1. Influencing British macroeconomic policy and the relationship with the European Union in the aftermath of a global economic crisis
Submitting Institution
Cardiff UniversityUnit of Assessment
Business and Management StudiesSummary Impact Type
EconomicResearch Subject Area(s)
Economics: Economic Theory, Applied Economics, Econometrics
Summary of the impact
Following the global economic crisis of 2007, the question of how
macroeconomic policies could be used to ameliorate its consequences has
come to the fore. Research led by Professor Patrick Minford at Cardiff
Business School (CBS) has promoted a shift in policy in the UK in a
classical direction and away from the Keynesian demand management
approach. CBS researchers from the Julian Hodge Institute of Applied
Macroeconomics (JHIAM) have shown through economic modelling how a series
of measures, for example, clear monetary rules which target inflation,
could benefit the UK economy. The research has also been used both
directly and indirectly, via MPs and intermediaries, to inform policy
debates around such major issues as Britain's membership of the European
Union (EU), as well as contributing to the wider public debate.
Underpinning research
JHIAM is home to a group of researchers at CBS who have carried out
modelling work on the UK and other economies. They consist primarily of
Patrick Minford (Prof 93-present, joint-appointment with University of
Liverpool 93-97), Kent Matthews (Prof 96-present), Mike Wickens (Prof 08-
present), Vo Phuong Mai Le (PhD Student 04-08, Research Fellow 08-10),
David Meenagh (Research Assistant 98-04, Research Associate 04-12,
Lecturer 12-present) and Bruce Webb (Research Associate 95-12, Lecturer
12-present); others involved in various ways are mentioned in Section 4.
The work of JHIAM has involved the building of economic models, originally
the Liverpool Model of the UK3.1, and later a variety of
Dynamic Stochastic General Equilibrium (DSGE) models built on Rational
Expectations and exploiting recent developments in macro- modelling3.2
& 3.3. In this Rational Expectations approach which assumes
that on average people in the economy make choices as if they understand
how the economy works, demand effects are generally of at most temporary
importance while supply-side policies have desirable permanent effects on
the economy3.1. As part of this endeavour new methods of
estimating and evaluating models have been developed3.2 and the
principles of the approach applied to the evaluation of macroeconomic
policies3.1, 3.4 & 3.5. These have included monetary and
fiscal policy3.1 & 3.4, exchange rate policy including the
Exchange Rate Mechanism (ERM) and entry to the euro3.5, and
supply- side policy, including policy on employment, growth and the EU3.1
& 3.6. The research has cumulatively added to the stock of
evidence both on the (strong) empirical basis of this approach3.2
& 3.3 and on the detailed effects the embrace of these new policies
would have3.1 & 3.3 - 3.6.
The need for a fiscal plan is a key implication of the group's models
which embody expectations as the major channel through which monetary
policy has its effects. As such, there needs to be an emphasis on limiting
money supply growth to curb inflation and on ensuring that tax policy is
then consistent with stabilising the level of public debt3.1 &
3.4. As an important lever for stimulating foreign direct
investment, economic growth and employment, policy in the field of
taxation is one example of an area that researchers at JHIAM have recently
revisited. Early work aimed at modelling the so-called `Laffer effects'
(the effects of lower marginal tax rates on the supply of work, effort and
tax avoidance) provided the grounding for new calculations to be made.
These identified several key reforms in tax policy which, together, could
lead to substantial benefits to the UK economy. Among these reforms,
proposed by Minford in 2006, was the abolition of the top rate of income
tax, the revenue loss from which he demonstrated would be offset by
broadening the base of taxation and by its positive effects on labour
supply, innovation and productivity growth.
In the early 2000s, with the argument for the UK to join the European
Economic and Monetary Union strong, Minford and colleagues used economic
models to investigate the extent to which the UK would suffer from losing
its power to set its own independent interest rate through having its own
currency and exchange rate. This work demonstrated that joining the euro
would more than double the variability of the UK economy and led
researchers to conclude that euro entry would be extremely damaging3.5.
