Friday, 21 December 2012

Marking myself to market: my predictions for 2012, revisited

Brad Delong calls for economists to "mark their beliefs to market" - that is, reassess their position when the facts suggest that they might have been wrong - and commendably shows us the way here.  He is also very hard on economists who fail to do so; I only wish the UK media would be equally critical of those whose analysis has proved wanting (I could suggest a few names..).

But I was talking about me, of course.  I have just despatched my reply to the usual end-of-year email from Chris Giles at the FT asking for my economic predictions for 2013. You'll have to wait until very early next year to read them and those of others; but I thought it was worth looking back at what I said in December 2011 (to the FT and separately to the New Statesman), which I reproduced here at the time.

Thursday, 13 December 2012

What Is Wrong with the UK Economy? A guest blog by Adam Posen

[This article. by Adam Posen, Director of the Peterson Institute for International Economics, and formerly a member of the Bank of England's Monetary Policy Committee, originally appeared here on the Peterson Institute website. He has very kindly agreed to allow me to reproduce it here as a contribution to the UK policy debate. Obviously the views below are his, not mine or NIESR's, although for what it's worth I am, as readers of this blog will know, in broad agreement.]

The British economy is lacking productive investment, but not for want of investment opportunities.  Banks and large corporations are sitting on cash, households are holding back on large purchases (including of housing), and the public sector is slashing its investment flow.  This shortfall reflects the deficiencies of the British domestic financial system, some of them longstanding from well before 2008, as much as lack of confidence in future prospects, and responsible macroeconomic policy can address both problems.  The current British coalition government’s economic policy program, however, instead is intended to address a lack of savings, not of investment, and is pursuing that mistaken priority in a self-defeating way.  The economic issue facing the UK therefore is not just one of Plan A versus B, or of the amount and pace of austerity versus growth – the issue is that the UK needs investment friendly structural reform and stimulus, not fiscal consolidation as a goal in and of itself.

Wednesday, 12 December 2012

"Ubi solitudinem faciunt, pacem appellant"

The FT article that appeared yesterday under the name of Olli Rehn, the European Commissioner for economic affairs, could have been written by a fairly unsophisticated economic cliche-generator: "we must stay the course..light at the end of the tunnel."  What caught my eye (and those of others, including Paul Krugman here and Kevin O'Rourke here) was that Mr Rehn and other eurozone policymakers have been saying the same things for the last two years (so indeed have policymakers in the UK, but that's a different story) and have yet, as Brad Delong would put it, to "mark their beliefs to market". 

I reproduce my letter to the FT in response: 

Sunday, 9 December 2012

Indexing benefits to inflation is not "unsustainable"

In the Autumn Statement the Chancellor decided to cut working age benefits and tax credits, thus reversing his previous (sensible) policy of allowing the "automatic stabilisers" to operate, and ignoring the advice of the IMF.  More on the macroeconomic issues here. He justified this change thus: 
But we have to acknowledge that over the last five years those on out of work benefits have seen their incomes rise twice as fast as those in work.  With pay restraint in businesses and government, average earnings have risen by around 10% since 2007.  Out of work benefits have gone up by around 20%.
That’s not fair to working people who pay the taxes that fund them.  Those working in the public services, who have seen their basic pay frozen, will now see it rise by an average of 1%.  A similar approach of a 1% rise should apply to those in receipt of benefits.  That’s fair and it will ensure that we have a welfare system that Britain can afford.
David Smith, writing in the Sunday Times, repeated the Chancellor's argument verbatim and stated that:
"In five years, out of work benefits have risen 20%, earnings 10%. That is unsustainable.."

Thursday, 6 December 2012

Robert Chote on the irrelevance of the credit rating agencies

I have frequently argued two, related, points.  First that, unlike countries in the eurozone, the UK's fiscal policy is not constrained by potential market fears of default; and second, that since the ratings of the credit rating agencies are in principle intended to reflect this non-existent default risk, the UK's AAA rating, and any possible downgrade, is meaningless and irrelevant. For these reasons, paying any attention to the ratings agencies when making policy is a serious mistake.  As I wrote here:

"In the event of nuclear war or an asteroid strike, it is possible the UK government might not pay its debts.   Then we'll have other things to worry about. Otherwise, it will, simply because it can -  and because the consequences of not doing so are dreadful...Saying that there is any meaningful probability that the UK will default on its debt - which is what downgrading the UK means - is not to take a particular view on the UK economic or fiscal outlook. It is simply not to understand what you are talking about...So how should the government, and the markets, respond to the rating agencies?  The former should, and the latter in my view will, simply ignore them."

Wednesday, 5 December 2012

The Autumn Statement and the OBR's forecasts: recovery postponed, again

Just as talk about a "double-dip recession" after the unusually bad second quarter growth figures was overdone, so was the euphoria about Britain "surging out of recession" after the third quarter figures.  The official forecasts from the Office of Budget Responsibility today are for growth of 1.2 percent in 2013 and 2 percent in 2014; very similar to NIESR's forecast.  These, further downgraded, forecasts mean the economy won't be growing faster than trend until 2015.  So the underlying picture remains much the same as it has for the last two years - slow (or no) growth, and certainly nothing like the sustained recovery we should have seen by now. 

