Left Outside

Mervyn King on the “mismatch recovery”

Some time ago Chris Dillow argued that it was possible that economic recovery was sluggish because of a mismatch. It seems that Mervyn King is coming round to this view (via).

What is limiting our ability to do more is not on the monetary side, it’s on the real side that the economy has to adjust to a new equilibrium. That is what I think is going to pose the constraint.

What we need now – it’s very clear if you look at the numbers – what the UK economy needs is more demand in the rest of the world to buy goods from the United Kingdom. And that is the key bit that’s missing from our attempt to rebalance and that’s why the challenge is so great.

The Bank of England hasn’t released the model it uses (much to Simon Wren-Lewis’s chagrin), but given the above this is how the model Mervyn is working with must look.

Imagine there are only two firms. One firm gives haircuts and the other firm makes hats. Haircuts can’t be exported, but hats can. Theoretically if people in the UK decided to wear hats less and get more haircuts workers at the one could shift to the other firm to avoid unemployment. However, if there are non-negligible costs to retraining these people and matching them to new jobs a shift in the competition of demand could result in high inflation and high unemployment.

Now because haircuts cannot be exported but hats can we end up in the odd situation where domestic demand as delivered by the central bank through interest rate cuts or quantitative easing or whatever won’t work. External demand will boost employment by helping people find work in the hat industry, but domestic demand will not because people would rather spend the money on haircuts. Domestic demand causes inflation not job growth but external demand (say from China) causes job growth but not inflation.

This is a neat story for Mervyn, because as a story it completely lets him off the hook! Imagine that. A central banker who manages to create a model where he is not responsible for the catastrophic screw up which happened on his watch.

However, there are a number of weaknesses with this model. Firstly, if Mervyn wants more external demand he can create that by weakening the pound. In fact, I’m not even sure how Mervyn could ease monetary policy without weakening sterling and increasing external demand. Secondly, it is a very pessimistic view of the economy. I thought the deal was that markets could sort this stuff out? Five years is a long time to wait for a rebalancing.

Mervyn King is still well respected and it seems he is creating “just so” stories to justified this continued respect. Unfortunately the stories just don’t add up.

Filed under: Economics, , ,

So. Much. Stupid. Conservative blind spots edition

Alex Tabarrok

Hey, black dudes! Its great having a big willy! Why you get so mad?! Us white guys are complimenting you!

Okay, that’s not what he said. But he did say this of Asians:

Alex Tabarrok

Hive mind is not even an insult it’s a compliment – like wisdom of the crowds. The hive mind diffuses knowledge and cooperates–it’s not all thinking alike it’s all using the best of each.

Perhaps I better back up a little and give all this a little context.

Noah Smith wrote a post saying that an academic paper  on A Garett Jones paper called “National IQ and National Productivity: The Hive Mind Across Asia“. When I hear about IQ and economic development I reach for my pistol. Noah Smith is just as sceptical. Personally, I don’t see the mechanism. As Chris Dillow says, there are models and mechanisms. You can come up with a pretty model and then become angry when the world deviates from it or you can think about how your pet theory would work its way through the real world.

I can understand a mechanism that uses slight changes in IQ to predict which “nation” will develop first. I’ll describe the one I have in my mind. There are thousands of institutional forms –  “rules of the game” – and only a few of them are compatible with economic growth and prosperity. A higher IQ gives a group 1) a wider the selection of institutional forms to choose between 2) those institutional forms will on average be more complicated 3) better institutions are more likely to be chosen 4) once successful institutions are identified a more intelligent group will be more likely to keep them.

That is an interesting model, but it doesn’t seem to bare any resemblance to the history of the world. The more accurate picture is that various interest groups fought it out in various different places until, in north western Europe a powerful merchant group came into the ascendency and won political concessions that secured their property rights. This happened to have happened after the political revolution following black death in which western European peasants won a degree of autonomy and near some coal. That combination of secure private property, freeish though expensive labour and cheap energy happened to produce sustained economic growth. Nobody planned it because they were smart. It wasn’t sustained because it was smart by the best of my knowledge either. Because Europe was the most violent place in the world, everyone had to strive towards economic growth or face political annihilation. So greed, luck and violence seem far more important to the first sustained initiation of economic growth than IQ.

