The coalition only had less than a one in twenty chance of being this bad! And they nailed it!

By George, they’ve beaten the odds. This might be the most idiotic Government since Churchill put us back on gold at prewar parity. Via KrugthuluSchularick and Taylor have an on the post crisis performance of US and UK economy. Below is the money shot.

 

You can see that both the US and UK suffered much worse recessions than normal, considering historical experience (and educated guess work). However, while the US is recovering from that recession more quickly than expected, the UK is recovering much more slowly. So slowly in fact, recovery is a misnomer. We are stagnating.

The only organisation, as far as I’m concerned, with the power to move that bottom blue line upwards is the Bank of England. Although operationally independent the Chancellor has the authority to instruct the Bank of England to be more vigorous at any time he likes by changing the definition of the “price stability” which he is meant to achieve.

New Labour initially had the Bank of England target RPIX of 2.5%, but in December 2003, the inflation target was changed to CPI of 2%. Were Osborne to decide to that price stability in fact meant nominal GDP targeting and that some catch up was necessary he could make this instruction without further ado. Osborne has not made this decision despite definitely receiving advice from Vince Cable’s office that it would be a good idea to do so. I don’t have any evidence he’s received advice, but knowing Vince and his SpAd the advice must have been proffered at some point.

It is within his remit within current legislation. It doesn’t matter that it is a fudge. Britain has always fudged crisis management, think of it a 21st century suspension of the Bank Act, British politics is good at muddling through. When it comes to childcare the coalition is adept at misdirection and fraud, when it comes to the disabled, they aren’t afraid to hurt people, but when it comes to the macroeconomy they seem to accept failure gleefully. Given the coalition’s incompetence in managing the affairs of the nation, they need kicking out.

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7 thoughts on “The coalition only had less than a one in twenty chance of being this bad! And they nailed it!

  1. You know much more about economics than I do, but couldn’t it be that these macro views are indicators, not of permanent and genuine recovery, but of policies that have successfully affected macro views of the economy?

    How good an indicator of lasting economic recovery/improvement is real GDP pc, historically? And what about the American “fiscal cliff”? And is government spending included in this measurement of GDP? After all, if it is, this could just be an indicator of higher government spending, i.e. a tautology from the point of view of your commentary.

    Just wondering because although judging by these macroeconomic metrics the US is doing better, there is certainly a lot of feeling that the actual case and outlook are not so good.

    1. Standard Econ101 says GDP is a really good measure of what it measures. The value add of an economy in dollars and cents. It only measures new production (so ignores second hand market) and cash transactions (so ignore in kind and barter) and is “gross” so damage done by pollution is usually not included.

      It is calculated by measuring the price differences in market transactions, so we get the value added (or gross product) or each transaction.

      Government doesn’t do markets so we assume that what we spend of government is what it produces. That is the assumption is that one pound spent on government creates one pound of value.

      Government spending is spending, so it isn’t exactly tautological. The idea isn’t that government spending disappears and the real resources it deploys vanish. It is that the real resources are put to better use. So excusing poor growth by saying government is shrinking so we want lower growth don’t make much sense without some second order effects.

      These are the dubious assumptions on which we base policy.

      That said…it is a pretty good metric. When GDP is growing things are better than when they are shrinking. Certainly, not better alternative has really been proposed. When looking at certain policies, some measures are more useful. Housing permits issued, or unemployment. But in general yeah, the broad movements of GDP contain lots and lots of information.

      The fiscal cliff are massive tax hikes and big spending cuts in defence and health. Basically, they are fiscal conservatives wet dreams and any republican’s you hear moaning about it are arseholes. I like defence cuts and higher taxes on rich people, so I think it sounds like a good idea.

      People are worried because it will cause a massive decrease in government spending directly causing people to lose jobs and an indirect decrease in private spending by increases taxes due.

      The central bank should be able to counter this by issuing lots of currency, but I’m not sure central banks are competent enough or can act quickly enough to physically stop all the negative effects of the fiscal cliff.

      1. Thanks for explaining that—makes more sense to me now!

        Vis a vis the fiscal cliff, yes, it does seem like spending cuts and tax hikes would be the “balanced budget” conservative’s wet dream, although I personally have never met a conservative in favour of massive tax hikes. However, presumably big cuts in federal spending combined with big tax hikes would cause an apparent drop in GDP in the US? In which case, will Americans then look to the (frankly anaemic) growth in Britain and envy the recovery here?

        I’m genuinely not trying to be argumentative with this, although I’m sure all the questions make it seem that way! The actual reason for the q’s is that I’ve just read a book about GDP and central banking and I’m not sure whether to believe what I’ve read or not, so I’m testing the hypotheses against people, like you, whose knowledge and perspective I respect.

  2. Why do I keep thinking of this statement by Robert Higgs?

    As a general rule for understanding public policies, I insist that there are no persistent “failed” policies. Policies that do not achieve their desired outcomes for the actual powers-that-be are quickly changed.

    OK, he was talking about US foreign policy in the Middle East, but I suspect the principles are the same…

  3. Um, isn’t the idea to rebalance the economy rather than repeat unsustainable patterns of economic management by reinflating the bubbles?

    The presumption can’t be that we get back to a situation where we recreate the same crisis, because next time it will be bigger.

    It’s a bit simplistic to say “When GDP is growing things are better than when they are shrinking” because unless there is balance between production and consumption you are always headed for a severe reckoning and merely trying to delay the inevitable.

    Politically speaking it’s impossible to change course while growth is strong, so when to do it? When it’s off the agenda, or when criticism is fiercest?

    Recently I was reminded that pre-crisis Germans were among one of only a few developed nations around the world with positive savings rates, and it was this that put them in such a powerful position subsequently. The only country to take Keynesian analysis seriously?

    I’m not against public expenditure, but it requires a serious economic calculation on productivity, not just political popularity. Equally too much private spending has been on consumption, removing the pressure to make good investment decisions.

    Just look at the types of things people spend money on – the deregulation of the UK gambling industry may have helped government finances in the short term, but while it was sold as building on a national success story there’s no way you can say this is good for a healthy economy or a healthy society in the medium-to-long run.

    Productivity growth in both public and private sectors has consistently lagged behind our competitors. This is what must change – while I’ll agree that the coalition hasn’t spoken with one voice on this, the opposition has been silent on it.

    Thoughts?

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