JHIAM researchers have also evaluated the economic impacts on the UK of EU
membership, which they have shown to carry significant net economic costs
of a supply-side nature3.6. Besides documenting the damaging
effects of intrusive labour market regulations through their economic
models of the UK, Minford and colleagues also investigated the less well-
understood cost to the UK of the EU's protectionist trade policies in
agriculture, manufacturing and services. Applying a standard model of UK,
EU and Rest-of-the-World trade, Minford showed that through these
policies, the EU is levying costs in wasted resources in the order of 3%
of GDP.
References to the research
1. Matthews, K. and Minford, P. (1996) British inflation
and unemployment in the 1970s: a model-based decomposition, Applied
Economics, 28 (1): 103-115. 10.1080/00036849600000013
2. Le, V.P.M., Meenagh, D., Minford, P. and Wickens,
M. (2011) How much nominal rigidity is there in the US economy?
Testing a New Keynesian DSGE Model using indirect inference, Journal
of Economic Dynamics and Control, 35 (12): 2078-2104. 10.1016/j.jedc.2011.08.009
3. Meenagh, D., Minford, P., Nowell, E. and Sofat, P.
(2010) Can a real business cycle model without price and wage stickiness
explain UK real exchange rate behaviour?, Journal of International
Money and Finance, 29 (6): 1131-1150. 10.1016/j.jimonfin.2010.02.006
4. Minford, P., Nowell, E. and Webb, B. (2003) Nominal
contracting and monetary targets - drifting into indexation, Economic
Journal, 113 (484): 65-100. 10.1111/1468-0297.00085
5. Minford, P., Meenagh, D. and Webb, B. (2004)
Britain and EMU: Assessing the costs in macroeconomic variability, The
World Economy, 27 (3): 301-358. 10.1111/j.1467-9701.2004.00602.x
6. Book: Minford, P., Mahambare, V. and Nowell, E. (2005) Should
Britain leave the EU? An economic analysis of a troubled relationship,
Edward Elgar Publishing Ltd. in association with the Institute of Economic
Affairs. ISBN 978-1845423797. Copy available from HEI on request or online
at: http://www.patrickminford.net/europe/book_index.html.
Details of the impact
Following the global economic crisis of 2007, there has been a particular
focus both in the UK and Europe on how macroeconomic policies can be used
to stimulate economic recovery. A separate, though closely related and
interdependent issue faced by the international community is that of the
euro-crisis. In this context, JHIAM's research provides not only an
evidence-base for policy makers and the business and financial
community, but a knowledge-base for society, which is
ultimately bound by decisions made by the government.
Impact on public policy
The macroeconomic policy issues that align with JHIAM's research and have
been the focus of debate since 2008 include: the budget deficit; the
crisis in the euro-zone and the UK decision to stay out; monetary policy,
including taxation and the inflation target; and growth and employment and
the implications for these of EU membership. In all these areas of
macroeconomic policy JHIAM researchers have contributed to policy debate,
both directly, by giving evidence and acting in an advisory
capacity to various government committees, and indirectly, through
intermediaries and by providing an evidence-base for politicians to base
their arguments on. A key example concerns the UK's role in Europe which
has dominated politics since the Coalition government came to power,
forcing policy makers to consider the economic impacts of EU membership.
The direct contribution of JHIAM researchers to policy debates
include Minford's appearance in front of both the House of Lords EU
Sub-Committee A on Economic and Social Affairs as part of the `Euro Area
Crisis: Follow-up Inquiry' (3 July 2012)5.1 and the House of
Commons Foreign Affairs Committee at an inquiry into `The
Future of the EU: UK Government Policy' (11 September 2012), where
he was introduced by the Chair of the committee as "one of the most
prominent economists advocating British withdrawal from the EU"5.2;
Minford went on to make direct reference to findings published in 3.5 and
3.6. For example, he referred to the "considerable costs [of] being
inside the European Union" as a result of its "protectionist"
nature and specifically to the "3% of GDP" that would be gained by
"moving to free trade"; this led Members to question Minford
further on the process and consequences of the UK exiting the EU5.2.
In the case of the House of Commons inquiry, the route to influence is
visible through the scrutiny of on-going correspondence between Lord
Boswell (Chair of the Committee) and the Financial Secretary (HM
Treasury). A letter dated 24 July 2012, composed by Lord Boswell, includes
direct reference to Minford's evidence which Boswell uses in support of
questions he poses to the Financial Secretary, for example, relating to
the "Compact for Growth and Jobs" and the importance of public opinion in
the euro-crisis5.3. Both these questions were subsequently
addressed by Rt Hon Greg Clark MP (the Financial Secretary at the time) in
the government's response, issued on 3 October 20125.3.