Friday, 23 November 2012

The Future Jobs Fund: what a waste

The Department for Work and Pensions today published an analysis of the impacts and costs of the Future Jobs Fund.  The impact analysis was peer reviewed by Helen Bewley of NIESR; the methodology and approach is very similar to that used by DWP, and also peer reviewed by NIESR, in previous impact analyses of Work Experience and Mandatory Work Activity, and Helen's own research on reoffending for the Ministry of Justice.

The bottom line is that the impact of the Future Jobs Fund (FJF) on the chances of participants being employed and/or off benefit was substantial, significant and positive. 2 years after starting the progamme (so long after the programme itself had ended, so the participants were back in the open labour market), participants were 11 percentage points more likely to be in unsubsidised employment.  

Monday, 19 November 2012

The Treasury Committee, cont: "My concern is not the economics"

I, and my colleagues Angus Armstrong and Simon Kirby, gave evidence to the Treasury Committee on Tuesday November 13th. The full uncorrected transcript is now available. Or you can watch. My discussion of one specific economic issue - why are gilt yields so low - is here

However, I thought I would post in full my exchange with Jesse Norman MP.  [Note that the transcript below is uncorrected and that the final form of its publication has not yet been approved by the Committee, although it is accurate as far as I can tell.  On the video, it starts at about 10:35].

Thursday, 15 November 2012

Faith-based economics at the Treasury Committee

I, and my colleagues Angus Armstrong and Simon Kirby, gave evidence to the Treasury Committee on Tuesday November 13th.  Should you have time and inclination, you can watch. As you would expect, we covered a range of topics: the fiscal framework and fiscal policy, multipliers, the "productivity puzzle", etc.  However, I was rather surprised by the tone of the questioning on one topic: why are long term interest rates (gilt yields) so low?  

Monday, 12 November 2012

Illegal migrants: can't even get themselves arrested?

How many illegal immigrants are there in the UK? Unlike other such questions - how many 12 year olds are there in the UK? how many gay Jews? - where, although we don't know the exact answer, either survey and administrative data allows us to make an informed and reasonably accurate guess, we don't know, even approximately. But a new initiative by the Metropolitan Police suggests that the number may in fact be surprisingly low. 

Wednesday, 31 October 2012

Self-defeating austerity?

Is austerity – particularly the fiscal consolidation programmes currently under way in most European Union countries - self-defeating?  This question has been thrown into sharp focus by the IMF’s belated reassessment of the magnitude of the “fiscal multiplier” in major industrialised countries during the Great Recession.   New research from NIESR, published in the National Institute Economic Review (£), makes the first attempt – to our knowledge – to model the quantitative impact of coordinated fiscal consolidation across the EU, using the National Institute Global Econometric Model.

Wednesday, 24 October 2012

Tomorrow's growth statistics today?

Did David Cameron's comments at Prime Minister's Questions - "the good news will keep on coming" -  today move the sterling exchange rate?   The first estimate of UK GDP in the third quarter of 2012 will be released tomorrow, and he will have seen it this morning; not surprisingly, his remarks have therefore been interpreted as signalling that the numbers will be good. For example, Nick Robinson said:  "The PM was giving a strong hint that tomorrow's GDP figures will be positive".

How did we get into this mess and what can we do about it?

The Department for Business, Innovation and Skills (BIS) asked me (as well as others) to record a brief video on the origins of, and potential policy responses to, the UK's current economic problems.  The video, which lasts about 7 minutes, can be seen here.   Obviously, the views expressed are my responsibility and mine alone, not that of the Department or government. 

Tuesday, 23 October 2012

Talking tough (but intelligent) on crime

New research, undertaken for the Ministry of Justice by Helen Bewley at NIESR, shows that increasing the punitive element of community orders, as proposed yesterday by the Prime Minister, has the potential to reduce re-offending. But there are potential pitfalls: reform needs to be cautious and based on the evidence of what works in reducing re-offending.  

[Helen is one of the leading experts in the complex statistical techniques required to establish the causal connection between particular policy interventions (like community orders) and economic and social outcomes (like reoffending). This post describes the research and its implications for policy, but he techniques and data used here have implications for policy analysis going well beyond this particular topic] 

Monday, 22 October 2012

If the confidence fairy ever existed, austerity has frightened her away

Yet more on multipliers; a reply to Chris Giles. Professor Richard Portes (President, Centre for Economic Policy Research) and me in the Financial Times.  NIESR will shortly be publishing detailed research on this issue, estimating multipliers and looking at the impact of coordinated fiscal consolidation in the EU (both the eurozone and the UK): watch this space.  Meanwhile, here's our letter: 

Friday, 19 October 2012

"We've got the deficit down by a quarter": an update

Figures for the public finances vary a lot from month to month, partly predictably, partly not; and they're invariably revised, often by quite large amounts. Hence, I've resisted updating this July post, which explains that while the government's repeated claims that "we've got the deficit down by a quarter" are true if you compare 2011-12 with 2009-10, this was mostly achieved simply by cutting public investment. But now seems a good time to do so, since today's public finance figures mark the half way point of the financial year, and - in contrast to recent months - the figures are not nearly as bad as expected, with revisions meaning that the first half  of the year now looks significantly better.

Nevertheless, there still isn't really much point in looking at month to month numbers; but the big picture is clear. Here's the total deficit (public sector net borrowing, excluding the purely financial transactions that distorted public investment in April 2012) and the deficit on the current budget, calculated on a rolling 12-month basis to eliminate seasonality as far as possible. 

