Why There Aren’t Microeconomists at the G20

An op-ed piece in Thursday’s Globe and Mail written by a professor and the dean of the Haskayne School of Business at the University of Calgary has caught our attention and deserves a comment or six. The article makes an argument for having micro economists at the G20 Summit, claiming that more understanding of individuals’ behaviour and the effect of regulations and institutions is required to solve the world’s macro economic problems. (Click here for the article)

We agree with the contention, but think we can offer an explanation for why that doesn’t happen. First, let us point out that there are macroeconomic models that are built on the principles of microeconomics. Unfortunately, there are few textbooks that use these models and even fewer professors that teach these models. One notable exception is the intermediate text: Macroeconomics by Stephen D. Williamson, published by Pearson. Most principles and intermediate texts use the Keynesian model or some form of it. The Keynesian model suggests that governments can borrow and spend to correct business cycle activity. Unfortunately, the Keynesian model assumes away a lot of consumer and firm behaviour. We offer a couple of recent newspaper articles at to illustrate this concept.

An article in the Globe and Mail published June 14 talks about the proposed changes to the Canada Pension Plan. It is argued that Canadians are not saving enough for their retirement and so the government is stepping in to increase Canada pension plan benefits and to pay for these benefits are increasing the payroll tax. The argument here is that the government can get us to save by forcing us to do so through the tax system. The microeconomist, however, will tell you that income taxes reduce the incentive to work and also reduce the ability to save. Workers don't actually care what the stated wage rate is what they care about is how much money ends up in their bank account every two weeks. An increase in CPP contributions reduces the amount that ends up in their bank accounts. This causes a reduction in both consumption and savings. (Click here for the article.)

Another article on June 26 of the Vancouver province indicates that British Columbians plan to cut back on spending after the HST is introduced on July 1. In this case the microeconomist will tell you that the HST does not reduce disposable income but instead changes relative prices. The amount of money going into the bank account every two weeks will be the same before and after the implementation of the HST. What will happen is that some items will become relatively more expensive than others, while some will become relatively less expensive. This causes a change in spending patterns but not necessarily in the level of spending. That is why most economists favour consumption taxes over income taxes.(Click here for the article)

When we apply microeconomics theory to macroeconomic policy we begin to look at the reactions of individuals to government policies. One of the biggest debates is whether or not governments can stimulate the economy through borrowing. The argument in favour suggests that when consumer spending, private investment spending and/or net export spending falls, the government can (and should) step in and increase their spending to keep the economy moving. The argument against, looks at how the government funds this spending. If the government increases taxes to pay for the increase, consumer and investment spending may fall by an amount equal to the increase in government spending. If the government borrows the money, they create a future tax liability for payment of interest and perhaps the principal. In 1974 paper published in the Journal of Political Economy, Professor Robert Barro showed that the net effect of government spending financed by borrowing could be zero.


So why then do we not see more application of microeconomic principles to macroeconomic policy? Perhaps we need to look at the behaviour of politicians whose objective is to stay in power. Macroeconomic policies based on Keynesian models lead to big governments. Macroeconomic policies based on microeconomic principles lead to smaller governments. Politicians like bigger governments. Perhaps that is the reason there are no microeconomists at the G20 Summit.

Cited:
Are Government Bonds Net Wealth? Robert J. Barro, The Journal of Political Economy Vol. 82 No. 6, Nov 1974