All 4 entries tagged Economics

Why the UUK proposals on USS pensions are mistaken

This is an opinion piece published in the Times Higher, https://tinyurl.com/ydfcr5zt (paywall) on 17 November 2017.

The USS pension scheme changes will be a disaster for universities; but they are preventable

The changes to the USS that UUK proposed on Friday will substantially alter the nature of academic employment in the Pre-92 universities and will damage higher education irrevocably. They will mean academic salaries having to rise substantially to attract the best both internationally and from other industries to maintain standards. As such, they are a very unwise, short-sighted – and unnecessary - move by the university employers.

The academic career in a leading institution is never easy. Research is fraught with hazards. However the certainty of a pension provides a safety net that facilitates risk taking. It permits a researcher, for example, to explore an avenue of enquiry, not knowing what if anything is there to be found, but always in the knowledge that if it turns out to be a blind alley – as is often the case - then at least he or she will not be personally worse off as a result. It is a good basis for intellectual risk taking on which progress in human knowledge comes.

So why are the UUK preparing to scrap the pension scheme that has worked so well and contributed to the success of British higher education? We are told it is all getting too risky and hence too expensive. But I don't think that is true.

Without going into technicalities, two things stand out, one political, one intellectual, as having created this fallacy. The political change was the coalition government’s withdrawal from formal involvement in the management of the scheme. Originally, when it started in 1975, there were three partners with seats on the board: the employers, the members and the government. At that time universities were mainly government financed through the University Grants Committee. The scheme had a strong covenant so could ignore any short term market volatility and invest long term in high return assets. But HEFCE withdrew in 2011, since when the institutions themselves have had to stand collectively behind the scheme. That is proving increasingly difficult given the uncertainties they are currently having to face. On the other hand, many commentators regard this particular group of well respected institutions as almost certainly sure to thrive for many years to come, and wonder what the fuss is about.

The other change that has led to this crisis has been in the mental framework used for pensions accounting in recent years. Most of the actuarial profession has undergone an epic ontological conversion from having a world view based on macroeconomics to one based on financial economics. Instead of pension schemes being able to benefit long term from economic growth by investing in productive capital, the traditional approach, they are now seen as myopic speculators in financial assets. Instead of investment return being the reward for patience, it is now seen as the reward for bearing risk; the world has become a “Random Walk Down Wall Street”; all assets are assumed to have a fixed quantum of risk which automatically and always gives a commensurate return. There is no distinction between long term and short term investment; all investment is speculation.

Financial economics has been widely adopted despite the fact that it is merely a theory without a sound basis: a pseudoscience. Many of its core ideas have been debunked by leading economists. For example the efficient markets hypothesis – that markets embody all known information - has been refuted by leading economists Joseph Stiglitz and Robert Shiller on theoretical and empirical grounds respectively.

Yet much of the finance industry including many pension scheme managers ignore the evidence. It is at the heart of the USS valuation methodology which talks about market derived asset prices, yield curves and inflation expectations being “objective”. But it is nothing more than a theory based on a particular set of assumptions.

It is a truly alarming state of affairs that such a closed belief system should be governing something as important and mundane as pensions. Yet universities themselves must ultimately take the blame. For the past twenty years or so business schools have found a ready market for financial economics courses. They have been marketed as “modern finance” embodying the latest research, with the emphasis on application of techniques rather than critically reviewing evidence, and have trained many thousands of graduates applying the ideas uncritically and confidently.

We are told there is a fixed amount of risk: the USS valuation document talks about a “risk budget”. Such a thing could only exist in the world according to financial economics. Risk depends on the context. There is a lot less risk if the scheme remains open to new members than if it may have to close. The view embodied in the USS valuation is the latter and that means market volatility poses a great risk that the pensions may not be paid and that has to be covered at great expense to the institutions. But if it remains open there is no need to regard market volatility as a problem and there is much less risk. In fact the UCU actuaries, First Actuarial, have demonstrated that the scheme could continue to invest in high return equities for the long term and all would be fine. Why are the UUK not listening?

Dennis Leech : 25 Jan 2018 15:52 |  Tags: Economics Financial Pensions;Uss; |  Comments (0) |  Close comments |  Report a problem

Interesting discussion on economics organised by the NYRB

A recent conference organised by the New York Review of Books entitled "What's wrong with the economy - and economics?" had some interesting contributions about the state of economics after the crash.

Especially I thought the following contributions to be very stimulating and insightful for anyone with an interest in current debates.

