George Osborne has been criticised for skipping a parliamentary question about the unraveling of his Budget – and for putting a junior minister up in his place.

The Government has backpedalled on a number of policies in just days since the Chancellor announced his spending plans for the coming year.

As well as a major U-turn on steep cuts for disability benefits, the Government has said it will not oppose a number of Labour amendments on issues including the so-called Tampon Tax and VAT on solar panels.

Conservative backbenchers have signed some of the Labour amendments – suggesting a rebellion when they come to a vote and a possible defeat for the Government, which only has a very small majority.

John McDonnell, Labour’s shadow chancellor has been granted an urgent question to ask about the changes – but the Government has said Mr Osborne will not reply himself.

Treasury minister David Gauke will field the questions from the dispatch box instead and reply for the Government.

We know that global demand for agricultural and forest commodities is soaring. Predictions suggest the world’s population will reach nine billion by 2050, and more people means more mouths to feed.

The sad reality is that over the past decades, meeting the rising demand for food and consumer goods has often come at the expense of forests, making commercial agriculture the main driver of tropical deforestation. Inefficient production schemes, missing or unclear economic and financial incentives for sustainable choices, poor governance structures and complex supply chains have contributed to this outcome. The devastating haze and forest fire crisis in Indonesia is a clear example of this negative cycle.

This cycle has to stop. Halting forest destruction is one of the easiest and most cost-effective ways to prevent catastrophic climate change. The good news is that the international community is getting serious about the potential to optimise the role of forests in climate change mitigation and adaptation.

Following a strong Paris agreement – including much-needed acknowledgment of the critical role that forests play in combatting climate change – there has never been a better time to work together to protect the world’s remaining tropical forests.

We don’t have all the answers and the road ahead will not be easy, but here are five reasons for hope right now.

1. The Amazon has shown us it can be done

Brazil has successfully decoupled agricultural production from deforestation in the Amazon forest – where agriculture output has been growing while deforestation rates have dropped substantially. Since 2005, through a combination of public policy and private sector actions, deforestation has reduced by 70% – keeping about 3.5 billion tonnes of carbon dioxide out of the atmosphere.

2. The Paris agreement sets the foundation for more progress

The Paris agreement sent a strong message to the international community about the importance of forests. All countries agreed on simple but strong language that operationalises forest protection.

The inclusion of REDD+ Reducing Emissions from Deforestation and forest Degradation as a standalone piece – Article 5 – in the final Paris agreement sends a clear signal that the period of mass forest destruction is drawing to a close.

3. Momentum has been built for place-based partnerships

The outcome from Paris also gives an excellent basis for public private partnerships to focus on converting entire jurisdictions (geographic areas in a country) to increase production while improving forest protection – what we call ‘production-protection’.

This approach is promising but not without challenges, as the Global Agenda Council paper on Better Growth with Forests highlights, therefore the solution models must be creative and nationally appropriate for transformational outcomes.

The ultimate aim is to create a “triple win”: to deliver rural development and domestic economic growth, while protecting and restoring forests on a large scale.

During the Paris negotiations Marks & Spencer and Unilever announced an intent to prioritise commodity sourcing from areas practicing sustainable agricultural production, forest protection and protection of livelihoods, with support from forest and donor governments and other consumer goods companies. The model provides jurisdictions with the design, technical support and necessary funding to develop implementable plans, while creating a global community of purpose to pilot and create investment-grade replicable partnerships and solutions.

What we now need is for more sub national leaders and consumer goods companies to join the Tropical Forest Alliance 2020 (TFA2020). This will allow all parties to come together via large bilateral and multilateral programmes to support jurisdictions (national or subnational governments) in developing and implementing landscape-level plans to reduce deforestation while putting smallholders and communities at the heart of the agenda.

4. Livelihoods depend on our success

More than 1.6 billion people worldwide depend on forests for food, medicines and fuel, as well as their jobs and livelihoods.

A key requisite for the ‘production-protection’ approach, is that jurisdictions have a strategy for how to reduce emissions from forests and other lands whilst increasing agricultural productivity and improving livelihoods.

Increasing agricultural productivity will have a profound effect on smallholder farmers in particular – in their role of producers, custodians of biodiversity and vendors – the more we can help them better manage land and improve their productivity, the more their livelihoods will improve.

In reality, production of the commodities that we all rely on is not possible without protecting the land, forests and communities involved.

5. We are many

The number of people focused on this agenda is growing. The Consumer Goods Forum and Tropical Forest Alliance bring together over 100 actors from business, government, and civil society. And through the New York Declaration on Forests, about 180 nations, companies, indigenous people and other organisations committed to halve deforestation by 2020 and stop it by 2030, while at the same achieving ambitious conservation, reforestation and forest restoration targets.

