we never disaggregate just who the 'Sector' actually encompasses, and who might deserve those provisions and who might not (academics probably do deserve this tenure, academic administrators don't. Hospital administrators do, hospital consultants don't. I might explain that in a later post). Gerard is right that stripping some of these workers of their permanency would result in a riot, as it would take away the main benefit the job has---the guarantee of its existence in ten years' time. No private sector worker can have that assurance. There are many workers in the Public Sector whose productivity is abysmally low. There are also workers whose productivity dwarfs that of their private sector counterparts, with no corresponding increase in salary as compensation. So we must be careful when attempting to make a distinction. 

Second, why shouldn't every worker in the State automatically have a defined pension provision the moment they begin work at 22? The pension could be managed in any number of ways, some of which Gerard suggest, but the point would be these workers would save for their future selves in retirements. Set the benefits according to the market conditions, and work off the assumption that every worker will retire at 70 or 75 rather than 65. Why endure a `race to the bottom' between stripping the public sector of their pension entitlements and disabusing the private sector of taking more out? In a time of increasing personal and governmental fiscal austerity, surely we should be saving more, not less, and surely we should be providing for the old ages of both the private and public sector worker equally? 

Notes to Self: Blanchard on the Future of Macroeconomics

Circulation in macroeconomics

Olivier Blanchard of MIT is one of the top macroeconomists in the world. When he write articles like this, it's worth your time reading what he thinks.

Or, you could read what I think he thinks. Which may save time.

My summary. Macroeconomics is the study of fluctuations. Since the 1970's there have been three approaches to macro. First, the new-classicals. These guys build models of the macroeconomy where the aggregate properties of the economy come from the decisions made at the household and firm level. All markets are in equilibrium, and the only thing which creates cycles is changes in technology. This approach is associated with Ed Prescott, Robert Lucas, and Thomas Sargent. Second, the new-Keynesians. These guys emphasised the role of market imperfections like asymmetric information in generating cycles. Top chaps in the NK school would be Greg Mankiw and Joseph Stiglitz. Third, the growth theorists. These guys mainly ignored the problem of fluctuations. People like Daron Acemoglu and Charles I. Jones come to mind. 

Blanchard argues that modern macroeconomics has had a sort of convergence from these three schools, where the theory of the new-classicals is augmented with imperfections. The problem with this approach is complexity. Now we need large dynamic stochastic general equilibrium models to make predictions about the economy in the short run, which makes understanding the message behind these models difficult. 

Blanchard sees a more `open source' future for macroeconomics, where we hack together macro models based on the problem they are built to solve, and estimate them numerically, without worrying about the general equilibrium and social welfare properties of these models.

I'm a bit skeptical about the issue of pluralism in economics (see here), but I think Blanchard's vision of a broader macroeconomic church, if it came about, would be nice to see if it ever happened.