Tuesday, 16 October 2012

The austerity debate: Paul Krugman and me vs. Bridget Rosewell and Stephen King

On October 15, I spoke in a debate at the Houses of Parliament entitled:  "Time for a radical rethink? The economics of deficit reduction". 

The debate was organised by Professor Lord Richard Layard, by kind permission of the Speaker and Lord Speaker (who introduced the debate).  It was chaired by Evan Davis.  I joined Professor Paul Krugman of Princeton University, and Nobel Laureate in Economics, in arguing that premature fiscal consolidation in the UK had been based two key misconceptions: that in the absence of accelerated deficit reduction, bond markets would panic; and that fiscal consolidation would have little or no negative impact on growth.   Bridget Rosewell, of Volterra Partners, and Stephen King, Group Chief Economist of HSBC, argued in contrast that austerity was a necessary corrective to the large debt overhang, both public and private, resulting from a financial bubble in the late 2000s and the resulting crisis.  

A summary of my argument appears in the Spectator here.  Excerpts of the debate, and a follow up discussion between me and Bridget Rosewell, featured on the Today programme [about 15 minutes in] on the morning of 16th October. Here is a nice narrative piece by Russell Lynch in the Evening Standard. 

Here is the full recording (audio only) of the debate (it is about 1 hour 45 minutes). 

Saturday, 13 October 2012

More on multipliers: why does it matter?

The IMF's reassessment of the "fiscal multiplier" has sparked off multiple reactions in the economics blogosphere both in the US and UK. My initial reaction is here. Meanwhile, Chris Giles at the FT has weighed in, attempting to demonstrate that the IMF's analysis is not robust. I'd like to step back a bit now from the IMF piece (I'll return to it later) and explain why this matters.

Tuesday, 9 October 2012

What explains poor growth in the UK? The IMF thinks it's fiscal policy

For the UK, and indeed other advanced economies, the most important point in today's IMF World Economic Outlook is not that it further explodes the myth - repeated again yesterday by the Chancellor - that low interest rates reflect policy "credibility" rather than economic weakness, or that it again emphasises that the UK and others could and should loosen fiscal policy in the face of that weakness. The IMF said all this about the UK back in July, as I explained then. Rather, it is that the Fund has radically revised its opinion about just how damaging the impacts of premature fiscal consolidation have been in the UK and elsewhere.

[Update, November 2012: following on from the IMF analysis, we at NIESR have now published the first rigorous quantitative estimates of the impact of coordinated fiscal consolidation in the eurozone. They show that austerity has, indeed, been self-defeating, in the sense that debt-GDP ratios are higher, rather than lower, as a consequence of the premature move to contractionary fiscal policy.]

Wednesday, 3 October 2012

Who's accountable for this spreadsheet? Ministers, civil servants and mistakes

A junior civil servant makes a coding error on a complicated spreadsheet.  Unfortunately, this has direct implications for a hotly debated political issue.  When the error is discovered, the Secretary of State apologises and issues an embarrassing correction.  Not surprisingly, his opposition counterpart is outraged:
"This is an extraordinary development. It really does call into into question the competence of ministers and of the government as a whole"

Tuesday, 2 October 2012

Fair taxes: not just about income tax

[This article originally appeared in the Independent]

The Liberal Democrats call for a "mansion tax" (that is, a higher rate of council tax for the most expensive properties), possibly supplemented by some form of wealth tax seems to have provoked a peculiarly illogical misuse of one particular statistic among economic commentators who really should know better.  Their objective appears to be to show that the "rich" are already paying more than their "fair share", and that any additional imposition would be both unfair and economically damaging.  This is, of course, an entirely legitimate argument, both as a matter of ideology and of economics. But they will have to come up with some rather more convincing facts and evidence than they have so far.  

Friday, 21 September 2012

"People aren't interested in graphs": Chris Skidmore's response to my review of "Britannia Unchained"

In an interview with the Spectator's Isabel Hardman, Chris Skidmore MP has responded to my New Statesman review of Britannia Unchained, his book with fellow MPs Kwasi Kwarteng, Priti Patel, Dominic Raab and Liz Truss . She quotes his response:
‘Well, it’s a 116-page book, there’s 433 footnotes to it. I go back to the point about data, there’s statistics, it can be backed up. The point, the broader point is that Jonathan Portes and the NIESR, you know, this is the problem we have with political discourse is that as politicians we want to get across a message and I think he was critical about it – I don’t know how well NIESR pamphlets sell, but people aren’t interested in looking at medians and graphs. We have a duty to try and broaden that message outside of the think tank zone.’

Thursday, 20 September 2012

What explains low long-term interest rates: article for Liberal Democrat Voice

[This article was originally published in Liberal Democrat Voice here in response to a specific request to comment on the texts reproduced below. I have made many of the arguments below in previous blogposts, so regular readers may not find much new, but for others it may be a useful summary]. 

As the head of an independent economic research institute, it's not my job to attend the Liberal Democrat conference (or indeed that of any other party).  But, following up an FT article here, I was asked to comment on the text of a motion which argues that:

"Conference recognises that the difficult decisions taken by the Coalition Government have ensured the credibility of the UK government’s position in the financial markets allowing the UK to borrow at record low rates"

and on an amendment:

"Conference also notes that it would be a mistake to attribute record low public sector borrowing costs to accelerated fiscal consolidation rather than to a flight to relative safety."

