Nota Banquero sounds a lot like Notenbanker

I’m very sympathetic to the idea that the peripheral Eurozone countries should cut loose and devalue their new currencies to regain competitiveness and aid recovery. Krugman here half-recommends a quick default and devalue solution for countries running a primary surplus (that is, only borrowing money to cover the interest payments of previous loans).

The basic logic is one which I adhere to. The European Central bank has caused a debt problem to be seriously exacerbated by an aggregate demand problem, a new national central bank in control of its own currency (Esnewdo etc.) could boost demand through an adequate devaluation.

But there is no guarantee that such a devaluation would be adequate, or that a new central bank would act aggressively enough. To a degree the newly empowered Central Bank would have no choice, markets would force it to devalue, but much commentary assumes they would also force the bank into the accommodative policy, this need not be so. Many countries have voluntarily maintained too tight monetary policy for too long.

The cult of the credible central banker would stay the hand of any newly independent central bank. The logical and sensible point that a central bank must not behave recklessly or unpredictably has been become a dogma. Modern central bankers have become overly concerned that any departures from fighting inflation could lead easily to inflation expectations becoming “unanchored“, potentially leading to hyperinflation.

The political pressure to boost demand for a periphery Central Bank with its own currency would be intense. But this would only intensify the professional and institutional pressure on Central Bankers to resist these calls to retain their “credibility”; Interest rates may remain too high, or the bank may signal its hawkishness at any sign of demand picking up.

Devaluation without a change in the culture and prescriptions of central banking could lead to the worst of all worlds for the peripheral countries of Europe. Their economy could remain depressed and uncompetitive due to central bank stubborness but their external burden would have increased because their national, or at least, private debts remain denominated in much more expensive Euros.

Many countries have the option of following the Swiss and Swedish in devaluing but so far the US, UK and Japan have all refused. Britain today ignores opportunities to increase demand using monetary stimulus just as we suffered all through the 1920s because we chose to overvalue our currency. I fear much of southern Europe could find itself in the same situation.

In addition to this cult of the central banker, it may be that Steve Randy Waldman is correct and that depression is a choice. He argues that because of demographic pressures interest rates are naturally quite low, and because there are lots of old people who live off fixed income there are institutional problems to getting enough stimulus because they fear their income will be inflated away.

The low interest rates make normal monetary policy hard and the political constituency make unconventional policy too difficult to employ. Hence nations, or currency zones, “choose” depression. Demographic pressures in Southern Europe are similar to those in Japan and the elderly are much more powerful in Italy than in the UK or the US where policy also remains too tight.

The combination of political constituencies who are threatened or think they are threatened by looser monetary policy and a cult which treats loose monetary policy as a dangerous barbiturate may mean that even an independent currency may not be enough to pull the periphery of Europe out of its doldrums. The institutional constraints which have helped create the current Eurozone crisis will outlive the euro and must be considered in any rescue plan.

Filed under: Economics, Foreign Affairs, Britmouse, David Glasner, Devaluation, Euro, Eurozone, Germany, Greece, Grexit, Italy, Krugman, Portugal, Scott Sumner, Spain, Switzerland

Osborne to the rescue?

Britmouse, otherwise a very informed commenter, makes the mistake of saying Britain would need a new parliamentary act to switch to a nominal GDP level targeting regime. Not so.

Here is the relevant section of the 1998 Bank of England Act:

11 Objectives

In relation to monetary policy, the objectives of the Bank of England shall be –

(a) to maintain price stability, and
(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.

12 Specifications of matters relevant to objectives

(1) The Treasury may by notice in writing to the Bank specify for the purposes of section 11 –

(a) what price stability is to be taken to consist of, or
(b) what the economic policy of Her Majesty’s Government is to be taken to be

The Treasury can, were George Osborne to be interested in re-election, switch to a nominal GDP targeting regime by only resorting to legislation which is already on the books. Defining the objective of the Bank of England as “to maintain price stability…including its objectives for growth and employment” is almost an exact layman’s description of NGDP level targeting.

