Phelps (2000:99) “Such tax relief is seriously cost-ineffective next to graduated employment subsidies owing to the way that personal income tax liability is formulated. The budgetary cost of graduated employment subsidies is only the disbursement of the subsidies to the firms employing low-wage earners, since high-pay employees are ineligible for such subsidies from the first euro earned, while an equivalent disbursement of income-tax relief in the low brackets – for example, the first $16 000 of annual income – will cost the government the loss of tax revenue on all higher earners’ first $16 000.” This is absolutely unfounded. See Figure 28 or Figure 29 that shows that this is not the case. Furthermore, in a reduced form there is no difference between tax reduction and wage cost subsidy, which means that they can be translated into each other.
Ormerod: “Death of economics”
The book’s name “The death of economics” is not inviting to serious research. One may appeal to a “The King is death. Long live the King !” approach, and indeed Ormerod’s last chapter “Economics Revisited” seems to suggest this. But this is so round-about and distractive ! Why first make people believe that you want to get rid of economics, and then tell them that you have a better economic analysis ?
This way of presentation also gives too much credit to decisions makers. Politicians and economic advisers who believed in those theories are presented as misguided persons, and victims of failing theories of old. Just as anybody can make errors. However, the proper story is that illusions and ideological views have been maintained in the face of contradictory evidence, and against the advice of renowned economists. Ormerod’s presentation obscures this evidence and its meaning. The proper story, that Ormerod misses, poses the question of reform in the structure of economic decision making.
Agreed
I agree with Ormerod: “The whole challenge of economic policy is to shift the attractor points around which the economies move, and hence the whole solution path of the economy over time.” (p208)
Disagreed
1. He claims that there is a new analysis of unemployment moving around an “attractor” (that itself can move).
Comment:
This attractor is nothing else but the NAIRU. It is true that it can be clarifying to shift from the conventional parlance to the parlance of chaos theory, but it is not revolutionary as claimed. The same immodesty as Phelps.
2. He defends the macro-economic approach, e.g. on using a rather simple relation between inflation and unemployment.
Comment:
Defence is fine, but the correct approach still is based upon micro-foundations.
3. Ormerod writes: “The distinguishing feature of chaotic systems is that their behaviour is impossible to predict in the long run (...)”
Comment:
The word “chaotic” means “deterministic looking like random” in mathematics. Above quote is only true for (systems of) equations with a random term somewhere.
“Chaos” has the connotation “random” in the public mind, so it might be best not to use the term in books for the general public.
Ormerod gives much attention to uncertainty, and the way that he presents it carries with it the suggestion that nothing can be done about unemployment. Though uncertainty is important to macro-economics indeed, it however is not really relevant for his main thesis that something could be done about unemployment. Quite tiring.