Many alumni of the Faculty of Economics will remember Jagjit fondly, either from his lectures on macroeconomics, or from reading his research. Now Director of The National Institute of Economic and Social Research, he is no longer teaching full time, however he is still a regular presence in the building, and often gives guest lectures, such as at the recent Marshall Society event.
“It’s great to be in the economics faculty, and on a lovely spring day too, when the old Austin Robinson building really comes into it’s own,” he says, and as we walks along the fourth floor corridor which spans between the Stone and the Keynes Room. It is clear that he fondly remembers being here full time. “That used to be my office” he mentions, as he greets fellow academics in passing.
Buildings often loom large in conversations about economics. He explains he became director of the National Institute of Economic and Social Research, the country's first independent Research Institute, established in 1938, originally as a vehicle for a certain John Maynard Keynes, “but as in classic British fashion, by the time the Institute got its act together and found buildings, he'd already decided he didn't want the job,” he shrewdly observes.
However, it is his reading of the macro-economic state of the UK right now that has been occupying most of his waking hours over the past year. “It really has been one shock after another. Even last week, when the Financial Times called wanting my take on the latest, rather poor, inflation numbers, I dropped everything to ensure they had a thorough analysis of a very complex situation.”
So is the UK really doing as badly as it appears? I pose the rhetorical question – and Jagjit returns with as rhetorical affirmation.
“It's a desperate situation, really. We've had very little growth in real incomes on average since the financial crisis. In the last couple of years, we've had projections of falls in real disposable income of the order of seven percent,” he confirms. “The important thing is that it's not only on average there's a distributional consequence here The adjustment is primarily falling on households in the bottom half of the income distribution. This is increasingly something that the frontier of economics is confronting as well.”
The kind of shocks and recessions that we've had are falling disproportionately on households who are finding it hard to bear the shocks, he explains. “The broad reasons are that they work in low paid, low productivity sectors, which means they don't have savings, and that a large amount of their incomes are spent on food. Energy is also a larger fraction of expenditure than for better off people. And at the same time, because we've had this productivity slowdown their income growth has been limited for half a generation,” he says.
Meanwhile the very well off have actually had some increase in their income over this period. “So, this is a huge distributional problem in the economy. And I think that is leading to some very hard questions being asked of fiscal policy, because what fiscal policy has tried to do is stabilise the level of debt to income or GDP since the financial crisis. It was ratcheted up, if you remember, from 40 to around 80 percent. And there was a concern that if it went too high, we wouldn’t be able to manage our affairs now. Naturally we need public expenditure for all the things that we need to establish our lives.”
So does he think the government has a reputation problem after the ‘fiscal event’ of the Truss era? “It's important the government is seen as solvent by the financial markets. So, we adopted a strategy of debt reduction,” he explains. “But in a world in which a large fraction of the population are not earning enough income, what we're finding is that we need more and more support from the state, as exemplified by the support that we gave families, quite rightly during the COVID period. We've got families in low incomes that need regular support. We then realised that when there are large shocks, they need even more support through COVID or the energy price guarantee. All of that then means it's incredibly hard for the government to reduce debt to GDP.”
Faced with this rather grim scenario, he pauses for a moment, looking out over the Sidgwick site where the tree outside the Faculty is growing vigorously. Unlike the economy. “What we get at the next step of the cycle is an even stronger attempt to try and reduce debt to GDP, which then further eviscerates people, who then require more fiscal expenditure to be undertaken. And what we're beginning to learn is that fiscal policy must be targeted at longer run structural issues. Things like public investment must be guarded so that over the medium to long run, we eventually support higher levels of productivity, which would generate high levels of income for those lower those families or lower incomes help the regions recover. That would then mean the fiscal position [in the future] is not as exposed as it currently is.”
Does this mean there is a structural fiscal deficit? “It does look like it,” he replies. “The country faces distributional problems, which are themselves a consequence of an economy that is not firing on all cylinders. It's strong in certain highly tradable sectors, but very weak in many other sectors. And that's something that successive governments haven't addressed. It’s something I've learned since I left academia.”
At NIESR he has been picking up the reports, interacting with officials, talking to public intellectuals, and getting a sense of the micro foundations of the economy. The experience of households, regions and individuals in their daily lives rather than the aggregate picture. So, I ask for what in journalism we call the ‘nutgaf’ (short for "nutshell paragraph") of his forecasts. It is, in his own words, not really encouraging.
“It looks as though the most likely outcome for the UK economy over the rest of this decade is relatively low growth. Nothing suggests there will be a significant increase in standards of living,” he sternly warns, before explaining; “We're looking at growth in income per head of a on average of between 0.5 and 1% a year, which is a fraction of what we saw in the post-war period after World War Two.”