If Britmouse means merely  that this decision would not be final, I agree, but no decision made by parliament is ever final. No Parliament may bind its successor. There is no way to forever adopt NGDP targeting, because no parliament can bind its successor. Mervyn King himself has written  (in a paper I will discuss when I get round it) that it doing so is likely impossible:

The core of the monetary policy problem is the uncertainty about future social decisions resulting from the impossibility and the undesirability of committing our successors to any given monetary policy strategy. The impossibility stems from the  observation that collective decisions cannot be enforced so that it is impossible to commit to future collective decisions. The undesirability reflects the fact that we cannot articulate all possible future states of the world.

There would be parliamentary fulminations were Osborne to announce an immediate change of policy, but a steep economic recovery would put pay to those. The British legal system is flexible, and by the time a legal challenge were mounted, if it ever were mounted, it would be easy to pass the Bill to formalise an already successful policy.

I don’t like Tory government, but I dislike this depression even more. The Tory have an almost foolproof re-election tool at their disposal, they should use it.

Filed under: Economics, Politics, Britmouse, NGDP, Osborne, Treasury

I must stop using such apocalyptic language, its not that ba…mother of God, what was that?

Via.

Filed under: Economics, Politics, Europocalypse, Hollande, Merkel

Told you so

Still screwed.

European stocks were in the black but off earlier highs Tuesday, as investors weighed strong German growth figures against the possibility of a Greek exit from the euro… [M]arket participants pointed to the fact that Tuesday’s GDP releases merely highlight the growing disparity between Germany’s strong performance and the weakness seen in Southern European members. Italy’s economy contracted by 0.8% in the first quarter, while Spain’s economy shrank 0.3% and Portugal remained in recession. In Greece, GDP contracted by an annual rate of 6.2% in the first quarter.

We have a balance of payments crisis; the continuance of this crisis is not good news, even if Germany keeps the Eurozone from entering a “technical recession.” The periphery is still exporting too little and importing too much, Germany vice versa.

Unless the periphery of the Eurozone is given somewhere to export to they will not recover. I’m not asking for any sacrifice from the Germans aside from the psychic cost of no longer being able to tell yourself how virtuous you are. I’m asking for the Germans to consume more! They should have more stuff themselves instead of selling it to Italians, Spaniards, Portuguese, Greeks etc. for bits of paper which might end up being worthless.

Have your cake and eat it Germans, better yet, eat a cake made by some Italians and  Spaniards and Portuguese and Greeks and Frenchmen! You’ve earned it.

Filed under: Economics, Foreign Affairs, Eurozone, Germany

We’re saved (or not)

 From the Wall Street Journal:

LONDON (Dow Jones)–European stocks are expected to open slightly higher Tuesday, in a reversal from earlier opening calls, after German gross domestic product figures came in significantly better than expected.

 Good news…or is it?

Amid all the doom and gloom, strong German GDP figures just out may give investors something to cheer about Tuesday. Data show Germany’s economy, the largest in Europe, grew much more than expected in the first quarter, driven by a surge in net exports.

It looks like Europe is getting further away from a necessary rebalancing in which Germany consumes more. Without Germany consuming more and exporting less/importing more there is almost no conceivable way for the Eurozone to survive. There are still no silver linings in Europe.

Filed under: Economics, Germany, Rebalancing

The True Meaning of Francois Hollande: As Politics move in the right direction the Economy is about to fall of a cliff

Here is a great graph via David Beckworth showing Nominal GDP for the whole OECD.

Source: OECD Statistics

Looks like we are all still way below trend. The demand shock starting in 2007/8 has not been corrected and although total spending has recovered to above its precrisis levels that masks wide variation in rates of recovery. Canada’s doing great, Spain, not so much.

During the worst of the crisis the fundamentals of developing world helped to drag global growth back up. In fact the late 00s were good for large parts of the world. China, Brazil, many African countries all performed strongly through to 2012, despite a set back in 2008. In fact global GDP per capita has never been higher.

The bad news is that serious problems appear to be developing all around the world. The Eurozone is still in a permacrisis, industrial production is stagnant in India, China has been fighting deflationary pressures for some time and appears to be beginning to lose, Brazilian industrial production has turned negative. The US is facing huge budget cuts in the autumn which will be broadly contractionary through its economy.