The critical mass of forest nations, donor governments, global agricultural commodity companies, consumer goods companies and funding partners that are now behind this goal is unprecedented.

We want to be optimistic – and this is indeed the moment in time to be so — but we realise many challenges still lie ahead. 2016 is an opportunity for us all to collaborate and show the world this can be done.

• Ending the carried interest tax break, which benefits hedge fund managers and private equity firms.

Proposed by Clinton, Sanders and Trump.

Rating: Good (20 good, 2 debatable).

• Lower the corporate tax rate to 25pc.

Proposed by Rubio.

Rating: Debatable (10 good, 10 debatable, 2 bad).

• Create a national infrastructure bank seeded with public money to finance infrastructure projects.

Proposed by Sanders and Clinton.

Rating: Debatable (10 good, 8 debatable, 4 bad).

• Make tuition free at public colleges and universities

Proposed by Sanders.

Rating: Bad (1 good, 1 debatable, 20 bad).

• Make tuition free at community colleges for students who contribute earnings from working 10 hours a week.

Proposed by Clinton.

Rating: Debatable (5 good, 9 debatable, 8 bad).

• Impose a “speculator tax.” Stock trades will be taxed at 0.5 percent and bonds at 0.1 percent.

Proposed by Sanders.

Rating: Debatable (4 good, 6 debatable, 12 bad).

• Raise the federal minimum wage to $15 an hour.

Proposed by Sanders.

Rating: Bad (2 good, 4 debatable, 16 bad).

• Trump's tax proposal: “If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households -- over 50 percent -- from the income tax rolls.”

Proposed by Trump.

Rating: Debatable (2 good, 9 debatable, 11 bad).

• Switch to the “Cruz Simple Flat Tax.” Everyone pays the same 10 percent tax rate. It retains some version of the earned income tax credit and deductions for lower-income families.

Proposed by Cruz.

Rating: Bad (1 good, 21 bad).

• Expel immigrants who are in the U.S. illegally.

Proposed by Trump.

Rating: Bad (22 bad).

• Minimum wages are probably not very good as anti-poverty strategies.

Using data drawn from the March Current Population Survey, we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. When we then simulate the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per hour, we find that such an increase will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour. Assuming no negative employment effects, only 11.3% of workers who will gain live in poor households, compared to 15.8% from the last increase. When we allow for negative employment effects, we find that the working poor face a disproportionate share of the job losses. Our results suggest that raising the federal minimum wage continues to be an inadequate way to help the working poor.

• Occupational licensing is an area ripe for meaningful reform.

Occupational licensing has been among the fastest growing labor market institutions in the United States since World War II. The evidence from the economics literature suggests that licensing has had an important influence on wage determination, benefits, employment, and prices in ways that impose net costs on society with little improvement to service quality, health, and safety. To improve occupational licensing practices, Kleiner proposes four specific reforms. First, state agencies would make use of cost-benefit analysis to determine whether requests for additional occupational licensing requirements are warranted. Second, the federal government would promote the determination and adoption of best-practice models through financial incentives and better information. Third, state licensing standards would allow workers to move across state lines with a minimal cost for retraining or residency requirements. Fourth, where politically feasible, certain occupations that are licensed would be reclassified to a system of certification or no regulation. If federal, state, and local governments were to undertake these proposals, evidence suggests that employment in these regulated occupations would grow, consumer access to goods and services would expand, and prices would fall.

• The U.S. still has a jobs gap of 1.8 million.

Each month, The Hamilton Project examines the “jobs gap,” which is the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels while also absorbing the people who enter the potential labor force each month. As of the end of January 2016, our nation faces a jobs gap of 1.8 million jobs. This chart shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close. The solid line shows the net number of jobs lost since the Great Recession began. The broken line tracks how long it will take to close the jobs gap if the economy adds about 217,000 jobs per month, which is the average monthly rate of job creation over the last 12 months. With this projected job growth rate, the economy will reach pre-recession employment levels by January 2017.

• Long-term real interest rates could remain incredibly low in the medium- to long-run.

Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.

• Monetary policy has longer-lasting, but delayed, effects on financial stability when compared with macroprudential policy (regulation).

The Global Financial Crisis has reopened discussions on the role of the monetary policy in preserving financial stability. Determining whether monetary policy affects financial variables domestically—especially compared to the effects of macroprudential policies— and across borders, is crucial in this context. This paper looks into these issues using U.S. exogenous monetary policy shocks and macroprudential policy measures. Estimates indicate that monetary policy shocks have significant and persistent effects on financial conditions and can attenuate long-term financial instability. In contrast, the impact of macroprudential policy measures is generally more immediate but shorter-lasting. Also, while an exogenous increase in U.S. monetary policy rates tends to reduce credit and house prices in other countries—with the effects varying with country-specific characteristics—an increase driven by improved U.S. economic conditions tends to have the opposite effect. Finally, we do not find evidence of cross-border spillover effects associated with U.S. macroprudential policies.

