Economics for troubled times

This interview appears in the latest edition of the UCL Policy Lab magazine. To find out more about Policy Lab and get the latest news events, sign up for their newsletter here. 

Wei Cui has spent most of his life thinking about economic shocks and their consequences. This is the stuff that goes from screaming trading floors to boarded-up high streets. And it hangs heavy on all of us at the moment, as the news tells us of the fierce headwinds that our economy here in the UK currently faces.

Cui grew up in Shenzhen, not far from Hong Kong and now the third largest city in China. Although we’re now sitting in an office six thousand miles away in Bloomsbury, the 1997 Asian financial crisis, which began in Thailand in the summer of that year, casts a long shadow, defining Wei’s research and going to the heart of what drove him to become a researcher.

“It had very material effects on my family life. I think our family was lucky, but still, we were adversely affected a lot. You see these bubbles, growing up, and then bursting later on. I was 11 and became very interested in the effect of financial crises.”

This childhood curiosity didn’t fade; instead, it charted his path. Following his undergraduate degree at Tsinghua University in Beijing, Cui continued his research, and later pursued graduate studies at Princeton.

“It’s a coincidence really - I studied under several professors who are affiliated with the Bendheim Center for Finance there. The BCF was established by Ben Bernanke, who was the Federal Reserve Chairman during the financial crisis in 2008. And what was even funnier, was that my first day of grad school was 15 September 2008.”

The day the Lehman Brothers filed for bankruptcy.

“These two things - one in 1997, and one in 2008 - gave me a lot of reasons to study the impact of financial shocks on macro fiscal policy and monetary policy.”

What does this look like in Cui’s research? He explains how he studies the impact of financial shocks from three different angles – firms, households, and government policy. Connecting all of these are the policy responses to financial crises that we have seen for many years, and Cui wants to know what that’s going to mean in the long-term. Take quantitative easing, for example. He gives the example of a stimulus cheque given to every household – they all benefit, and that stimulates the economy in the short-term.

“Then the lucky guys, the wealthy guys - they will consume their cheques, but also save in the stock market, or other assets they can buy”, Cui says. “But the unlucky guys – they get an initial stimulus cheque, they can spend, but afterwards, they have nothing.”

By viewing households like companies, where some are “productive” and some are “unproductive”, Cui provides us with a vital tool for understanding the impact of national economic policy on the lives of ordinary people.

“Quantitative easing types of policies, in the face of financial shocks, in the medium term create more inequality instead of less”, he argues. “That inequality will expand and, in the end, have very bad consequences for the economy because the larger the inequality, creates smaller demand, and eventually that’s not going to be helpful.”

This focus on unintended consequences extends to fiscal policy. Cui approaches questions in a way that seeks to grapple with the impact of economic policy on the long-term prospects for ordinary people. One challenge of recent years has been the effect of low interest rates and their impact on the economy and households.

“The key question is, do you want to utilize the low interest rate or not? You can tax. You can borrow. And what is the optimal combination of all of these? Focusing on growth will eventually address almost all the problems right now. We talk about the division of a pie. Some will be happier; some might be angry about the increase of tax. But if the size of the pie is larger, everyone benefits from the policy.”

As he mentions, the new British government’s first budget announced a desire to boost investment. But what happens when the government is constrained, such as by its limited taxing power?

“Firms are not stupid and will react in facing higher taxes. That means that the government’s taxing power is limited. And then what should they do? If tax power is limited, and the government cannot raise revenues from labour, income tax, capital gains tax, corporate tax? One thing they can do, unfortunately, is to tax savers.” Cui puts it bluntly.

“It doesn’t matter who you tax, it’s who is more responsive or less responsive to paying the tax that will shape the impact of the policy. The most inelastic source pays most of the tax. Like with quantitative easing, we end up discussing how politically plausible, short-term solutions have a long-term impact. The urgent need to ease the burden for everyone after a financial shock brings with it, not its ramifications for the economy years down the line. Do you tax the corporate sector, who may decide to move their investments overseas? Or do you tell savers at home that the tax burden is on them, and immediate sacrifice now will lead to a better growth rate in the future?"

Cui is clear that there is not an easy answer. Short-term fixes often seed long-term struggles. “In economics,” he suggests, “if we really want to talk about welfare or growth in the long run, there’s only one solution. It’s not investment – it’s technology. The idea of boosting growth and investing in innovations, in something that can improve the technological frontier will be much more beneficial than thinking about short term growth.”

I think back to his experience of the 1997 crash, at the end of a century and the edge of a millennium. In terms of technological growth, 1997 feels like the distant past. With history on my mind, I ask him what he expects will happen now that we have a new generation of economists who have cut their teeth on financial crises, from the 2000s recession and the dotcom bubble, through 2008 and now to the ongoing effects of the COVID-19 pandemic.

“In the 70s, 80s and 90s,” he explains, “most of the research was about economies without much financial frictions and financial shocks. But after 2008 – it’s obvious that that’s the area we should push for, and we will definitely see much more research.”

But, as Cui points out, it’s not just the frontiers of new research that matters. He would like to see a redesign of the undergraduate curriculum. “The problem is how to make the research much more accessible to undergraduate education. The influence [of living through financial shocks] is financial literacy to some extent – so that in the future, people can make better financial decisions and understand the system better.”

And what does this mean, in the long-term, I ask?

Cui is hopeful. “In the end, I would forecast that there will be less of such things in the future – we better understand the financial system and people will make more sound financial decisions.”

Often, when we talk about consequences, it is in a negative framing - suffer the consequences, bear the consequences of one’s actions etc. Yet, it is this optimistic note that stays with me. The long-term solution of living through a series of generational defining crises is one of education, of lessons learnt and a willingness to ensure that history doesn’t repeat itself. If we learn, future crises can be less severe.

In Wei Cui and his research, we find a yearning to help learn those lessons and help make a difference, not just in his discipline but in the lives of people the world over.

This interview appears in the latest edition of the UCL Policy Lab magazine. To find out more about Policy Lab and get the latest news events, sign up for their newsletter here.