The insane European Central Bank‘s policy rate is at 1%. That’s right, despite the Eurozone imploding the insane ECB is has steadfastly refused to ease policy despite even Germany heading towards recession. Other central banks around the world have all done good jobs avoiding anything as horrific as America’s Great Depression, but they all remain wary of using unconventional tools to expand demand.

In 1999, what Ben Bernanke argued was needed in times of great crisis is the willingness to be aggressive and experiment, to show Rooseveltian Resolve to get the economy moving again:

Needed: Rooseveltian Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

This is the real meaning of Francois Hollande. He needs to say “non!” to more or less everything Merkel and the insane ECB put forward.  Hard money and austerity have been a disaster in a benign international environment, if demand for European and American exports dries up and deflationary pressures go global we will see a recession inside a depression scarily reminiscent of the 1930s. We need a Roosevelt.

Filed under: Economics, Foreign Affairs, Politics, Ben Benanke, Brazil, China, David Beckworth, FDR, India, the insane ECB

Probably going to regret this one…

Here’s my controversial argument of the day.

New Labour spent a lot of money on infrastructure, education and healthcare. Lots of money, I think we can all agree on that. A lot of people think a lot of this money was wasted. Some also think Labour damaged the productive part of our economy by burdening it with too much red tape and taxation.

But UK’s unemployment is currently lower than you would expect given a nasty, steep recession. Perhaps some of New Labour’s spending is having measurable effect in reducing the non-inflationary level of unemployment, even if we couldn’t work out was while they were in office what was Labour’s return on  investment.

Despite extra burdens on employers introduced by New Labour we still have a very flexible employment market. This is especially true for the young and the newly employed. The National Minimum Wage is lower for the young and those in a job for under a year have few employment rights.

If you strip out VAT and import prices (that is, if you cheat a bit but for easily rationalisable reasons) inflation has been rather low of late. Compared to the normal employment/output dynamic unemployment has also been low.

This leads me to argue that the UK may have seen some sort of positive supply shock in the late 2000s which has improved our unemployment rate today. If true this would mean that the natural rate of unemployment has decreased and the cyclical component is higher than most people realise.

EDIT 19:05 11/05/2012: Second paragraph edited. Unemployment no longer “very” low just “lower than you would expect.”

Filed under: Economics, Controversy, Inflation, Linkbait, Unemployment

The City: Not that Important

Finance and Professional services are not synonymous with The City, something Rob Marchant (via Chris Dillow) needs to grasp when discussing Hollande’s lessons for Ed Miliband.

And, regarding his policy programme, it is difficult to see Hollande being a pragmatist in government. For example, take this declaration from a January speech:

“My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

All very well, I suppose, down with capitalism: hurrah. But, whatever additional regulation the financial sector may need, is it a good idea, on any level, to emote about it being the “enemy”? In any event, this is an approach that Miliband would be wise not to try to emulate; in a country like ours, where one-fifth of GDP derives from the City, it would have very deep implications for government credibility, for borrowing and for investment. It is easy for France to talk about a financial transaction tax when it has a tiny financial sector compared with the mighty City; everyone wants higher taxes for the other guy.

The City probably adds about 4% to UK GDP not a fifth, that number is from 2003 and The City probably added a little more than that between 2003 and  2007 and a lot less (perhaps negative?) since then. [1] It’s contribution to GDP is still about half that of UK manufacturing (!) and about a fifth of the total 20% added by all finance, insurance and professional services combined. Data from the ONS. This is where I presume Rob Marchant got his one fifth figure from by adding K48, K57 of page 19.4 and deriving a percentage from cell K77.

Discussion of high and low finance should be separated, something which I suppose Hollande needs to take on board as well. I should perhaps tentatively suggest three things: that most finance is dull, should be dull and most of it takes place outside The City. It consists either of taking short term deposits and lending that money out at a rate slightly higher rates or taking payments from large numbers of people and paying a small subsection of them large sums when something bad happens. It is very dull, very worthwhile and  it adds a lot of value but it is a world apart from what occurs in The City.