• Philip Mirowski in the session "Who and where are the economists?" (from 48:00) gives a very entertaining talk in which he argues that the real problem is not with macro - which has been the subject of a lot of discussion since the 2008 crisis - but with micro. Micro today has changed fundamentally from what it used to be: it used to be primarily concerned with the efficient allocation of resources. Today it is all about markets as information processors - which have greater capacity and power than any human being or group of humans - and are consequently a threat to democracy and truth.
• Andrew Graham gives another very entertaining and stimulating talk called "Rethinking the teaching of economics" in the session "The education of economists" (from 45:25). He points to the danger of simplistic application of mathematical functions in economics, illustrated with the Phillips curve.
• Paul Krugman argues persuasively that there is nothing wrong with macro theory as such. Keynes' General Theory plus Hicks' IS/LM apparatus from the 1930s fits the present circumstances very well. The problem is not with economics but with policymakers not understanding basic economics and not listening to economists. This is in the session "Economics after the Crash: A Discipline in Need of Renewal?" (from 24:15).
  
• Robert Skidelsky argues the opposite (same session from 38:45). Much of what he says he has said before (and need saying again) but he makes what seems to me to be a particularly insightful point I have not heard before against methodological individualism, an assumption that is widely used and has caused a fundamental change in the way macro is done. In the past macro and micro could be studied separately - macro could be, and often was, taught first in principles courses. But now the focus is on micro-foundations and, with methodological individualism, macro is seen simply as a matter of aggregating individual decisions. He quotes Keynes who argued strongly against this saying that the economy should be viewed as an 'organic unity' rather than simply a collection of Robinson Crusoes.
  

Dennis Leech : 03 May 2015 16:53 |  Tags: Economics |  Comments (0) |  Close comments |  Report a problem

Letter to THE: Plea for more balanced reporting on USS

I have complained to the Times Higher Education magazine about their reporting about the USS. They tend to present deficit figures as if they are given facts rather than misleadng statistics derived from the misapplicaiton of financial theories. Fair reporting would at least acknowledge that the whole question of the deficit is political and highly controversial.

I would recommend that all should heed the advice of the Cambridge economist Ha-Joon Chang in his latest book "Economics: A Users Guide" and in his recent Guardian article "Economics is too important to leave to the experts" After all we are all participants in the economy and as such users of economics.

Letter to the Times Higher Education to be published on 25 September.

Dear Sir

I wish to complain about your reporting about USS pensions. Your reports tend to imply that statistics show a funding deficit as if the USS's assets and liabilities are objective scientific truths when in fact they are based on theories.

There are two principles on which DB (defined benefit) pension schemes are organised: pay-as-you-go - used throughout the public sector including the teachers' pension scheme - and funding - used for smaller pension schemes offered by private sector employers in the risky market place. How we think about the USS depends on which of these principles we apply. Viewed as a PAYG scheme USS appears to be financially strong with an annual surplus of over a billion pounds a year, a strongly performing investment portfolio and growing membership. The deficit figures you quote come from regarding USS as if it were the other type of scheme, one belonging to a small company that must be prudently managed against the likelihood of the firm failing. But to apply that approach to the whole pre-92 HE sector covered by USS is to misuse a theoretical model by applying it in circumstances it was not designed for and in which it will cease to work. We have heard a lot about economic models failing in the financial crash of 2008; we have the same issue today with pensions.

Can I suggest that you follow the advice of Ha-Joon Chang when he says "Economics is too important to leave to the experts"? Rather than taking on trust the opinion of someone styled as a pensions expert (as you frequently do) you actually get them to justify in detail what assumptions they are making, and recognise that the whole issue of the state of the USS is in fact highly controversial.

Dennis Leech
Professor of Economics
University of Warwick
Coventry CV4 8UW
d.leech@warwick.ac.uk
www2.warwick.ac.uk/fac/soc/economics/staff/faculty/leech
07712353201

Dennis Leech : 22 Sep 2014 09:59 |  Tags: Economics Neoliberalism; Pensions; Uss; |  Comments (0) |  Close comments |  Report a problem

Economics as a Discipline

In today's Guardian there is a story about a conference on the state of the discipline of economics being held at the Bank if England: Economics Lecturers accused of clinging to pre-crisis theories

There is nothing new about criticism of the Economics curriculum. It has been going on for over forty years. Here is the presidential address by Wassily Leontieff to the American Economic Association in 1970, "Theoretical Assumptions and Non-Observed Facts", in which he made the same points. Nothing has been done to address them. He was simply ignored.

Dennis Leech : 11 Nov 2013 18:07 |  Tags: Economics |  Comments (0) |  Close comments |  Report a problem