It also doesn't look very promising for many advanced economies. “It's not just a UK problem. There seems to be an advanced economy slowdown in trade at the moment. The evidence isn’t completely convincing, but it does look as though the UK is doing a little bit worse than most of its trading partners.”
So perhaps I suggest the real question is, how do you construct a better form of economic policy faced with some pessimistic indicators?
“As far as the MPC is concerned, it actually doesn't affect real incomes in the long run. Something we all learned at the University of Cambridge is that we think money is neutral. All it can do in the end is affect the inflation rate. It doesn't affect real incomes, endowments, productivity. These things are really driven by the decisions of firms, households and supportive arm of government. So, what we need to do is work out why that isn't working at the moment,” he says, and I ask what the big questions should then be?
“What is government doing wrong that it needs to think about? Why aren't firms investing? Who can argue about the actual numbers? I know many people in the faculty looking at this, but it does look as though over the last five to seven years trade intensities are falling. Trade is a very important driver of productivity. Productivity is the key driver of real wages. I know Meredith Crowley [Professor of International Economics] is looking at that very question. It also looks as though business investment is way below the trend that we saw in the 2010s after the financial crisis. There were some boost to business investment after the financial crisis, but that has stalled very much since about 2016.”
And what in turn has caused this business investment slowdown – and indeed does it matter? “Public investments are investment in infrastructure. The railway system, broadband, the roads; the things that facilitate the private sector. These areas seem to have performed poorly. The optimal level of public investment, when we add in a green transition, may be as high as something like 4 to 6% of GDP. We've barely scraped 2% in the UK in the last few years. So that means we have to do more. Also bear in mind that the stock of public capital is not where it should be, and that means that nurses don't have the machines that they ought to have, or teachers don't have the equipment that they might need,” he says, suggesting that his rather pessimistic analysis the UK economy should provide motivation for a commitment by successive governments to increase public investment that should reduce uncertainty in the economy, and that in turn ought to help business investment.
However, the public debate around these issues seems to concentrate on wages, rather than the growth of the economy, so I pose the question, if there is a real issue of a lack of understanding of economics in the population?
“It's an excellent point,” he says. “We had a discussion recently with Michael Blastland and Andrew Dilnot, who wrote a report for the BBC. And what was interesting is that despite the fact there are some excellent communicators of economics from this faculty, and many other places. However, it's also clear that that people are absorbing news in a very different way.”
“I'm one of the few people who still gets a newspaper delivered every morning. Lots of younger people are looking at YouTube or Twitter for their feeds and asking their friends as a different audience,” he says. “The way they're absorbing things are very different as well. And these things are very closely related to having mathematical skills as well, understanding compound interest or the way that particular markets work, you know, requires some understanding that we need to do a better job of explaining. So, I think we need to accept there are many different ideas out there. We need to take time to explain to young people how these things work. Maybe that might require some change of the syllabus, the skill level, broadening it so these things are introduced.”
He quickly glances at his phone for the latest worrying numbers on what is happening to the bond market – and it is clear media interest in his analysis continues unabated, with further demands for interviews. I wonder if he misses being in the Faculty full time?
“I live just around the corner and I’m always popping in anyway, before taking the train to Kings Cross, and walking down to NIESR. We are closely linked, and the Institute continues to have very strong links with Cambridge. Many people who were here, were also there, like Robin Mathews, who was previously master of Clare College. And of course, one of my predecessors, Director Martin Weale, is also of this faculty. Indeed, for many years there was a group of economists attached to the institute called the Clare Group of Economists, and these were the great and the good of the economics profession drawn from London and Cambridge. The idea about the institute is very similar to the original idea of the faculty here in the Department of Applied Economics, which is to try and use frontier research and economics and apply it to real world policy problems and come up with answers that hopefully policymakers will listen to.”
Jagjit has another meeting with another academic in just a few minutes, to discuss their latest research, and it is clear that the connection between the Faculty and Westminster continues, often through the transmission of NIESR.
As he leaves, we reminisce about academics we know who have carried on this tradition. “Remember Geoff Harcourt, who always cycled into the Faculty, even in his 80s, and then in Australia he carried on his research nearly until he passed,” he mentions. “And of course, we are all familiar with Keynes's wonderful idea that a policymaker or politician is listening to the scribbled hand of an academic for many years ago. And thanks to this Faculty, they do.”
This is an edited interview by Julian Lorkin with Visiting Professor Jagjit Chadha. The full interview is available as a podcast.
https://podcasters.spotify.com/pod/show/cambridge-faculty-of-econ/episodes/Macroeconomics-Is-the-economy-in-a-state-e25lb3d/a-aa08bm1