____

[1] Remember that many firms in The City receive a huge hidden subsidy each year too.

For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Not small sums at all, and I recommend you read Haldane’s speech in full. The City’s contribution to GDP is modest, although its contribution to exports is larger.

Filed under: Economics, History, Haldane, High Finance, Low Finance, Rob Marchant, Subsidy, The City

What would the “failure” of a NGDP targeting central bank look like?

Nominal Gross Domestic Product is depressed, that leads real GDP to be depressed because it is very difficult to accommodate rapid and large deflation so logically it must be lower. It also leads to the quantity of people employed to be depressed because the same is true of aggregate wages.

I don’t fully understand what critics of NGDP targeting mean when they say they suspect the policy would fail. I think the language NGDP targeting is something of a handicap, because once you start thinking in this language you begin to translate people’s statements and in the process they cease to make sense.

Chris Dillow says…

I fear, though, that economists who invoke “expectations” and “credibility” are making the error of mistaking the tidy maps of models for the messy terrain of reality.

Unlearning Economics says…

This is a clear example of confusing correlation and causation. When looking at two correlated variables, a good question to ask is which one moves first – here, the drop in RGDP clearly precedes the drop in NGDP. This suggests that the decline in RGDP is not a result of the decline in NGDP; rather, its the opposite.

So what happened in 2008? Obviously, the conventional story is true: a large drop in asset prices made many households and firms realise they were less wealthy than they thought; this caused firms to lay off workers; real production decreased; nominal income followed; expectations dropped; this created a spiral. The NGDP-driven story doesn’t withstand scrutiny, else we’d expect the NGDP drop to come first.

First of all, I agree with Chris that relying on expectations is a weak lever. But, if you are powerful enough to not have to rely on expectations, the market should anticipate that and you will be able to rely on expectations. To he that hath shall be given, and we hath in abundance. I think a Bank with a fairly doveish reputation with the printing press combined with the supremacy of parliament, the Royal prerogative and a government intent on re-election is more than powerful enough for the above to hold true.

Secondly, I disagree with UE. In 2007/8 asset prices fell because expectations of future NGDP fell which was priced into current asset prices. This lead to a fall in real GDP contemporaneous with a fall in NGDP, but both were caused by fall in expectations of future NGDP as is argued by adherents (cultists?) of NGDP targeting. Asset prices are forward looking and money is an asset, hence you have to look at expectations of future NGDP rather than looking at which moved first by a few months, RGDP or NGDP.

So what I don’t understand is what non-NGDP monomaniacs think will happen were a central bank to adopt a NGDP targeting regime. Say the treasury ask the Bank of England to adopt NGDP targeting and to catch up entirely to trend from 2008. What does failure look like?

1. NGDP does not reach trend because the bank lacks credibility and the policy is abandoned.
2. NGDP fails to reach trend for a long time, and so has little effect on anything important.
3. NGDP reaches trend but nominal growth consists (almost) entirely of price changes.
4. NGDP over shoots target massively and cannot be contained because  inflation expectations become unmorred and accelerate upwards: the price level spirals out of control.
5. NGDP targeting is effective and a la Kalecki capitalists stage some sort of investment strike and must be abandoned for political reasons.
6. NGDP targeting is effective and workers/voters realise it is a way of moderating their wage demands and must be abandoned for political reasons.
7. NGDP targeting is effective and we realise we’ve seen a series of unsustainable booms rather than real growth because of a slow down in innovation and all economic growth ends up accruing to land and rents and must be abandoned for political reasons.
8. NGDP targeting is effective and some combination of 5,6 and 7 occur.
9. Other?

Can anyone fill me in?

Filed under: Blogging, Economics, Chris Dillow, Interfluidity, Kalecki, NGDP, NGDPLT, Nick Rowe, Ricardo, Scott Sumner, Unlearning Economics

Well, this just got interesting

After accepting a mandate to create a multi-party administration following inconclusive elections, Alexis Tsipras sent shockwaves through financial markets by announcing the pledges Athens had made to secure rescue funds from the EU and IMF were null and void.

*Gets Popcorn*

We’re all still screwed by the way, this just makes the whole process much more entertaining.