JHIAM research also enters the political arena indirectly through
its use by backbench MPs. According to a senior politician5.4,
Minford's team's "comprehensive economic analysis of UK macroeconomic
issues in an EU setting provides MPs, in particular those within groups
such as `Fresh Start' and `Better Off Out' with valuable material to
support their arguments." Members of the `Better Off Out' campaign
are keen to highlight research on the cost of EU membership. An article in
The Commentator in which the group's Director, Rory Broomfield, states "This
burden of regulation ... is said to be 5 percent of UK GDP per year ...
Similar estimations have been made by .... Professor Patrick Minford
CBE" (`A
referendum is only the start: We must plan for the finish', 15
May 2013), demonstrates the use of Minford's research in supporting their
argument.
JHIAM researchers also interact regularly with intermediaries in
order to achieve indirect impact on policy and practice. A number of
policy think-tanks benefit from JHIAM's research via publications and
seminars, including the Adam Smith Institute, The Taxpayers Alliance,
Reform, Open Europe and the Centre for Policy Studies. JHIAM's strongest
relationship is with the Institute of Economic Affairs (IEA) whose
mission is to communicate ideas about the workings of the market economy.
The IEA claimed to reach an estimated 750 million people in 2012,
influencing government through input to select committees and
consultations, and the wider public through extensive media coverage.
Several members of the JHIAM research team have contributed written
material to the think-tank. For example, Minford has recently contributed
to two IEA books. In the first, `Sharper
Axes, Lower Taxes' (2011), a book which had a print run of
2,600 and has been downloaded over 4,590 times, Minford co-authored a
chapter in which he explained the results of his taxation modelling. This
book received endorsements from several MPs and others, including the
following comment from Lord Lamont: `I particularly enjoyed the chapter
by Patrick Minford and Jiang Wang, which persuasively queries the idea
that "state investment" contributes to higher economic growth'
(published on IEA website)5.5.
In the second, `The
Euro - the Beginning, the Middle ... and the End?'
(2013), he wrote a chapter which drew heavily on JHIAM's research into the
cost of the UK's membership of the EU, and concluded that "the
institutional evolution being triggered by the euro crisis threatens to
make the [substantial net economic costs on the UK] higher still ..."
This report had a print run of 2,300 copies, has been downloaded over
1,724 times and was featured on Sky News, BBC 5 Live, BBC Radio 4, BBC
Radio 2 and in a comment in The Daily Telegraph (`Europe's
leaders would do well to listen to some constructive criticism',
11 April 2013). An earlier publication by Minford, `Should
Britain join the euro?' (2002), also continues to be of value with
over 400 downloads taking place from January to June 2013. [5.6]
Another key element of JHIAM researchers' strategy to achieve wider
influence is through membership of the IEA sponsored Shadow
Monetary Policy Committee (SMPC). The SMPC was founded in 1997 as a
forum of independent monetary economists to debate monetary policies of
the newly independent Bank of England. Minford (co-founder) and Matthews
have been members since its inception. Prof. Akos Valentinyi and Wickens,
both members of JHIAM, also belong to the SMPC alongside well-known City
economists Peter Warburton, David B. Smith, John Greenwood (Invesco) and
Trevor Williams (Lloyds TSB). The SMPC's monthly output (a freely
available report on the monetary situation drawing on the research of its
members) is widely cited in the media and followed by the Bank of England
Monetary Policy Committee (MPC). [5.6]
Through pathways such as these, JHIAM's research has influenced and
continues to influence policy decisions. Recent policy changes
that are consistent with JHIAM's research include the Prime Minister's
veto of any Treaty change at the EU summit in December 2011 and most
recently his speech on EU renegotiation and an in/out referendum on 23
January 2013. The latter policy change was likely driven at least partly
by pressure from backbenchers, with an article (`Better
off out?', 17 January 2013) published by the think tank, The
Centre for Policy Studies, in the run up to the announcement stating that
"the great majority of the Conservative party is clear that
[Britain's relationship with the EU] should change ..."; the same
article credits Minford as one of the principal sources of ideas relating
to the consequences of EU withdrawal.