• In a world with high debt burdens, little fiscal space and what appears to be constrained monetary policy, changing the fiscal architecture of governments to include revenue-neutral automatic stabilisers may be the way forward in terms of combatting recessions.

Designing fiscal policy for today’s complex and uncertain economic climate is a problem that perplexes governments worldwide. This column proposes a solution – a new fiscal architecture with strengthened but budget-neutral automatic stabilisers. It won’t be easy, but overcoming predominantly political challenges will help foster steady and enduring growth.

• It appears that fiscal stimulus is most effective when done in the form of tax cuts and welfare/intergovernmental transfers. If the ARRA was done entirely via those two channels, growth in the first year would've been 0.8pc higher and the jobs gap would've been 500,000 jobs smaller. Not quite sure how this fits in with the post-Recessionary period we've witnessed so far, though.

The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Second, to internalize these spillovers, what central government fiscal policies are most effective for stimulating income and job growth? Both federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.

• Monetary finance, or the procedure of 'funding' tax cuts or discretionary spending through the creation of money and purchasing of debt instruments from the government by the central bank, may be the most effective solution to downturns in some circumstances. Risk to the independence of the central bank, however, are high.

My aim in this paper to assess the possible and appropriate role for monetary finance of fiscal deficits. And I will argue that all the really important issues are political, since the  technical issues surrounding monetary finance are already well understood (or should be) and that the technical feasibility and desirability in some circumstances of monetary finance is not in doubt. Monetary finance of increased fiscal deficit will always stimulate aggregate nominal demand: in some circumstances it will be a more certain and/or less risky way to achieve that stimulation than any alternative policy lever: and the scale of stimulus can be appropriately calibrated and controlled – there is no knife edge nonlinearity which makes dangerously high inflation inevitable.

• Raising interest rates in order to "lean against the wind" of debt growth and the buildup of financial risk doesn't pass cost-benefit analyses. This is a point against using monetary policy to mitigate risk of future financial crises or debt buildups.

“Leaning against the wind” (LAW) with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker. For existing empirical estimates, costs exceed benefits by a substantial margin, even if monetary policy is nonneutral and permanently affects real debt. Somewhat surprisingly, less effective macroprudential policy and generally a credit boom, with resulting higher probability, severity, or duration of a crisis, increases costs of LAW more than benefits, thus further strengthening the strong case against LAW.

• More evidence for even greater slack in the U.S. labour market.
  

In the wake of a severe recession and a sluggish recovery, labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.

• Financial systems dominating by banks contribute to greater systemic risk and slower growth, especially during crises in the housing market. Policies aimed at strengthening capital markets could mitigate this issue.

Europe’s financial structure has become strongly bank-based – far more so than in other economies. We document that an increase in the size of the banking system relative to equity and private bond markets is associated with more systemic risk and lower economic growth, particularly during housing market crises. We argue that these  two phenomena arise owing to an amplification mechanism, by which banks overextend and misallocate credit when asset prices rise, and ration it when they drop. The paper concludes by discussing policy solutions to Europe’s “bank bias”, which include reducing regulatory favouritism towards banks, while simultaneously supporting the development of securities markets.

• Inequality has been a significant drag on growth in OECD economies, although probably not through the channels you would expect. It's negative for growth due to the bottom ~40pc being left behind, as opposed to the top few percent extracting from the economy.

The gap between rich and poor keeps widening. Growth, if any, has disproportionally benefited higher income groups while lower income households have been left behind. This long-run increase in income inequality not only raises social and political concerns, but also economic ones. It tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole. This book highlights the key areas where inequalities are created and where new policies are required, including: the consequences of current consolidation policies; structural labour market changes with rising non-standard work and job polarization; persisting gender gaps; the challenge of high wealth concentration, and the role for redistribution policies.

• It would appear that the trajectory, rather than size, of a country's public debt burden is most important as to whether it drags on growth.

This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965- 2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers in the long run.

• Taking a gradualist approach towards monetary policy in order to avoid volatility in the bond market may be counter-productive.
  