Filed under: Economics, Foreign Affairs, Austerity, Greece

Policy Pragmatism

What concrete step caused the British Pound to appreciate rapidly on the 18th April?

The correct answer is “we’ll never know what confluence of events caused that particular movement.” Any concrete answer should be ignored. But please allow me to tentatively suggest (tentative suggestion is fine) that the price of Sterling, and hence the stance of British monetary policy, was changed by news that Adam Posen had withdrawn his support for more Quantitative Easing. This unexpected action caused sterling to hit a 19 month high against the euro.

So when Chris says to Nick Rowe “that relying upon expectations to do work is to rely upon a weak lever” I am somewhat sceptical. Adam Posen changed monetary policy by changing the future expected path of monetary policy – his actions lessened the chances of more QE and brought forward rate rises and the unwinding of the Bank’s balance sheet – and the market acted accordingly.

A similar mechanism might be all that is required for NGDP to work. A credible commitment to change the path of future policy would have immediate effects, we know this because (I tentatively suggest) we have already seen it happen.

Similarly, if Chris agrees that a higher sterling reflects tighter Bank of England policy and if Chris agrees a looser policy would help create jobs – as the sentence “I don’t doubt that more QE – the likeliest tool of an NGDP target – would create some jobs” implies – then there is something illogical in his pessimism towards adopting NGDP targeting.

I don’t think it could come from the Bank; Andrew Sentence is completely unable to offer a credible commitment to NGDP level targeting. But were the Treasury to change the Bank’s mandate then it could commit to change the path of future policy easily. Thanks (!) to  New Labour’s habit of concentrating power ever more in the executive, this change could happen at any point because the Treasury is empowered to change the Bank’s mandate at will.

I don’t think you can accuse me of Policy Utopianism, as I said in my last post many problems would remain after the adoption of NGDP level targeting. If the Doctor’s creed is “first do no harm,” the economic policy maker’s should be “first pick up the free lunches.” To ignore monetary policy, as Chris often does, is to leave all-you-can eat buffets to one side. Pragmatism requires adopting policies that put what labour, capital and land available to work. Even a “small improvement” would be a huge improvement to thousands.

Filed under: Economics, Adam Posen, Chris Dillow, Market Monetarism, Mervyn King, NGDPLT, Nick Rowe, Scott Sumner, Unemployment

Its catching…

One down, eleven to go

From Matt O’Brien at The Atlantic:

Chicago Federal Reserve president Charles Evans doesn’t look the part of a heretic. But in the cozy, conservative club that is central banking, he certainly qualifies. While most of his colleagues at the Fed have recently taken an even more hawkish turn, Evans remains a champion of additional monetary stimulus. And on Tuesday he took an even bigger step: He became the first sitting Fed member to endorse nominal GDP (NGDP) level targeting.

.   .   .

A PARADIGM SHIFT?

The Fed is still a long way off, if ever, from adopting an NGDP level target. But Evans’ endorsement of the idea is a big first step in what could be a hugely important paradigm shift. Even if there isn’t a large difference between the quasi-NGDP level target that is the Evans Rule and an actual NGDP level target, it’s a fairly radical new way of framing policy. Rather than the central bank letting the economy recover faster, it puts the onus for a faster recovery on the central bank.

Most incredible is how quickly the idea is gaining acceptance. It’s true that writers like The Atlantic’s own Clive Crook have long advocated the merits of NGDP targeting. But as recently as 2009, it was mostly just a few lonely bloggers like Scott Sumner and David Beckworth who picked up the torch. Then Goldman Sachs chief economist Jan Hatzius and Paul Krugman said they were willing to give it a try. Now, a sitting Fed president is on board.

At this rate, it might not be long until we describe Evans as an orthodox central banker. Now that would be progress.

That is one of the US’s top central bankers supporting NGDP level targeting as endorsed on this blog. Hopefully a UK central banker will make the leap soon too, senior figures inthe

Filed under: Economics, Foreign Affairs, Charles Evans, NGDPLT, Scott Sumner, Vince Cable, Will Hutton

How to End this Depression!

