Unemployment and recessions
Writing on her ‘Stay at Home’ blog, economist Claudia Sahm proposes a policy to automatically increase the level of unemployment benefits in recessions.
Sahm supports greater use of ‘automatic stabilisers’. These are mechanisms to increase government support to the economy when it is weaker and decrease support when it is stronger, without requiring specific policy changes. For example, government spending on unemployment and welfare benefits, which boosts the economy, tends to rise naturally during recessions as unemployment rises and incomes fall.
According to Sahm, automatic stabilisers are “great policy” as they remove both politics and (potentially inaccurate) forecasting from economic policy. She argues they limit employment losses and economic damage from recessions.
Sahm reports that the Conservative Party in Canada adopted a form of her preferred policy in its manifesto for the recent federal election. Its proposal was to pay employment insurance at 75% of salary, instead of 55%, when a province enters recession.
In the blog, Sahm notes that there are different ways of defining when an economy is going into recession. These include her own ‘Sahm Rule’, which uses a pre-defined threshold for the increase in the unemployment rate from its low point over the previous 12 months. However, she states that the precise definition of a recession is less important, as long as unemployment benefits are automatically uplifted when the threshold is hit.
Sahm also calls for the approach of enhanced automatic stabilisers to remain in place indefinitely. She contrasts this with, for example, the US uplift to unemployment benefits in response to coronavirus. This has seen several expiry dates, extensions and deadlines which, Sahm says, lead to a “rollercoaster” for families depending on benefits.
Read the full article: Claudia Sahm, O Canada!, Stay at Home Macro Blog, 25 August 2021
Public investment and net zero
A paper, Greening Public Finance: The UK’s Public Finance Ecosystem and the Net Zero Transition, for the thinktank the New Economics Foundation argues that organisations providing public sector finance should be reformed to help meet the UK target to reach net zero greenhouse gas emissions by 2050.
The authors highlight four state-owned finance institutions (SOFIs): the UK Infrastructure bank; (UKIB); the British Business Bank (BBB); UK Export Finance (UKEF); and the CDC Group. The paper states that, combined, these institutions finance over £7 billion of projects each year and so have “significant financial firepower” to support the transition to net zero. However, the authors argue that the mandates of the SOFIs have not been updated to reflect this policy priority and they should be changed accordingly.
In addition, the paper suggests specific reforms for each institution. For example, it proposes:
- UKIB should incentivise low-carbon projects by offering cheaper funding and technical support. It could also help to coordinate projects across the country.
- BBB should provide venture capital funding for high-risk green projects. It should also stop working with firms whose activities are insufficiently aligned with the Paris Agreement on climate change.
- UKEF should provide more generous financing terms for exporters of low-carbon goods and services. In addition, it should assess the “protection of biodiversity and nature” in its financing decisions.
- CDC should stop making investments through private equity funds. It could also play a broader role in providing technical support and facilitating green technology transfers.
The authors propose other changes applicable to all the SOFIs. These include an end to “arbitrary limits” imposed by government on their lending and borrowing. Instead, government should enable them to raise the funds they need to meet their mandates, provided they are managed prudently. This could include financing from the Bank of England in certain circumstances.
Finally, the paper suggests changes to the governance of the institutions. It proposes that the four SOFIs are brought together under a single state-owned holding company. The authors argue this will promote synergies and strategic planning. They say the holding company’s board should be chaired by the chancellor of the exchequer and include representatives from finance, industry, trade unions and the regions.
Combined, the authors believe these changes can make a “significant contribution” to the UK becoming a world leader in green finance.
Read the full article: Laurie Macfarlane and Chaitanya Kumar, Greening Public Finance: The UK’s Public Finance Ecosystem and the Net Zero Transition, New Economics Foundation, 9 September 2021