We develop a model of monetary policy with two key features: (i) the central bank has private information about its long-run target for the policy rate; and (ii) the central bank is averse to bond-market volatility. In this setting, discretionary monetary policy is gradualist, or inertial, in the sense that the central bank only adjusts the policy rate slowly in response to changes in its privately-observed target. Such gradualism reflects an attempt to not spook the bond market. However, this effort ends up being thwarted in equilibrium, as long-term rates rationally react more to a given move in short rates when the central bank moves more gradually. The same desire to mitigate bond-market volatility can lead the central bank to lower short rates sharply when publicly-observed term premiums rise. In both cases, there is a time-consistency problem, and society would be better off appointing a central banker who cares less about the bond market. We also discuss the implications of our model for forward guidance once the economy is away from the zero lower bound.

• EITC is still the bomb, boosting employment and reducing poverty.
  

In this paper, we examine the effect of the EITC on the employment and income of single mothers with children. We provide the first comprehensive estimates of this central safety net policy on the full distribution of after-tax and transfer income. We use a quasi-experiment approach, using variation in generosity due to policy expansions across tax years and family sizes. Our results show that a policy-induced $1000 increase in the EITC leads to a 7.3 percentage point increase in employment and a 9.4 percentage point reduction in the share of families with after-tax and transfer income below 100% poverty. Event study estimates show no evidence of differential pre-trends, providing strong evidence in support of our research design. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. By capturing the indirect effects of the credit on earnings, our results show that static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure, Short 2014) may be underestimated by as much as 50 percent.

• Performanced-based pay produces good outcomes in the education sector.

The long term effect of teachers’ pay for performance is of particular interest, as critics of these schemes claim that they encourage teaching to the test or orchestrated cheating by teachers and schools. In this paper, I address these concerns by examining the effect of teachers’ pay for performance on long term human capital outcomes, in particular attainment and quality of higher education, and labor market outcomes at adulthood, in particular employment and earnings. I base this study on an experiment conducted a decade and a half ago in Israel and present evidence that the pay for performance scheme increased a wide range of long run human capital measures. Treated students are 4.3 percentage points more likely to enroll in a university and to complete an additional 0.17 years of university schooling, a 60 percent increase relative to the control group mean. These gains are mediated by overall improvements in the high school matriculation outcomes due to the teachers’ intervention at 12th grade. The pay scheme led also to a significant 7 percent increase in annual earnings, to a 2 percent reduction in claims for unemployment benefits, and a 1 percent decline in eligibility for the government disability payment.

• The time may be right for greater investment in infrastructure.

This chapter finds that increased public infrastructure investment raises output in both the short and long term, particularly during periods of economic slack and when investment efficiency is high. This suggests that in countries with infrastructure needs, the time is right for an infrastructure push: borrowing costs are low and demand is weak in advanced economies, and there are infrastructure bottlenecks in many emerging market and developing economies. Debt-financed projects could have large output effects without increasing the debt-to-GDP ratio, if clearly identified infrastructure needs are met through efficient investment.

• Government debt management when we hit the zero-lower bound probably offset a third of the Fed's efforts to stimulate the economy via QE.

We first document that the Treasury’s decision to lengthen the average maturity of the debt has partially offset the Federal Reserve’s attempts to reduce the supply of long-term bonds held by private investors through its policy of quantitative easing. We then examine the appropriate debt management policy for the consolidated government. We argue that traditional considerations favoring longer-term debt may be overstated, and suggest that there are several advantages to issuing greater quantities of short-term debt.

• It may be the case that current fiscal multipliers are under-estimated.
  

Using non-linear methods, we argue that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. In the case of OECD countries, the problem originates in the fact that, contrary to one’s priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the “true” long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.

• After a rebound in the U.S. labour force participation rate during 2015 and '16, it's expected to fall again due to the ageing population.
  

The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering. A key question is how much of the post-2007 decline is reversible, something which is central to the policy debate. The key finding of this paper is that while around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging. This paper’s measure of the “employment gap” also suggests that labor market slack remains and will only decline gradually, pointing to a still important role for stimulative macro-economic policies to help reach full employment. In addition, given the continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth. Finally, stimulative macroeconomic and labor supply policies should also help reduce the scope for further hysteresis effects to develop (e.g., loss of skills, discouragement).

• School spending is an incredibly important factor in educational and economic achievement down the line.
  

Since Coleman (1966), many have questioned whether school spending affects student outcomes. The school finance reforms that began in the early 1970s and accelerated in the 1980s caused some of the most dramatic changes in the structure of K–12 education spending in US history. To study the effect of these school-finance-reform-induced changes in school spending on long-run adult outcomes, we link school spending and school finance reform data to detailed, nationally-representative data on children born between 1955 and 1985 and followed through 2011. We use the timing of the passage of court-mandated reforms, and their associated type of funding formula change, as an exogenous shifter of school spending and we compare the adult outcomes of cohorts that were differentially exposed to school finance reforms, depending on place and year of birth. Event-study and instrumental variable models reveal that a 10 percent increase in per-pupil spending each year for all twelve years of public school leads to 0.27 more completed years of education, 7.25 percent higher wages, and a 3.67 percentage-point reduction in the annual incidence of adult poverty; effects are much more pronounced for children from low-income families. Exogenous spending increases were associated with sizable improvements in measured school quality, including reductions in student-to-teacher ratios, increases in teacher salaries, and longer school years.