Wednesday, 19 September 2012

Lazy Brits 2: Attack of the Zombies

[Starring Toby Young and Daniel Hannan MEP (title roles), Daniel Knowles and Chris Cook (data geeks), and Dr. Anna Hedge (punchline writer)]

As I hope is clear from the title, this is a nerdy post about statistics and research.  In his Sun column on Sunday, Toby Young said:
As [Daniel] Hannan points out in his book, Britain is the seventh largest economy in the world, the fourth largest military power and the fourth largest exporter.
The last point looked odd; surely the UK exports less than any of China, Germany, the US and Japan?  So I questioned it, via twitter.   First, Mr Hannan said:: "It is both true and surprising"; then, when I said that I didn't think it could possibly be right, he pointed rather vaguely to one of "the IMF, OECD, CIA Factbook".

Sunday, 16 September 2012

Sterling: my part in its downfall

[this post was published September 17, 2012 in Juncture, the journal of the Institute for Public Policy Research]

The economic and political history of the UK's ill-fated experiment with the Exchange Rate Mechanism (ERM) has been picked over many times, and the broad outlines of the story are well known (for a range of well-informed views, see here). So this is more of a personal recollection of how it felt at the time.

Wednesday, 12 September 2012

Debt, deficits and the fiscal framework

It has been widely reported that the government is considering abandoning the second half of its fiscal mandate - that debt should be falling as a percentage of GDP in 2015-16.  My view is that the short term economic impacts of this are limited.  It's not really news; NIESR has been saying for well over a year that this target was unlikely to be met.  What deficit reduction we've seen so far - largely achieved through cutting investment - hasn't exactly gone according to plan.  Nor should we worry about the markets - they certainly haven't reacted yet and I doubt they will.  As for the ratings agencies, any policymaker who pays them the slightest attention shouldn't be allowed near economic decision-making. 

Friday, 7 September 2012

Chris Giles and the "NIESR chart"

Today we published our latest monthly GDP estimates, and alongside that our chart showing the path of recession and recovery in this and previous downturns.  Chris Giles has responded with a critique, pointing out that if you look at employment rather than output the picture is very different.  He's quite right; but, as he says, many others (including me) have made this point before.   Having made this simple point, though, he then becomes somewhat hyperbolic, arguing that:
"NIESR is doing the country a huge disservice in continuing to publish the NIESR chart alone"

Wednesday, 5 September 2012

Things could and should be better

[This note was prepared for the Policy Network economy conference, "The quest for growth".] 

The UK economy has many underlying strengths and things could and should be better. If only policymakers would act
There is plenty of spare capacity in the UK economy. The Office for Budget Responsibility’s (OBR) estimate of the "output gap" (a little over 2 percent) is unrealistically low; both we at NIESR and the International Monetary Fund (IMF) think it is higher (around 4 percent). And we may well be too pessimistic.
Indeed, even with an improving labour market, unemployment is still nearly a million higher than official estimates of the "structural" rate (the NAIRU), while on the OBR's forecasts (which are likely to be too optimistic on growth in the short term, and too pessimistic on supply potential) unemployment will remain well over the NAIRU, and output well below potential, for years to come.

Thursday, 23 August 2012

Cut red tape to boost growth? Start with immigration

With the economy persistently weak, there is a growing consensus among economists that premature austerity has done considerable unnecessary damage, and that there is a strong case for slowing fiscal consolidation -  at least to restore some of the unnecessary and damaging cuts to public investment (which have been the source of most of the deficit reduction so far). However,  others have instead argued that the problem is not on the demand side, but on the supply side, and that what is needed is a radical programme of deregulation - "cutting red tape" - especially in the labour market.  

Friday, 3 August 2012

The impact of alternative paths of fiscal consolidation on output and employment

NIESR has just published research estimating the economic impact of immediate versus delayed fiscal  consolidation in the UK.  The research was undertaken by Dawn Holland (NIESR), John Van Reenen, Professor of Economics at the London School of Economics and Director of the Centre for Economic Performance, and Nitika Bagaria, a Phd student also at LSE and CEP.  John and I have written an article for the FT(£). 

Thursday, 2 August 2012

NIESR's UK forecast, August 2012

NIESR's quarterly forecast for the UK economy is published today. Highlights: 

  • The economy will contract by 0.5 per cent this year, but grow by 1.3 per cent in 2013.
  • Consumer price inflation will fall below the 2 per cent target by the end of 2012.
  • Unemployment will peak at 8.6 per cent in 2013.
  • We expect the cyclically adjusted current budget to be in surplus in 2016–17.

NIESR's world economy forecast, August 2012

NIESR's quarterly forecast for the world economy is published today. Highlights:

  • Concurrent slowdown in every major economic region: world growth to slow to 3.3 per cent this year and 3.7 per cent next year.
  • All major countries opt for the same policies of near zero interest rates and fiscal tightening.
  • European countries face remarkably divergent growth paths next year: Germany above trend growth and Southern Europe in deep recession. Tensions will heighten further.
  • World demand below potential output growth means rising unemployment – in some countries even higher than seen in the Great Depression.

Monday, 30 July 2012

Which (macro)-economists are worth listening to?