Targeting the path of Nominal Gross Domestic Product (NGDP) is probably the most “fashionable” solution proposed for dragging the developed world’s economies out of depression. This post will refer to the UK, but lots more work has been done on the US from this perspective, particularly by Scott Sumner and David Beckworth. Britmouse has blogged about NGDP from a UK perspective.

Real GDP is a proxy for our incomes adjusted for inflation, how well off we are. Nominal GDP is the same but refers to our incomes in cash terms. This nominal measure deviating from trend has been what has driven the wild swings in employment and production the developed world has seen since 2007.

NGDP matters because wages and debt are sticky.

Wages: NGDP can decrease if all other prices decrease with it, the relative prices between them will not change and apart from updating some menus nothing will have really changed. But it is incredibly hard to cut wages, look at the clustering of wage changes around zero in the below graph (via Paul Krugman). This means a decrease in NGDP relative to wages will throw people out of work as employers become unwilling to employ them at the prevailing nominal wage.

Debt: We care about what real resources we can consume but all our contracts are written in nominal terms. If I owe someone £10,000 then at some point I have to hand over some bits of paper, or packages of electrons, to someone for that amount. But, if NGDP grows below trend the total nominal size of the economy will be smaller than expected when I took out the debt, but the size of my debt will not. The real cost of my debt will have increased and this will work to depress the economy because this dynamic will affect a number of people.

If NGDP sinks below trend there are then at least two mechanisms which can act to depress an economy. [1] Has it sunk below trend? Yes it has.

Is off trend NGDP growth associated with weak real GDP growth? Yes it is.

Are changes from trend NGDP correlated with changes in employment? Yes they are.

That might be a little difficult to make out for some. So I zoomed in and inverted the unemployment figures. Are they correlated? Yes, and closely.

Let me tell you a story with a different ending to the one you know. The year 2007 began with NGDP growing to trend, and employment decreasing against the backdrop of international inflationary pressures and financial distress. NGDP reversed course and began to decline during the second quarter of 2007 as did employment, crucially this was before the Lehmann Brother’s bankruptcy and the ohmygodwereallgoingtodie stage of the financial crisis. Unemployment had already increased by nearly 200,000 after NGDP began declining but before the financial crisis began in earnest.

This doesn’t exhonerate any bankers, they put the Bank and Treasury in this position after all. But it does imply different priority for actions. Occupy Threadneedle Street, my friends, not the London Stock Exchange.

Scott Sumner and Ben Bernanke

Looking at the third graph you can see NGDP decline, recovery and stagnation correlating closely with decline, (mild) recovery and stagnation in UK employment. The Bank of England controls the country’s printing presses and hence the nominal economy and responsibility for this depression lies with the Monetary Policy Committee for doing too little to avert it and with the Treasury for doing so little to force them to do more.

In the UK and US the last couple of decades have seen NGDP grow at about 5% a year, and this nominal growth has been split between price increases and economic growth. In 2008 NGDP collapsed and we saw deflation, disinflation, and recession. To date NGDP has not yet recovered to trend, in fact it remains over 10% below trend – and this is our main problem.

Increase NGDP and employment, incomes and taxes would increase, many intractable problems would vanish (though many would not). There are risks and there are methodological problems, but there huge gains for everyone if they right policy is adopted and I want to do my part to try and make sure the right policy is adopted.

____

[1] Data from here, I’ve used basic prices to strip out the effect of VAT jumping up and down

Filed under: Economics, Foreign Affairs, History, Politics, Society, Adam Posen, Britmouse, Market Monetarism, Mervyn King, NGDPLT, Scott Sumner, Unemploy, Unemployment

If I’m not making myself clear

The UK’s economy crashed in 2008 in large part because the Bank of England and the Treasury allowed it to crash by allowing nominal gross domestic product to crash below trend. It stays depressed because the Bank of England and the Treasury have not acted to return nominal gross domestic product to trend.

See this graph. See the disaster then the depression. We are almost growing at our trend rate again, but are nowhere near our trend level. This is the main reason things suck and I will be focusing on this more monomaniacally on this from now on.