• Martin Feldstein recommends that Europe drop its policy of quantitative easing and instead turn to fiscal policy which will spur aggregate spending but in a revenue-neutral way.

All of the attempts to end the euro crisis and to return the Eurozone countries to healthy growth rates of income and employment have failed. The options that are currently being discussed are not likely to be more successful.

If there is a politically feasible way out of the crisis, it will be through revenue neutral fiscal incentives adopted by the individual Eurozone countries. I describe some of these fiscal options after reviewing the history of failed attempts and the options that are currently on the table.

• Higher tax progressivity is associated with lower overall maximum sustainable debt level.

Since the Global Crisis, debt sustainability has received increasing attention. This column argues that the maximum sustainable debt level depends negatively on the progressivity of the tax system. The authors estimate that the US is still relatively far from the peak of its Laffer curve and from its maximally sustainable debt level. However, adopting a flat tax would raise the maximum sustainable debt from 330% to more than 350% of benchmark GDP, whereas adopting Danish-style progressivity would lower it to less than 250%.

China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, are key items on the research agenda for trade and labor economists.

• Surprisingly, it looks possible that low-income workers never recover from trade shocks.
• Social security benefits increase by much more than TAA benefits following trade shocks, indicating that TAA benefits ought to be dramatically expanded.
• On a more positive note, it's possible that the U.S.'s growing current account deficit during the period in study retarded specialisation into areas where the U.S. has an advantage over China.

MY THEORY of democracy is very simple and easy for everybody to understand. But its fundamental problem is so different from the age-old theory of democracy which everybody takes for granted that it seems that this difference has not been grasped, just because of the simplicity of the theory. It avoids high-sounding, abstract words like “rule”, “freedom” and “reason”. I do believe in freedom and reason, but I do not think that one can construct a simple, practical and fruitful theory in these terms. They are too abstract, and too prone to be misused; and, of course, nothing whatever can be gained by their definition.

This article is divided into three main parts. The first sets out, briefly, what may be called the classical theory of democracy: the theory of the rule of the people. The second is a brief sketch of my more realistic theory. The third is, in the main, an outline of some practical applications of my theory, in reply to the question: “What practical difference does this new theory make?”

The classical theory
The classical theory is, in brief, the theory that democracy is the rule of the people, and that the people have a right to rule. For the claim that the people have this right, many and various reasons have been given; however, it will not be necessary for me to enter into these reasons here. Instead, I will briefly examine some of the historical background of the theory, and of the terminology.

Plato was the first theoretician to make a system out of the distinctions between what he regarded as the main forms of the city-state. According to the number of the rulers, he distinguished between: (1) monarchy, the rule of one good man, and tyranny, the distorted form of monarchy; (2) aristocracy, the rule of a few good men, and oligarchy, its distorted form; (3) democracy, the rule of the many, of all the people. Democracy did not have two forms. For the many always formed a rabble, and so democracy was distorted in itself.

If one looks more closely at this classification, and if one asks oneself what problem was at the back of Plato’s mind, then one finds that the following underlay not only Plato’s classification and theory, but also those of everybody else. From Plato to Karl Marx and beyond, the fundamental problem has always been: who should rule the state? (One of my main points will be that this problem must be replaced by a totally different one.) Plato’s answer was simple and naive: “the best” should rule. If possible, “the best of all”, alone. Next choice: the best few, the aristocrats. But certainly not the many, the rabble, the demos.

The Athenian practice had been, even before Plato’s birth, precisely the opposite: the people, the demos, should rule. All important. political decisions—such as war and peace—were made by the assembly of all full citizens. This is now called “direct democracy”; but we must never forget that the citizens formed a minority of the inhabitants—even of the natives. From the point of view here adopted, the important thing is that, in practice, the Athenian democrats regarded their democracy as the alternative to tyranny—to arbitrary rule: in fact, they knew well that a popular leader might be invested with tyrannical powers by a popular vote.

So they knew that a popular vote may be wrongheaded, even in the most important matters. (The institution of ostracism recognised this: the ostracised person was banned as a matter of precaution only; he was neither tried nor regarded as guilty.)The Athenians were right: decisions arrived at democratically, and even the powers conveyed upon a government by a democratic vote, may be wrong. It is hard, if not impossible, to construct a constitution that safeguards against mistakes. This is one of the strongest reasons for founding the idea of democracy upon the practical principle of avoiding tyranny rather than upon a divine, or a morally legitimate, right of the people to rule.