This post relates to the ongoing blog debate on "the state of macroeconomics", which I contributed to here, and which has drawn in a whole host of economics bloggers who know far more about modern macroeconomic theory than I do.  However, here I want to address a related, more mundane question, but one which is perhaps more relevant to most non-economists' concerns.   That is,  when economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?

Thursday, 19 July 2012

The IMF explodes the myth of fiscal "credibility"

There is a huge amount of interesting material in the full IMF staff report on the UK, released today, in particular the lasting damage ("hysteresis" to economists) done by this prolonged period of very low growth.  But in this post I wanted to draw attention to one particular paragraph (it is para 43 on page 38).   I reproduce it here in full: 
Some further slowing of consolidation is unlikely to trigger major market turmoil
43. Further slowing consolidation would likely entail the government reneging on its net debt mandate. Would this trigger an adverse market reaction? Such hypotheticals are impossible to answer definitively, but there is little evidence that it would. In particular, fiscal indicators such as deficit and debt levels appear to be weakly related to government bond yields for advanced economies with monetary independence. Though such simple relationships are only suggestive, they indicate that a moderate increase in the UK’s debt-to-GDP ratio may have small effects on UK sovereign risk premia (though a slower pace of fiscal tightening may increase yields through expectations of higher near-term growth and tighter monetary policy).  This conclusion is further supported by the absence of a market response to the easing of the pace of structural adjustment in the 2011 Autumn Statement. Bond yields in the US and UK during the Great  Recession have also correlated positively with equity price movements, indicating that bond yields have been driven more by growth expectations than fears of a sovereign crisis.

The Supporter's Fear of the Penalty Kick

Guest post by Alex Bryson, Senior Research Fellow, NIESR

 Like Marmite you either love it or hate it: the penalty shoot-out. Either way it is clear - we are not very good at them. Using data from on 95 national teams for 367 shoot-outs (including double-counting of head-to-heads) we find England is ranked 77th in terms of percent of shoot-outs won.  The only teams who are below England are countries that have never won a penalty shoot out. Figure 1 shows the win rates for all countries with at least one win. England has won just one of six, a 17% success rate. Sixteen countries have a 100% record, but 11 of these have only ever been in one shoot-out.  The shoot-out kings are Angola: they have won all four of their penalty shoot-outs.

Sunday, 15 July 2012

"We've got the deficit down by a quarter": if this is success...

The first achievement highlighted today by the Prime Minister in his Sunday Times article was deficit reduction:
"We’ve got the deficit down by a quarter already"
This statement is true. But what the Prime Minister didn't say was that the economic outlook the Prime Minister inherited was for precisely this pace of deficit reduction; that's exactly what the Office of Budget Responsibility was forecasting on the basis of policies in place in May 2010.

Friday, 6 July 2012

Explaining the benefit system to John Humphrys..

I was on the Today programme this morning to discuss a report, written by Howard Reed of Landman Economics for a group of childrens' charities, called "In the Eye of the Storm", about the impact of tax and spending change on "vulnerable children and families".
John Humphrys began by asking me what the report showed. I said that it showed that, not surprisingly, tax rises and benefit cuts, combined with cuts to public services, were likely to disproportionately affect the poorest.    I expected - evidently naively - that to be a prelude to a more detailed discussion of the analysis in the report and the implications. We never got to the report itself; instead, Humphrydd asked:
“surely it isn't the case that benefits are being cut for the poorest? There are benefit cuts yes, but mostly they’re caps on the higher limits, on the top limits”
You can listen to it all (only three minutes) here. [begins at 2h 57min].  It is clear that Humphries really is under the impression that cuts to welfare benefits will not impact the poorest or genuinely disabled people.

Thursday, 5 July 2012

Full circle on policy? Let's hope so.

[This article appeared first in Public Finance]

The G-20 has come full circle.  In April 2009 in London the talk was of a massive coordinated fiscal stimulus. While this was considerably exaggerated - much of the "trillion dollar package" has already been announced - there was a genuine collective determination to do what was necessary to ensure the financial crisis did not become a prolonged depression.

Monday, 2 July 2012

The LIBOR scandal and reforming the banking sector

[By Angus Armstrong, Director, Macroeconomic Research, NIESR]

The damage to the City of London of the revelations of manipulation in the London interbank market cannot be overestimated. The City is the global centre of foreign exchange trading (37% of global turnover), the home of the money markets and half of the $650 trillion global over-the-counter derivatives market.[1] The London Interbank Offer Rate (LIBOR) is the benchmark interest rate on which these transactions are priced, as well corporate loans and even mortgages. According to the IMF’s Article IV Spillover Report the UK's dominance in finance is reinforced by its "robust" market infrastructure, including the setting of LIBOR - the global benchmark interest rate.

easyMoney could save the eurozone

[This article is joint with Declan Gaffney, who blogs (mostly on welfare and benefit related issues here; it was prompted by a twitter conversation with Sue Marsh, also a prolific blogger on disability issues. After writing it, we became aware of this FT article by James Mackintosh, who obviously thought of the basic idea first, but having written it we thought it was worth posting, and it makes some additional points]. 

A few weeks ago it was reported that a group of holidaymaking Germans in a Cretan bar refused to pay their bill on the grounds that it was "their money". Unsurprisingly, a fight broke out.  This microcosm of the political and economic troubles of the eurozone is revealing - because both sides had a point.  More optimistically, it points to a possible solution to the fundamental problems of the eurozone that could benefit all sides.

