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Will the Credit Crunch Lead to Recession?

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Will the Credit Crunch Lead to Recession? CentrePieceISSN 1362-3761 The Magazine of The Centre for Economic Performance Volume 13 Issue 1 Spring 2008 Unemployment and welfare to work Nurses’ pay Voting on interest rates Britain’s new homes WILL THE CREDIT CRUNCH LEAD TO RECESSION? China’s entrepreneurs India’s foreign investment policy Management practices in China and India CentrePiece CentrePiece is the magazine of the CEP director, John Van Reenen Centre for Economic Performance at the CEP research director, Stephen Machin London School of Economics. Articles in this issue reflect the opinions of the authors, not Editor, Romesh Vaitilingam of the Centre. Requests for permission to Design, DesignRaphael Ltd reproduce the articles should be sent to the Illustration p4, John Minnion Editor at the address below. Print, Ghyllprint Ltd Editorial and Subscriptions Office © Centre for Economic Performance 2008 Centre for Economic Performance Volume 13 Issue 1 London School of Economics (ISSN 1362-3761) All rights reserved. Houghton Street London WC2A 2AE Annual subscriptions for one year (3 issues): Individuals £13.00 Students £8.00 Organisations (UK and Europe) £30.00 Rest of world £39.00 Visa and Mastercard accepted Cheques payable to London School of Economics Editorial Management gurus and the publishing into policy, practice and public CEP is hosting in early July. industry that sustains them often understanding. Elsewhere, we examine the often congratulate themselves on their In this issue of CentrePiece, we take perverse effects of regulation in Britain ‘thought leadership’, compiling endless a leaf out of the management crowd’s – the lethal impact of pay regulation in lists of ‘ultimate business thinkers’ and book with the launch of a series of healthcare; and how planning ‘most enduring ideas’. All very amusing reviews of CEP’s achievements, looking regulations stop us building houses – indeed, frequently lampooned by back at some of the ‘big ideas’ that where they’re most needed – and the columnists like Lucy Kellaway in the have emerged from the research and role of incentives – for the unemployed Financial Times – but disturbing too. their influence on both scholarship to get a job; and for novice monetary Despite the lack of intellectual and public policy. In the first article, policy-makers to conceal their true rigour in most business bestsellers John Van Reenen describes how the views on interest rates. and an absence of any evidence beyond Centre’s work on unemployment Finally, our cover story asks whether the anecdotal, they clearly have a and welfare have not only changed the the credit crunch will lead to recession ready market. way economists think about these and reaches a worrying conclusion. Economists and other serious social problems, but also led to policies like This too draws on enduring ideas scientists tend to be more modest in the New Deals. from economic research: the doctoral the claims they make for their ideas – CEP research of a more recent thesis of Federal Reserve chairman and they are typically more reluctant to vintage is making significant advances Ben Bernanke. When it comes to package their findings in a way that in the study of management itself, and management of the world economy, will attract an audience beyond here we report findings from our economists and their ideas are, academia. The Centre for Economic surveys of management practices in fortunately, more prominent than Performance (CEP) has always sought to China and India. Two other articles the business gurus. buck this trend: one of its central aims address key issues for these emerging is for top-quality economic research to giants of the world economy – and Romesh Vaitilingam have an impact on society through the much more will be discussed at a Editor long-term percolation of new ideas three-day conference on the topic that [email protected] CentrePiece Spring 2008 page 26 page 24 Where to build Britain’s Delayed doves new houses Contents in brief... page 2 page 7 Big ideas: unemployment and welfare to work Understanding trade unions John Van Reenen presents the first in a series of surveys of significant Richard Freeman has been honoured for research findings that have emerged from CEP his pioneering research on labour markets page 4 page 8 The unemployment trap Can pay regulation kill? Barbara Petrongolo investigates whether the Job Seeker’s Allowance John Van Reenen and colleagues succeeded in getting people back to work examine the impact of regulating the labour market for nurses on hospital page 10 performance in England Can better management sustain growth in China and India? Nick Bloom and Rebecca Homkes evaluate management practices in the page 19 two countries’ manufacturing sectors India’s foreign investment policy: the impact on page 15 productivity China’s entrepreneurs Arunish Chawla considers what kinds of Linda Yueh explores