The (in my opinion, vicious) principle of legitimacy plays a great part in European history. While the Roman legions were strong, the Caesars based their power upon the principle: the army legitimises the ruler (by acclamation). But with the decline of the Empire, the problem of legitimacy became urgent; and this was strongly felt by Diocletian, who tried to support the new structure of the Imperium of the God-Caesars ideologically with traditional and religious distinctions and the corresponding attribution of different titles: Caesar, Augustus, Herculius, and Jovius (i.e., related to Jupiter).

Yet it seems that there was a need for a more authoritative, deeper religious legitimation. In the next generation, monotheism in the form of Christianity (which, of the available monotheisms, has spread most widely) offered itself to Constantine as the solution to the problem. From then on, the ruler ruled by the Grace of God—of the one and the only universal God. The complete success of this new ideology of legitimacy explains both the ties and the tensions between the spiritual and the worldly powers which thus became mutual dependants, and therefore rivals, throughout the Middle Ages.

So, in the Middle Ages, the answer to the question “Who should rule?” became the principle: God is the ruler, and He rules through His legitimate human representatives. It was this principle of legitimacy which was first seriously challenged by the Reformation and then by the English revolution of 1648-49 which proclaimed the divine right of the people to rule. But in this revolution the divine right of the people was immediately used to establish the dictatorship of Oliver Cromwell.

After the dictator’s death, there was a return to the older form of legitimacy; and it was the violation of protestant legitimacy by James II, by the legitimate monarch himself, which led to the “Glorious Revolution” of 1688, and to the development of British democracy through a gradual strengthening of the power of Parliament, which had legitimised William and Mary. The unique character of this development was precisely due to the experience that fundamental theological and ideological quarrels about who should rule lead only to catastrophe. Royal legitimacy was no longer a reliable principle, nor was the rule of the people. In practice, there was a monarchy of somewhat dubious legitimacy created by the will of Parliament, and a fairly steady increase of parliamentary power. The British became dubious about abstract principles; and the Platonic problem “Who should rule?” was no longer seriously raised in Britain until our own days.

Karl Marx, who was not a British politician, was still dominated by the old Platonic problem which he saw as: “Who should rule? The good or the bad—the workers or the capitalists?” And even those who rejected the state altogether, in the name of freedom, could not free themselves from the fetters of a misconceived old problem; for they called themselves anarchists—that is, opponents of all forms of rule. One can sympathise with their unsuccessful attempt to get away from the old problem “Who should rule?”

A more realistic theory
In “The Open Society and its Enemies” I suggested that an entirely new problem should be recognised as the fundamental problem of a rational political theory. The new problem, as distinct from the old “Who should rule?”, can be formulated as follows: how is the state to be constituted so that bad rulers can be got rid of without bloodshed, without violence?

This, in contrast to the old question, is a thoroughly practical, almost technical, problem. And the modern so-called democracies are all good examples of practical solutions to this problem, even though they were not consciously designed with this problem in mind. For they all adopt what is the simplest solution to the new problem—that is, the principle that the government can be dismissed by a majority vote.

In theory, however, these modern democracies are still based on the old problem, and on the completely impractical ideology that it is the people, the whole adult population, who are, or should by rights be, the real and ultimate and the only legitimate rulers. But, of course, nowhere do the people actually rule. It is governments that rule (and, unfortunately, also bureaucrats, our civil servants—or our uncivil masters, as Winston Churchill called them—whom it is difficult, if not impossible, to make accountable for their actions).

What are the consequences of this simple and practical theory of government? My way of putting the problem and my simple solution do not, of course, clash with the practice of western democracies, such as the unwritten constitution of Britain, and the many written constitutions which took the British Parliament more or less as their model. It is this practice (and not their theory) which my theory—my problem and its solution—tries to describe. And, for this reason, I think that I may call it a theory of “democracy”, even though it is emphatically not a theory of the “rule of the people”, but rather the rule of law that postulates the bloodless dismissal of the government by a majority vote.

My theory easily avoids the paradoxes and difficulties of the old theory—for instance, such problems as “What has to be done if ever the people vote to establish a dictatorship?” Of course, this is not likely to happen if the vote is free. But it has happened. And what if it does happen? Most constitutions in fact require far more than a majority vote to amend or change constitutional provisions, and thus would demand perhaps a two-thirds or even a three-quarters (“qualified”) majority for a vote against democracy. But this demand shows that they provide for such a change; and at the same time they do not conform to the principle that the (“unqualified”) majority will is the ultimate source of power—that the people, through a majority vote, are entitled to rule.