Friday, 29 June 2012

The consequences of ignoring the evidence [updated]

[this post was updated at 9pm on 29/6/2012 to respond to Sam Freedman (DFE)]

In justifying the decision to abolish the Educational Maintenance Allowance (EMA), the government argued repeatedly that the decision was justified by the evidence; in particular, that  EMA was ineffective in increasing educational participation among young people. For example, the Minister for Further Education, in November 2010, said
"we have focused on the evaluation evidence and other research which indicates that EMA does not effectively target those young people who need financial support to enable them to participate in learning.  It will be replaced by a scheme that does."

A manifesto for economic sense

The Manifesto for Economic Sense, authored by Paul Krugman and Richard Layard, has now been signed by a number of distinguished economists, including (but not limited to) the following:  

Alan Manning - London School of Economics
Andrew Graham - Oxford University
Charles Wyplosz - The Graduate Institute, Geneva
Chris Pissarides - London School of Economics and Political Science
Christopher Allsopp - Director, Oxford Insitute for Energy Studies, Oxford
Colin Thain - University of Birmingham, UK
David Blanchflower - Dartmouth College
David Soskice - University of Oxford
Eric van Wincoop - University of Virginia
Gary Mongiovi - St Johns University, New York
Geoffrey M. Hodgson - Professor, University of Hertfordshire, UKJ. 
Bradford DeLong - U.C. Berkeley
Jeffrey Frankel - Harvard University
Jeremy Hardie - LSE Centre for Philosophy of Natural and Social Science
John Van Reenen - Centre for Economic Performance, LSE
Justin Wolfers - Princeton University
Olaf Storbeck - Handelsblatt - Germanys Business and Financial Daily
Oriana Bandiera - London School of Economics
P.E.Hart - Emeritus Professor of Economics,University of Reading
Paul Anand - Open University/ HERC Oxford University
Paul Gregg - Professor, Dept of Social and Policy Sciences, University of Bath
Paul Krugman - Princeton University
Peter E. Earl - University of Queensland
Peter J. Hammond - University of Warwick
Philip Arestis - University of Cambridge
Philippe Martin - sciences po (paris)
Raquel Fernandez - NYU
Richard Jackman - London School of Economics
Richard Layard - LSE Centre for Economic Performance
Rick van der Ploeg - University of Oxford
Robert A. Feldman - IMF and Adjunct Professor Georgetown U. (retired)
Robert Skidelsky - Wawick University
Simon Wren-Lewis - Oxford University
Wendy Carlin - UCL
William Brown - University of Cambridge

Monday, 25 June 2012

Macroeconomics: what is it good for? [a response to Diane Coyle]

Diane Coyle is not just one of the UK's most eminent "public intellectuals", but also simply one of the most impressive people I know; how she manages to run her own economic consultancy, serve as Vice-Chair of the BBC Trust and as a member of the Migration Advisory Committee, write a book every year or two and tweet constantly is completely beyond me.  So I take it very seriously indeed when she disagrees with me, as she did (semi-) publicly in this blog last week.  I promised a response, and here it is. [Warning: longish,  and occasionally nerdy.]

Friday, 22 June 2012

Why Ed Miliband shouldn't apologise for making the right decision on Eastern European migration

[This is slightly updated version of an article that appeared first last September in the Independent here. For a discussion of some other immigration related issues, see here (on immigration and labour markets more broadly), here (immigrants and schools) and here (immigrants, public services and benefits)]

It appears to have become conventional wisdom in the Westminster village that the previous Labour government was wrong to give immediate access to the UK labour market to citizens of the new Member States of East and Central Europe that joined in 2004. The argument is that the decision was based on flawed analysis, in particular misleading forecasts of the numbers who were likely to come; and that influx of new workers from those countries damaged the employment prospects of British workers, especially the young and low-skilled.

Wednesday, 20 June 2012

After two wasted years, the G20 pivots back towards fiscal sanity

The G-20 has come (almost)  full circle.  In April 2009 in London, the communique set out leaders' commitment to a massive coordinated fiscal stimulus:
We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth.
While the degree of coordination was somewhat exaggerated,  there was a genuine collective determination to do what was necessary to ensure the financial crisis did not become a prolonged depression.

Friday, 15 June 2012

The Chancellor accepts the logic of more government-financed investment

My thoughts on the bank lending measures announced by the Chancellor and Governor yesterday are well reflected here.   But I wanted to focus on one particular part of the Chancellor's Mansion House speech that has got less attention.  The Chancellor argued:
"Credit is not the only area where we can use the global confidence in our balance sheet to boost private sector growth.  We are already taking action to support new house-building and infrastructure investment through government guarantees.  In the next month we will set out how we can do much more."

Tuesday, 12 June 2012

DWP analysis shows mandatory work activity is largely ineffective. Government is therefore extending it..

The Department for Work and Pensions today published an impact assessment of the Mandatory Work Activity (MWA) programme.  The analysis compares participants on the programme with "comparable" (as determined by sophisticated statistical techniques) non-participants.  Briefly, what the analysis shows is that the programme as currently structured is not working. It has no impact on employment; it leads to a small and transitory reduction in benefit receipt; and worst of all, it may even lead to those on the programme moving from Jobseekers' Allowance to Employment and Support Allowance.  