Similarly, why are some nations wealthy now and some not? Well there is again a similar model where clever nations adopt good institutions and stupid ones don’t, merely out of ignorance, but that doesn’t seem to be the mechanism we observe. Very poor places had their institutions fucked up by white people – psst, that’s Africa, Latin America, China, India etc. – and it takes a long time to get it together after an occupation and negative structural shock. National IQ sounds racist, and while I concede it might have some predictive power with regard to who’s developed, it doesn’t accord with most of the other mechanisms we have for where economic growth comes from – so I’m fairly happy to dismiss it.

So it is into this milieu we jump.

Noah argues that the paper discussed, by Garett Jones, uses lots of racist tropes and should handled with care. He provides some evidence contrary to the predictions of the paper of varying degrees of convincingness. Scott Sumner, whom I respect greatly, hits back that there is a great deal of explanatory power in culture and that Noah shouldn’t throw around the word racist because it is a bad thing. The only problem is that nobody was talking about culture, they were talking about racially innate IQs, and their explanatory power with regards to economic growth. And that brings us to Alex Tabarrok’s comment, at the top of this post and left underneath Scott’s saying how a “hive mind” is a good thing.

This gets to the heart of the real problem.

For some reason, those on the left can see the context in which things happen in a way those on the right cannot. Noah isn’t too left wing, but he seems to have this special power (and attribute of the left wing hive mind, no doubt).

Because for conservatives it often seems context means nothing. I mean seriously; when, in any cultural artefact ever created, any film, novel, piece of art, daydream or utopian novel has a “hive mind” been presented in a positive light? From Zamyatin’s We, to Huxley’s Brave New World a hive mind is not presented as something good. The hive mind does not refer to the wisdom of crowds.

Lets go back to black people, because its easier to talk about racism against blacks. What has been one of the most persistent racist tropes about black people? That they are sexually promiscuous, even sexually aggressive. This is why white people going on about black guys large cocks is usually racist in content, and often racist in its implications. For a female example, the Hottentot Venus wasn’t exhibited for Londoners to gawp at just because white people were/are racist, but because they were/are racist in particular ways. The ways in which people are racist must colour the way in which we view statements.

Context matters. Asians have been stereotyped as sneaky, corrupt, uniform, “hive mind” automatons for over a  century. You still see it in most western reports of strikes and social unrest in China – shocked, shocked reporters that Chinese people are rebelling against their bosses or bureaucrats. Jamie covers Mass Gathering Incidents frequently and there is a good article length treatment of labour unrest here. Hive mind? Tell that to Foxconn. Considering a racist slur in context is not hard, it takes effort in fact to abstract away from the negative connotations of most racist slurs, yet conservatives do so all too often.

This is sometime around the 1970s conservatives realised they were losing the fight for intolerance, so they changed tactics and tried to reframe the debate. They were no longer arguing in favour of racism, oh no, they were arguing against over earnest antiracism. This was politically convenient for two main reasons.  One, lots of the ground work of antiracism was carried out by those on the left. Two, it gave racists someone to vote for. Now in the UK Labour had an at best mixed record on race, especially with regard to housing policy, but during the 1980s they were much more focussed on antiracism. During the same period conservatives began to create a victim mentality where attacking antiracism became more important than attacking racism.

Alex Tabbarrok might like the idea of being part of a hive mind. And some white men might like the idea of being sexually promiscuous with a mighty, large penis. But to completely ignore over a century of casual and institutional racism is plain stupid. But it is a pattern conservatives find themselves slipping into too often: attacking antiracism more virulently than racism. This post is less than completely satisfactory, but I’ll leave it there, and pick up in the comments if necessary.

Filed under: Economics, History, Politics, Society, , , , , , , , ,

Why you can’t rely on the railways: Institutional constrains to fiscal stimulus

The timing of infrastructure spending should be strongly countercyclical so government can employ people without crowding out private sector activity and provide jobs when they are scarce. But, as Chris shows, government investment is in fact rarely strongly countercyclical. Simon Wren-Lewis is understandably annoyed that David Cameron is true to form in this respect. There will be no economic growth this year, borrowing is cheap and yet there will be no new infrastructure spending.

The coalition has announced £9bn of rail infrastructure spending, which is great – gentlemen, get your rivet guns ready! – apart from the fact the spending won’t hit until 2014 (and most of it has already been announced). This is because Network Rail’s investment in the rail industry takes place over five years plans control periods. We are in the middle of control period 4, which runs from 2009 to 2014, and we have just had the announcement for work to take place in control period 5, from 2014 to 2019.