All these theoretical difficulties are avoided if one abandons the question “Who should rule?” and replaces it by the new and practical problem: how can we best avoid situations in which a bad ruler causes too much harm? When we say that the best solution known to us is a constitution that allows a majority vote to dismiss the government, then we do not say the majority vote will always be right. We do not even say that it will usually be right. We say only that this very imperfect procedure is the best so far invented. Winston Churchill once said, jokingly, that democracy is the worst form of government—with the exception of all other known forms of government.

And this is the point: anybody who has ever lived under another form of government—that is, under a dictatorship which cannot be removed without bloodshed—will know that a democracy, imperfect though it is, is worth fighting for and, I believe, worth dying for. This, however, is only my personal conviction. I should regard it as wrong to try to persuade others of it.

We could base our whole theory on this, that there are only two alternatives known to us: either a dictatorship or some form of democracy. And we do not base our choice on the goodness of democracy, which may be doubtful, but solely on the evilness of a dictatorship, which is certain. Not only because the dictator is bound to make bad use of his power, but because a dictator, even if he were benevolent, would rob all others of their responsibility, and thus of their human rights and duties. This is a sufficient basis for deciding in favour of democracy—that is, a rule of law that enables us to get rid of the government. No majority, however large, ought to be qualified to abandon this rule of law.

Proportional representation
Such are the theoretical differences between the old and the new theories. As an example of the practical difference between the theories, I propose to examine the issue of proportional representation.

The old theory and the belief that the rule of the people, by the people, and for the people constitutes a natural right, or a divine right, form the background of the usual argument in favour of proportional representation. For if people rule through their representatives, and by majority votes, then it is essential that the numerical distribution of opinion among the representatives mirrors as closely as possible that which prevails among those who are the real source of legitimate power: the people themselves. Everything else will he not only grossly unfair but against all the principles of justice.

This argument collapses if the old theory is given up, so that we can look, more dispassionately, and perhaps without much prejudice, at the inescapable (and possibly unintended) practical consequences of proportional representation. And these are devastating.

First of all, proportional representation confers, even if only indirectly, a constitutional status on political parties which they would otherwise not attain. For I can no longer choose a person whom I trust to represent me: I can choose only a party. And the people who may represent the party are chosen only by the party. And while people and their opinions always deserve the greatest respect, the opinions adopted by parties (which are typically instruments of personal advancement and of power, with all the chances for intrigue which this implies) are not to be identified with ordinary human opinions: they are ideologies.

In a constitution that does not provide for proportional representation, parties need not be mentioned at all. They need not be given official status. The electorate of each constituency sends its personal representative to the chamber. Whether he stands alone, or whether he combines with some others to form a party, is left to him. It is an affair he may have to explain and defend to his electorate.

His duty is to represent the interests of all those people whom he represents to the best of his ability. These interests will in almost all cases be identical with those of all the citizens of the country, of the nation. These are the interests he must pursue to the best of his knowledge. He is personally responsible to persons.

This is the only duty and the only responsibility of the representative that must be recognised by the constitution. If he considers that he has also a duty to a political party, then this must be due solely to the fact that he believes that through his connection with that party he can do his primary duty better than without the party. Consequently it is his duty to leave the party whenever he realises that he can do his primary duty better without that party, or perhaps with a different party.

All this is done away with if the constitution of the state incorporates proportional representation. For under proportional representation the candidate seeks election solely as the representative of a party, whatever the wording of the constitution may be. If he is elected, he is elected mainly, if not solely, because he belongs to, and represents, a certain party. Thus, his main loyalty must be to his party, and to the party’s ideology; not to people (except, perhaps, the leaders of the party).

It can therefore never be his duty to vote against his party. On the contrary, he is morally bound to the party as whose representative he was voted into parliament. And in the event that he can no longer square this with his conscience, it would, in my opinion, be his moral duty to resign not only from his party but from parliament, even though the country’s constitution may place no such obligation upon him.

In fact, the system under which he was elected robs him of personal responsibility; it makes of him a voting machine rather than a thinking and feeling person. In my view, this is by itself a sufficient argument against proportional representation. For what we need in politics are individuals who can judge on their own and who are prepared to carry personal responsibility.

Such individuals are difficult to find under any party system, even without proportional representation—and it must be admitted that we have not yet found a way of doing without parties. But if we have to have parties, we had better not, by our constitution, add deliberately to the enslavement of our representatives to the party machine and to the party ideology by introducing proportional representation.

The immediate consequence of proportional representation is that it will tend to increase the number of parties. This, at first glance, may seem desirable: more parties means more choice, more opportunities, less rigidity, more criticism. It also means a greater distribution of influence and of power.