Sunday, 10 June 2012

The Government continues to abuse the data on "troubled families"

The Independent on Sunday today says that "the Government is to call for an end to what it describes as an "it's not my fault" culture of excuses, which has allowed 120,000 "troubled families" to avoid taking responsibility for their own lives." Eric Pickles is quoted as saying the programme will be "more forceful in language, a little less understanding". He added: "Sometimes we've run away from categorising, stigmatising, laying blame."

Looking at Winter Fuel Payments without looking at the basic pension has no logic, either economic or moral

[This article appeared in the Independent on 10 June 2012]

The case for withdrawing the Winter Fuel Payment (and free bus passes) from better-off pensioners appears to have united all parts of the political and intellectual spectrum, from the Sun's argument that we should "stop wasting money on rich pensioners who don't need it" to the Independent's complaint that  "hundreds of thousands of very well-off people of advanced years who are being subsidised out of general taxation." It is supported by respectable centrist think-tanks such as the Social Market Foundation and CentreForum.  Indeed, is widely accepted that the only block to removing this absurd and wasteful subsidy to rich oldies is political - the Prime Minister's reluctance to renege on an explicit pre-election pledge, incorporated into the Coalition Agreement, particularly after the Budget fiasco over the "granny tax".

Wednesday, 6 June 2012

A welcome return to common sense: now for delivery

Two weeks ago, I wrote this:
When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this:
"with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest.  This is not just basic macroeconomics, it is common sense. "
From today's Independent:  
A senior government source told The Independent:
"While a lot of families are struggling and have no disposable income, there are others who are quite cash rich but have nowhere secure to put their money where they can be guaranteed a decent return. Because interest rates are as low as they are, there is the potential to tap into this money and get it invested in infrastructure which will have a dramatic effect on Britain's long-term growth."  
The benefits of investing in infrastructure were twofold, the source said.
"Not only will it provide a welcome kick-start to the economy at a time when growth is sluggish, but infrastructure improvement will also help Britain's long-term competitiveness and encourage investment from overseas. In that way it is a win-win situation."
There is no meaningful difference here: the argument about the economics of whether we need more government borrowing (on or off balance sheet) to increase demand and investment spending is over.  The issue for the government now is delivery and implementation: can they actually do it, quickly enough and on a scale big enough to make a difference?  Too much time has been wasted already.  

Thursday, 24 May 2012

Chris Giles: evidence based analysis, but not so the conclusions

Chris Giles' FT piece here argues essentially that the political debate focuses too much on fiscal policy; and that given the uncertainty about the impacts past and future, of fiscal policy, economists should refrain from taking sides in this debate. I think that while there is much in Chris' piece that I agree with, ultimately his conclusions are confused at best, and damaging at worst. I shall make extensive reference to his points below, but I don't want to misrepresent him, so please do read his piece first!

The Immigration Minister thinks a fall in UK exports is a policy success

GDP figures today were revised down to -0.3%. As I've said before, small quarterly movements of this sort are largely irrelevant to the broader picture.  What was initially a reasonably strong, albeit patchy, recovery stalled in the autumn of 2010; since then there has been essentially no growth at all.  The government can and should act now.

Amid the gloom, recent statistics have contained one piece of relatively good news; exports are doing well, especially to countries outside the EU. In particular, we continue to run a large surplus on trade in services. What sort of services do we export: financial services and insurance, business services, the creative industries - and education.  The Department for Business estimate that in 2008-09 the value of education and training exports was about £15 billion. This looks to be about the same at the time as our exports of food and drink, and maybe half of our exports of cars, which are now rising sharply.   

Wednesday, 16 May 2012

Gilt yields and confidence (again): the Prime Minister vs. the Bank of England

I've written on this before in depth, most recently here, but I thought the juxtaposition of what the Prime Minister said today, and the Bank of England's analysis in its Quarterly Inflation Report, also today, was worth noting.

Monday, 14 May 2012

Explaining the real cost of funding government borrowing (and why David Smith is very confused..)

[Update. David has responded here. His post simply ignores the second-to-last para below. which addresses the substantive point.  At this point, I really don't know whether it is because he's dug himself into a hole and doesn't want to admit it, or because he genuinely doesn't understand the government's intertemporal budget constraint - a standard identity, taught in any decent graduate macro or public finance course, if not before.].  

My post yesterday claimed that

"if the government were, as I suggest, to fund a £30 billion (2% of GDP) investment programme, and fund it by borrowing through issuing long-term index-linked gilts, the cost to taxpayers - the interest on those gilts - would be something like £150 million a year."  

David Smith, however, tweeted repeatedly that this was wrong, arguing (for example)
"No, again, £150 million of revenue doesn't give £30 billion of funding. £1 billion - real yield plus inflation - might."
Why is David wrong?  Well, as the chart in the post showed, real interest rates for very long term index linked gilts have been hovering around the 0.5% mark for the last couple of years. Indeed, they are currently lower, and recently the government has actually auctioned index-linked gilts at real rates of basically zero, but lets take 0.5% as the government's current real borrowing rate.  David hasn't argued with that. 

Saturday, 12 May 2012

The pasty tax could pay for a £30 billion infrastructure programme: four charts show why history will judge us harshly

When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this:
"with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest.  This is not just basic macroeconomics, it is common sense. "

Tuesday, 8 May 2012

How the Chancellor made the right decision about the timing of austerity

[This article originally appeared in the Independent here]. 