what we know about the people who have liberalisation policies make a difference to driven China’s remarkable economic growth firms’ productivity page 20 page 24 Will the credit crunch lead to recession? Delayed doves Nick Bloom suggests that uncertainty will lead to a slowdown much Stephen Hansen and Michael worse than we currently anticipate McMahon look back at the voting records of external members of the page 26 Monetary Policy Committee Where to build Britain’s new houses Tim Leunig argues for an end to the planning laws that constrain housing development in the South East 1 CentrePiece Spring 2008 To illustrate CEP’s impact on public policy and debate, John Van Reenen introduces and presents the first in a series of ‘big ideas’, surveying the significant research findings that have emerged from the Centre over the past three decades. hat has economics our research can be disseminated to a policy implications are not accepted done for me lately? wider audience. immediately – or sometimes at all. Many I am often asked Our researchers are also formally are disproved by events or further about the purpose involved in policy-making in a number of investigation, but even the ones that prove of the Centre for different areas, serving on bodies such as to be right take time to be supported and WEconomic Performance (CEP). What the Low Pay Commission, the Monetary put into practice. This means, of course, impact have we had? How can we justify Policy Committee, the Migration Advisory that many of the new ideas that we have our funding? Service and pay review bodies, and been generating in recent years may not The CEP makes a difference in a variety advising business and non-governmental have an effect for many years to come. of ways. We evaluate public policies to see if organisations such as trade unions. Our first ‘big ideas’ overview looks at they have any benefits and, if so, to whom But this perhaps misses out what is unemployment and welfare to work. those benefits accrue and whether they most important: the long-term impact of Future commentaries will include the outweigh any costs. The literacy hour in the CEP. Starting in this issue of causes of rising wage inequality and primary schools, the Job Seeker’s Allowance CentrePiece, we have decided to give a policies to combat this inequality such for the unemployed, R&D tax credits and flavour of how our ideas have influenced as education, the minimum wage and many other policies have been subjected the world. As Keynes said in The General unions; declining social mobility; to our rigorous and objective assessment. Theory, ‘Madmen in authority, who hear productivity and competition; innovation Our findings can be used by governments voices in the air, are distilling their frenzy policies; economic geography; and and others to assess what worked in the from some academic scribbler of a few happiness and mental health. past and what needs to be changed in years back.’ Whatever your opinion of their the future. mental state, there is no question that Unemployment and Of course, many of these findings go policy-makers have been significantly welfare to work unattributed once they enter the national influenced by CEP research. Unemployment and welfare to work have bloodstream. Ideas, once accepted, are Obviously our ideas are not developed been one of the most high profile areas in often bastards. How many people know in a vacuum: we have many interactions which the combination of theory and that the decline in social mobility between with the wider research and policy careful empirical analysis at CEP led to the generations born in 1958 and 1970, community, above all with others in the policy developments. In turn, the mentioned repeatedly by politicians and economics faculty at the London School of recommendations that were adopted commentators, was first discovered by Economics (LSE). We are fortunate to be were evaluated and this allowed us to CEP researchers? part of the department that is the enhance our theoretical understanding of CEP researchers do not hide away from highest-ranked in the world outside the these issues. public debate. In 2007 alone, CEP research United States. In the aftermath of the Great appeared in the print, online or broadcast We have learned that it takes time for Depression and World War II, the media on more than 380 occasions. It is by academic ideas to percolate into public Keynesian consensus was that taking public communication seriously that consciousness. Our findings and their unemployment was essentially a problem Big2 id CentrePiece Spring 2008 of demand. Governments needed to get much as a treatise than as a that has been taken up by governments the level of aggregate demand right to manual of battlefield surgery. Its around the world, particularly in the UK maintain full employment through a purpose is clear: How to since 1997. mixture of monetary and, above all, fiscal understand, and then how to An example of this is the New Deal for policies.
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