It isn’t a physical problem which has pushed investment to 2014 it one of organisation. The are many shovel ready projects in the rail industry. Newark could use a flyover to ease congestion, electrifying the Barking to Gospel Oak line would open a freight corridor linking east and north London, the Welsh valleys which are to be electrified have needed more investment for decades.

So while there are rivet gun ready projects, we have to concede that investing in rail does takes a lot of planning. Since privatisation that planning has taken a very particular form. Every five year the DfT announce what infrastructure they expect Network Rail to deliver and the Office for Rail Regulation decide whether or not that is realistic given the industry’s business constraints. There is tooing and froing as they negotiate and they eventually settle on the work to be done.

It would be possible to bring forward infrastructure spending but you would have to pass new legislation to do so. The Office of Rail Regulation would need to look the other way while you stuff money and project managers down Network Rail’s throat. Gordon Brown called himself a restless reformer, rail has felt the worst of a political culture that makes a virtue of constant turmoil.

After more than two decades of regular reorganisations and continuous micromangement, there is no industry more in need of certainty over funding, infrastructure and organisation than rail.  The final round of organisation reform, infrastructure spending, spending priorities and fare structure may finally leave us with something approaching a decent railway by the end of the decade.

Fiscal policy is just one aspect of what a Government does. Countercyclical investment projects can and should be prepared, they could and should have been included in a separate schedule of possible work for this control period, but they were not. The lesson here is that where institutions have been established after hard bargained the feasibility of idiosyncratic countercyclical spending is reduced.

_____

PS This bargaining determined capacity for idiosyncratic countercyclical spending explains the lack of countercyclical investment before Thatcher discussed by Chris. Before the 1980s institutions were much more rigid; labour unions demanded more predictable working patterns and there was less entry and exit of firms and facilities with the greater prevalence of state owned industries. This is rather a counter intuitive result given the trumpeting of China’s countercyclical prowess.

Filed under: Economics, Politics, , , , , , ,

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, , , , , , , , ,

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, , , , , , , ,

Workfare’s Impact on Those in Work

Consider these paragraphs:

Example 1:

She was put on a work placement with Superdrug over the Christmas holidays, unpaid. Just JSA and travel expenses. After the new year she was told by Superdrug not to go back, without any explanation.

Example 2:

Poundland requested two candidates a week to be “inducted”. They then spend the next two weeks stood up on the tills for JSA plus travel. At the end of the two week placement they are no longer needed and sent back to us.

Liberal Conspiracy reports the sort of experience that would make anyone angry and any employee worried about their employer’s conduct. Next consider this paragraph:

It is shown that, over all respondents, well-being is typically negatively correlated with others’ unemployment. However, closer examination reveals a distinct pattern in this correlation: the well-being of the employed is often lower when the unemployment rate of others is higher; on the contrary, the unemployed report higher levels of well-being as others’ unemployment rises. The psychological experience of unemployment is tempered by the labour market status of those with whom the individual is in close contact, as models of comparisons or norms would imply. This relationship could also help to explain the polarisation of work between households.

Andrew Clark‘s paper is proof of the old saying that “misery loves company” and conversely that “happy people hate the company of the miserable,” a saying less well known, but true nonetheless. The two excerpts are connected. Liberal Conspiracy has discussed the growing phenomenon of workfare, imported from Australia and the US but always intellectually popular with  the right of this country. Working for your crust of bread, ostensibly for your own good.

What has not been discussed so far is the effect of workfare on those in work. That’s understandable, workfare’s main problems impact those involved, but workfare’s impact will be even more penetrating than already reported, and harmful in ways not yet discussed.

There are two reasons higher unemployment makes the unemployed more happy, one it allows them to discount any feelings of personal failing – hey, there’s a depression! What can I do? – and two it means there are other people in the same circumstance with which they can socialise: Clark found a strong effect on the reported wellbeing of the unemployed when more than one unemployed person was at home with them because they could share household tasks and lessen the increase housework associated with unemployment.

Similarly, employed people surrounded by the unemployed report liow well being for a couple of reasons.  Predominantly though, it is caused by increased nervousness; caused by an increased recognition that their employment situation is precarious and that they too could become unemployed (from Chris: pdf, pdf).