Impact on the business and financial community
Researchers at JHIAM are committed to engaging politicians on issues
critical to the business community in the UK. For example, in 2011,
Minford played a lead role in a media campaign in respect of a letter,
published in the Financial Times on 7 September, which warned that the 50
pence tax rate was "doing lasting damage to the UK economy" due to
the unfavourable economic environment for business which it created. The
letter was signed by 20 UK economists, including representatives from
eight universities and two former MPC members. The publishing of this plea
not only led the Treasury to respond with a public statement in which it
stated that the Chancellor had "asked HMRC to conduct an analysis of
the revenue raised by the rate", but also captured the attention of
the media, with Minford invited to contribute to a debate
on the issue hosted by Radio 5 Live. The support from academics on this
issue enabled business leaders to launch similar campaigns of their own,
with subsequent letters along similar lines being published in The
Telegraph in November 2011 and February 2012. This debate culminated in
the top 50 pence tax rate being cut in the 2012 Budget.
Impact on society
The contribution of JHIAM's research to policy makers and the financial
sector is complemented by its cultural value and input to wider public
debate around economic policy5.7-5.10. Minford is a regular
contributor to BBC Radio 4 current affairs programmes, notably Today, on
which, in the context of his research, he has provided insights into
topics such as inflation targeting (Is
the BoE wrong on inflation?, 18 October 2011), exchange rate
and finance (Are
financial markets rational? 20 March 2010). Minford was also
invited to contribute to the Radio 4 series Stephanomics
(31 July 2012) in an episode which looked at whether growth should be a
major target of government policy5.7. [text removed for
publication]
Sources to corroborate the impact
- Oral Evidence from the House of Lords EU Sub-Committee A on Economic
and Social Affairs inquiry: `Euro Area Crisis: Follow-up Inquiry' (3
July 2012), available at:
http://www.parliament.uk/documents/lords-committees/eu-sub-com-a/EuroCrisis/EACFUSuppandoral.pdf.
Minford's contribution can be found on p33-54.
- Transcript of oral evidence by Minford to the House of Commons Foreign
Affairs Committee inquiry into `The Future of the EU: UK Government
Policy' (11 Sep 2012), available at:
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmfaff/c115-iii/c11501.htm.
- Correspondence following the House of Lords EU Sub-Committee A on
Economic and Social Affairs inquiry into `Euro Area Crisis: Follow-up
Inquiry' (see 5.1) in which Minford's evidence is used in support of
questions posed in Letter 1 (24 July 2012) on pages 3-5. These questions
were subsequently addressed in Letter 2 (3 October 2012). Both available
at:
http://www.parliament.uk/documents/lords-committees/eu-sub-com-a/EACJan2013/Combinedresponse.pdf
- Statement: Member of Parliament, corroborating Minford's contribution
to the policy debate surrounding the UK's membership of the EU.
- Endorsements of the `Sharper Axes, Lower Taxes' book which demonstrate
the value to MPs and others of this publication. See the Institute of
Economic Affairs website at:
http://www.iea.org.uk/publications/research/sharper-axes-lower-taxes.
- Contact: Editorial Director, Institute of Economic Affairs (IEA), to
corroborate the influence of JHIAM's research on policy makers and wider
society via the IEA and the SMPC.
- Minford interviewed by Stephanie Flanders about how far long-term
economic growth should be the over-riding objective of governments in
countries like Britain. Radio 4, 31 July 2012, Stephanomics, Series 2,
Episode 3. Available at: http://www.bbc.co.uk/programmes/b01l7sf9
- Minford contributed to a news feature about banking regulation. BBC
News Channel: 19 Sep 2008, Viewpoints: Where now for capitalism?
Available at:
http://news.bbc.co.uk/1/hi/business/7621771.stm
- Minford contributed to a news feature about interest rates. BBC News
Channel: 4 Sep 2008, Grim backdrop to UK rate decision. Available at:
http://news.bbc.co.uk/1/hi/business/7596695.stm
- [text removed for publication]
All documents and web pages were saved as pdf on or before 26.07.13 and
are available on request from the HEI.