Two years ago, the coalition set out its programme for government. Today, the Prime Minister and Deputy Prime Minister reaffirm their commitment to the central element of that programme - cutting the deficit quickly.  This is despite the dismal results this strategy has delivered, despite the fact that even the IMF is arguing that there are more sensible alternatives, and despite the growing realisation in the eurozone that austerity is a dead end.  

But, particularly in the light of the Governor of the Bank of England's comment that the government's approach was a "textbook response to the situation", it is worth looking back and considering what the new government's options were and whether there was, in fact, no alternative.

After the election, it was clear that the recession had left a massive hole in the government's finances.  Ultimately the books needed to be balanced; spending would have to be cut, and taxes increased.  The question was timing: cut the deficit quickly, or wait until growth was reasonably strong again. Both David Cameron and I, from our very different perspectives within government, understood this.  But ultimately the decision was the Chancellor's. 

Fortunately, he made the right call.  And the result was solid, sustained and healthy growth. As he said in his Budget Speech:
"In doing so, I have had to balance two key objectives : first, the essential task of helping recovery; secondly, the need to tackle the deficit so that the recovery will be sustained. I believe that my proposals today strike that right balance. In the year ahead their effect will be broadly neutral, thus allowing the recovery to take hold.  However, for subsequent years, as the economy strengthens, my proposals are designed to build in a wedge of steadily rising revenue."
OK, by now you will have twigged I wasn't talking about 2010.  The quote is from Norman Lamont's Budget Speech in 1993.  David Cameron and I were both 26; I had been Lamont's speechwriter (a civil service position) through and after the election, although I'd left his office by the time of the budget.  Cameron was still his Special Advisor.  
The 1993 Budget famously raised taxes (both National Insurance and VAT) to accompany previously announced tight restrictions on public spending. But neither kicked in immediately. The deficit actually rose in 1993-94, and, according to the Treasury, so did the cyclically adjusted current deficit (the structural deficit that the government currently targets. So there wasn't any fiscal tightening at all.  Only in 1994-95 did the deficits, both structural and headline, begin to come down.    By the time spending cuts and tax increases actually began to kick in, the recovery was firmly established; growth in 1994-95 was close to 4 percent.  As the chart clearly shows, fiscal consolidation followed recovery; it did not cause it.

Fast forward to 2010.  In the Chancellor's "emergency" Budget,  he committed himself to the precise opposite of this approach.  Deficit reduction was a precondition for growth, not something to be achieved after recovery had been secured: 
"Some have suggested that there is a choice between dealing with our debts and going for growth. That is a false choice.  The crisis in the Eurozone shows that unless we deal with our debts there will be no growth.  And these forecasts demonstrate that a credible plan to cut our budget deficit goes hand in hand with a steady and sustained economic recovery, with low inflation and falling unemployment."
So he announced what he described as an "accelerated reduction in the structural deficit." - aiming to reduce it by more than 2 percent of GDP between 2009-10 and 2011-12.  Of course the forecasts turned out not to "demonstrate the credibility" of Mr Osborne's plan, but rather the reverse - unlike Mr Lamont's, which turned out to be very much on the cautious side. 
Two very different approaches. Two very different results.  But hardly surprising, to anyone who remembered even the basics of undergraduate macroeconomics.  There is a simple, absolutely standard prescription for dealing with an unsustainable deficit resulting from a recession.  It is the following. Announce, and commit clearly to, tax and spending measures to deal with the deficit.  But ensure implementation follows recovery, not precedes it. This is the "textbook response" that Mervyn King should have commended to the Chancellor.  

If done right, such an approach will ensure fiscal credibility, maintain confidence, and allow businesses and households to plan, without committing the elementary error of reducing demand when the economy needs it most.  The 1992-97 Conservative government followed this prescription to the letter - and it worked.  Pity about this one. 

Thursday, 3 May 2012

NIESR's latest quarterly forecasts

NIESR's quarterly forecasts for the UK and world economies were published today, May 4.

In the UK, more than four years after the start of the recession, the economy is well over 4 per
cent below its pre-crisis peak. Growth this year will be close to zero, but about 2 per cent in 2013. We expect the unemployment rate to rise to almost 9 per cent at the end of this year, and to remain elevated throughout the forecast period. This will do permanent damage to the UK’s productive capacity.

Wednesday, 25 April 2012

On GDP figures today, credibility, and Popperian falsifiability..

Much of the discussion about today's GDP figures has focused on the "surprise" fall in construction, as if this had somehow come out of nowhere and was nothing to do with government policy. And perhaps the figures will be revised. But more broadly, it is hardly surprising that the construction industry is having a hard time when the government has taken a deliberate decision to slash public sector investment - down 25% last year, as Tuesday's ONS figures showed. In fact, virtually all last year's deficit reduction came from investment cuts; the current (non-investment) deficit hardly changed. 

Tuesday, 17 April 2012

Who wants to tax and spend? the IMF, that's who.

[This piece appeared first in the Independent here]

I noted at the turn of the year that the IMF, since Christine Lagarde took over, had made it more and more obvious that it thought a number of countries, including the US, Germany and (by implication) the UK, were tightening fiscal policy too fast.  In January, in its quarterly update of the World Economic Outlook (WEO), the Fund said
"those [advanced countries] with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation. Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.