By bringing the unemployed into closer contact with the employed workfare will reduce the wellbeing of the employed if it reinforces feeling of insecurity with respect to keeping a job and powerlessness over one’s employment prospects. Unfortunately, this appear to be exactly the sort of workfare we’re getting.

A workfare which worked, in which the unemployed were given skills and opportunities to find jobs themselves or massaged into jobs when this failed would raise the wellbeing of those newly employed by getting them a job and the wellbeing of those already employed by making them feel more secure in their job and the job market in general. Very little research has been done on what effect workfare has on the attitudes of those already working in firms making use of it, but anecdotally it appears workfare as currently practiced is hurting everyone.

Filed under: Economics, , , , , , ,

QE is Probably Going to Have to be Paid Back

I’ve already taken a pop at Richie today over QE and now I’m going to have a go at Chris, which is an all the more worrying prospect, intellectually speaking.

1. Richard Murphy is basically right to say that this means that government debt is lower than official figures show, if we consider the government and Bank of England as a single entity. What’s happening is that government borrowing is being financed not by debt sales to the private sector but by an increase in base money. This is entirely consistent with the government budget constraint (pdf). Warren Buffett was quite correct to say that you cannot have a debt crisis if the authorities can print their own money.

I think the collorary to this is that if actual government debt is lower than the official figures then the price level is about to become much higher than it is now. QE is backed by a credible commitment to unwind it to reduce the amount of base money circulating. Taking the Bank and Government as one does not lead us to the situation described above where some debt does not exist. We have a situation where some debt exists in the odd form of a credible promise that at a future date someone will be being burning money.

Evidence for this abounds. The price level is not significantly above where it should be if the Bank of England had fanatically maintain an inflation rate of 2%. According to some rough calculations, since 1997 the price level is about 20% higher than a 2% level rule would suggest. Since QE was initiated in 2009 it is somewhat above even than high trend, but that was the point of QE, there is very little evidence that investors view QE as bound to be inflationary due to it being later monetised.

That low inflation isn’t consistent with a large scale monetisation of Government debt unless there is significant slack in the economy such that nominal increases mostly show up as increased real activity. I think there is room for more monetary expansion, and a little credible commitment to recklessness may be useful at the moment, but I know Chris holds that this is unlikely.  

If markets are pricing in a monetisation of UK debt (and subsequent change in price level) they are pricing in only a very modest erosion of the Bank of England’s holdings. Chris can argue that we don’t need to consider Gilts held by the Bank of England under QE as real liabilities, but he needs to take that up with the markets, not me, it is they who are predicting much lower inflation for the UK ahead.

Filed under: Economics, , , , ,

*Sigh* Ford didn’t pay high wages so that his employees could afford his cars

From Richie (via Chris):

When Henry Ford built his car plant he realised that unless the product he made was cheap enough for the workers to buy then there was no point in building it: there was no market to supply. This was the basis of Fordism.

Nope. The main element of Fordism is mass production of standardised products and scientific management of that process. The high wages were added later and not for the reasons Richie gives.

The high wages typically associated with Fordism were efficiency wages, wages paid to ensure people continued to work hard even though they were being managed intensively and told exactly how to do a boring repetitive job by annoying people with clipboards. Always with the clipboards.

After introducing the production line Ford was annoyed that his very profitable company was suffering because of high labour turnover and worried because this high turnover was damaging productivity. He was not worried that his potential market was not big enough.

The US economy was the richest country in the world, growing strongly and still attracting lots of migrants, his market was secure and he was always bloodymindedly sure that meant the US would need cars, lots of cars.

He decided to do the sensible thing and offer more money to his workers. That this enabled his workers to afford to buy one of his cars was incidental to the logic behind the move, although it made for good propaganda.

He didn’t do this to increase the size of his market, but because people tend to work harder for more money. Don’t take it from me though, a lowly blogger, try Larry Summers and Daniel Raff:

Ford’s decision to increase wages dramatically is most plausibly portrayed as the consequence of labor problems of the kind stressed by efficiency wage theorists. The structure of the five-dollar day program is consistent with the predictions of efficiency wage theories. There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day.

 Moral of the story: don’t go valorising old capitalisms.

Filed under: Economics, History, , , , , , , ,

When NGDP is Depressed, Employment is Depressed

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Increase NGDP, Put These People Back to Work

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