Filed under: Economics

Its still a demand problem

Britmouse, et al, passim.

Filed under: Economics

Stiff upper lip chaps!

It could be worse, couldn’t it?

Oh, no sorry, my bad. In fact, the beatings will continue until morale improves.

Filed under: Economics, Politics, Austerity, Cameron, Idiots, Osborne

Austerity…

… is more than spending cuts. Contra Alex here discussing the spending of the US and UK state.

Government spending puts money and demand into people’s pockets; tax takes demand out. With regard to spending versus taxes, Adam Posen, for it is he, estimated that the US fiscal stance has contributed about 3 percent mroe to GDP growth compared to the UK’s fiscal stance. Posen’s techniques and figures are entirely uncontroversial.

This is in large part because the coalition decided a large VAT increase would be the best way to close the deficit despite lots of evidence on how damaging tax increases were during downturns.

Government may continue to buy boondoggles for people, if that’s how you want to look at it, but the Government has acted in an austere manner from a macroeconomic perspective.

Filed under: Economics, Foreign Affairs, Adam, Adam Posen, Alex Massie, Spending, Taxes

Paging Adam Posen

Look Adam, we have had high inflation, but we’ve also had low (and negative) growth, nominal expenditures just aren’t accelerating in a dangerous way. The UK’s real GDP is a long way from peak because its nominal GDP is a long way from peak, and your job is to take charge of nominal GDP.

So please restate your commitment to a more expansionary monetary policy or we’re all screwed.

Signed,

Everyone.

Filed under: Economics, Adam Posen, BOE, NGDP, QE

Sucky Economy Still Sucky

Just in case any of you thought things were going well, they officially aren’t. Double dip recession over 2011 Q4 and 2012 Q1.

Oh, and with any sub 0.2% GDP growth, we’re actually getting poorer as the population grows.

Can we sack them yet?

Filed under: Economics

The Eurozone as a Country

I think this data from WolframAlpha is worth thinking about with reference to thinking about the Eurozone as a country.

1 | Luxembourg | $107000 per person per year
2 | Netherlands | $48300 per person per year
3 | Ireland | $47600 per person per year
4 | Austria | $45900 per person per year
5 | Belgium | $43800 per person per year
6 | Finland | $43700 per person per year
7 | Germany | $41500 per person per year
8 | France | $41200 per person per year
9 | Italy | $35100 per person per year
10 | Spain | $32400 per person per year
11 | Greece | $29400 per person per year
12 | Cyprus | $28300 per person per year
13 | Slovenia | $24300 per person per year
14 | Portugal | $21700 per person per year
15 | Malta | $20300 per person per year
16 | Slovakia | $18200 per person per year
17 | Estonia | $14400 per person per year

Some thoughts. The most successful currency union I can think of is the United States. The Eurozone is very different from the US is some very important ways normally the negative are emphasised, but some of these differences are positive.

Potted History: The South and the North had different institutions up to the 1960s, what with the South being very, very racist. Unsurprisingly this left the South much poorer. After much brouhaha, the North won, finally completed the South’s reconstruction and the South began to converge on the living standards of the North. The South went from about half as wealthy, they were even still picking about half their cotton by hand, to about as wealthy. There is about a three to one difference between the poorest parts of Europe and the richest (ignore Luxembourg). That convergence took basically the whole history of the United States until very recently, this does not bode well for Europe, disparities can exist for a very long time.

But, despite larger inequality with respect to income, nowhere in the Eurozone is as much of a basket case as was the US South in terms of institutions. This means that it should see faster convergence on wealthy living standards which is one thing which makes the current crisis such a tragedy. There are no fiscal transfers within the Eurozone analogous to those within the US but neither does Europe have the terrible legacy the poorer parts of the US had. So there are (limited) reasons to be cheerful.

UPDATE: As Innocent Bystander points out in the topics, I’ve just provided a list of numbers without context. As you’re all not psychic let me say they refer to Gross Domestic Product Per Capita.

Filed under: Economics, Foreign Affairs, History, Convergence, Estonia, Eurozone, Institutions, Jim Crow, Luxembourg, Racism, Slavery, US North, US South