However, this first impression is totally mistaken. The existence of many parties means, essentially, that a coalition government becomes inevitable. It means difficulties in the formation of any new government, and in keeping a government together for any length of time.

Minority rule
While proportional representation is based on the idea that the influence of a party should be proportional to its voting power, a coalition government means, more often than not, that small parties can exercise a disproportionately great—and often decisive—influence, both on the formation of a government and on its resignation, and so on all its decisions. Most important of all, it means the decay of responsibility. For in a coalition government there is reduced responsibility for all the partners in the coalition.

Proportional representation—and the greater number of parties as a result thereof—may therefore have a detrimental effect on the decisive issue of how to get rid of a government by voting it out of office, for instance in a parliamentary election. The voters are led to expect that perhaps none of the parties will obtain an absolute majority. With this expectation in their minds, the people hardly vote against any of the parties. As a result, on election day none of the parties is dismissed, none is convicted. Accordingly, nobody looks on election day as a Day of Judgment; as a day when a responsible government stands to account for its deeds and omissions, for its successes and failures, and a responsible opposition criticises this record and explains what steps the government ought to have taken, and why.

The loss of 5% or 10% of votes by one or other of the parties is not seen by the voters as a verdict of “guilty”. They look at it, rather, as a temporary fluctuation in popularity. In time, the people become used to the idea that none of the political parties or their leaders can really be made accountable for their decisions which may have been forced on them by the necessity to form a coalition.

From the point of view of the new theory, election day ought to be a Day of Judgment. As Pericles of Athens said in about 430 BC, “although only a few may originate a policy, we are all able to judge it.” Of course, we may misjudge it; in fact, we often do. But if we have lived through a party’s period of power and have felt its repercussions, we have at least some qualifications for judgment.

This presupposes that the party in power and its leaders were fully responsible for what they were doing. This, in turn, presupposes a majority government. But with proportional representation, even in the case of a single party governing with an absolute majority and thrown out by a majority of disenchanted citizens, the government may not be turned out of office. It would rather look for the smallest party strong enough to go on ruling with its help.

Hence the censured leader of the larger party would still continue to lead the government—in direct opposition to the majority vote and on the basis of help received from one of the small parties whose policies, in theory, may be far removed from “representing the will of the people”. Of course, the small party may not be strongly represented in the new government. But its power will be very great since it may topple the government at any time. All this grossly violates the idea that lies at the root of proportional representation: the idea that the influence exercised by any party must correspond to the number of votes it can muster.

The two-party system
In order to make a majority government probable, we need something approaching a two-party system, as in Britain and in the United States. Since the existence of the practice of proportional representation makes such a possibility hard to attain, I suggest that, in the interest of parliamentary responsibility, we should resist the perhaps-tempting idea that democracy demands proportional representation. Instead, we should strive for a two-party system, or at least for an approximation to it, for such a system encourages a continual process of self-criticism by the two parties.
Such a view will, however, provoke frequently voiced objections to the two-party system that merit examination: “A two-party system represses the formation of other parties.” This is correct. But considerable changes are apparent within the two major parties in Britain as well as in the United States. So the repression need not be a denial of flexibility.

The point is that in a two-party system the defeated party is liable to take an electoral defeat seriously. So it may look for an internal reform of its aims, which is an ideological reform. If the party is defeated twice in succession, or even three times, the search for new ideas may become frantic, which obviously is a healthy development. This is likely to happen, even if the loss of votes was not very great.

Under a system with many parties, and with coalitions, this is not likely to happen. Especially when the loss of votes is small, both the party bosses and the electorate are inclined to take the change quietly. They regard it as part of the game—since none of the parties had clear responsibilities. A democracy needs parties that are more sensitive than that and, if possible, constantly on the alert. Only in this way can they be induced to be self-critical. As things stand, an inclination to self-criticism after an electoral defeat is far more pronounced in countries with a two-party system than in those where there are several parties. In practice, then, a two-party system is likely to be more flexible than a multi-party system, contrary to first impressions.

It is said: “Proportional representation gives a new party a chance to rise. Without it, the chance is much diminished. And the mere existence of a third party may greatly improve the performance of the two big parties.” This may well be the case. But what if five or six such new parties emerge? As we have seen, even one small party may wield quite disproportionate power if it is in the position to decide which of the two big parties it will join to form a coalition government.

It is also said: “A two-party system is incompatible with the idea of an open society—with the openness for new ideas, and with the idea of pluralism.” Reply: both Britain and the United States are very open to new ideas. Complete openness would, of course, be self-defeating, as would be complete freedom. Also cultural openness and political openness are two different things. And more important even than opening wider and wider the political debate may be a proper attitude towards the political Day of Judgment.