Monday, March 29, 2010

Accepting Reality

The phrase the most annoy me at the moment is "accepting reality", when used in the context of government spending. Last Sunday night on Radio 4 an SNP politician who suggested that they weren't all that keen on cuts was accusxed of living in an economic fantasyland. It appears again today in Nick Robinson's "Labour Cuts would be tougher than Thatcher" where he states "This is not the first time the chancellor has caused a stir by accepting reality."

When I first saw the figures for the budget deficit I remember making the suggestion that cuts might be needed, in hindsight that was the wrong thing to say. Admitting the need for cuts is not accepting "reality" it is nothing more than accepting the doctrine of fiscal conservatism, a doctrine that I just don't accept.

One thing that really hasn't been mentioned yet is that often cutting back on government spending doesn't even solve the problem. It's already being suggested that Greece's austerity measures are making their situation worse and there are plenty of other examples from the pages of history.

The problem is that if public sector demand is withdrawn there has to be some kind of other demand to replace it. On this score things are not exactly looking hopeful, private sector demand is slowly coming back, but not in a major way, the British consumer is still suffering under the burden of it's debt. The exports front also looks dim with other countries embarking on austerity measures it looks unlikely that we can look abroad for a source of demand.

Altogether things are not looking hopeful, but concentrating on the deficit at the exapense of everything else is not accepting reality, it's economic suicide.

Thursday, March 25, 2010

Blogroll Additions

Apologies for the lack of posting recently, I'm afraid that I've been a little distracted with work as well as feeling a little short on inspiration. Anyway, I've found the time to add a couple of links to the blogroll.

Firstly, we have John Cook, Labour PPC for Norwich North. A thoroughly nice bloke who I'd rather like to see in the House of Commons. Second, we have Tim Worstall who I've been meaning to add for a while. Despite being an evil Thatcherite I do find his writing both thoughtful and entertaining (and occasionally stupidly pedantic).

The Sun's Economic Nonsense

A very confused fragment of economic commentary, from the Sun:

But Britain is likely to be £1.4trillion in the red in 2015 - with debt making up 75 per cent of our total economic output.

Debt may be equal to 75 percent of the national output but it won't be 75 percent of our economic output will be debt, that doesn't even make sense. Perhaps this is being pedantic but I'd expect someone in the role of business editor of a national newspaper (even if it's the Sun) to explain the debt situation correctly.

More stupidity on the same page from Trevor Kavanagh

The acid test of this Budget was the health of the stricken Pound. Hopes it would flicker back to life were dashed as feeble Sterling FELL against the American dollar.

Beyond all the debate about the relative merits of a strong or weak pound there is the simple truth that the day to day movements of currencies mean absolutely nothing.

I know I shouldn't expect much from the Sun, but it would be nice if their contribution to the economic debate was at least led by people who have a clue.

Thursday, March 11, 2010

RIP Mark Linkous

I'm more than a little saddened this week by the unfortunate death of Mark Linkous, lead singer of Sparklehorse. I'm sure most people have never heard of them, but to me they really were something special. Here's a few songs:

...and one more...

Friday, March 05, 2010

Stuff* Happens

I was really wound up by this particular tweet by @TimMontgomerie (he of ConservativeHome fame).

He points to this Wall Street Journal article pointing out that some Hatian entepreneurs have lost out as a result of the aid operations undermining their businesses. I don't object in any major way to the article, I'm sure it's correct in what it's saying, what winds me up is Tim's judgemental "Will we ever learn?" remark and the implication that somehow we shouldn't really be conducting these kind's of aid operations.

I've never planned an emergency relief operation in a disaster prone country myself but I would guess that the initial information that planners had to work with was pretty sketchy, the details of the worst hit areas where aid was most needed were few and far between and the initial planning had to be done in pretty short order.

Given the incredible difficulty of the task, is it really too much to ask that we simply accept that thing's won't be perfect and deal with problems as they arise rather than immediately allocating blame.

*I'm trying to avoid swearing

Wednesday, March 03, 2010

Another Economists Letter

Writing letters appears to be the done thing for economists these days, the following is one written to the Guardian by a group of economic historians (my emphasis):

We are economic historians concerned at the recent tone of the debate as to the scale and scope of British public sector debt (Report, 2 March). History shows, first, that British public debt is not high by the standards of the last 200 years. It is rather low in comparison to the second half of the 18th century, the first three-quarters of the 19th century, and most of the interwar and post-second world war era in the 20th century. It is also low in the context of the developed world; only Germany's and Canada's are lower among the larger industrialised powers.

Second, the last 20 years has seen exponential escalation in the scale of each financial crisis: the savings and loan scandals of 1985-89, BCCI in 1991, Long-Term Capital Management and the Asian crisis of 1998; Enron in 2001; and then Lehman Brothers and the mayhem of 2008. Each step in this woeful narrative seems to have deepened the moral hazard involved, as speculators have been encouraged to believe that governments would always come to their rescue. Each crisis has demonstrated ever more clearly that, without radical global regulation, jobs and growth in other sectors are cruelly exposed to the costs of risk-taking in which the general public had no say but which it is always expected to pay for.

We urge policymakers to take into account these historical lessons and turn their attention to promoting the economic growth that can speed up the repayment of public debt. This is most likely to occur through enabling the knowledge economy to flourish, rather than continuing to be too reliant on the unreliable and profligate financial sector. The next government should develop a constructive strategy for growth, capitalising on the UK's clear advantage as the home of four of the world's top 10 universities, to invest in its role as an international hub for learning, science, innovation, advanced study and green jobs. Economic growth enabled Britain to escape from crushing debt burdens in the early 19th century and during the 1950s and 1960s. It could do so again, if the public spending cuts that would endanger such knowledge-based growth are ruled out in the short to medium term.
Dr Glen O'Hara Oxford Brookes University
Dr Simon Szreter St John's College, Cambridge
Dr Alastair Reid Girton College, Cambridge
Prof Martin Daunton Trinity Hall, Cambridge
Prof Jane Humphries All Souls College, Oxford
Dr Richard Sheldon University of Bristol
Prof Jim Tomlinson University of Dundee
Prof David Edgerton Imperial College London
Prof Roger Middleton University of Bristol
Prof Geoffrey Hosking University College, London
Dr Richard Toye University of Exeter
Prof Steve Hindle University of Warwick
Dr Hugh Pemberton University of Bristol
Prof Frank Trentmann Birkbeck, University of London
Prof Noel Whiteside University of Warwick
Dr Paul Ryan King's College Cambridge
Prof Patrick O'Brien London School of Economics
Dr Paul Warde University of East Anglia
Prof Ronen Palan University of Birmingham
Dr Scott Newton Cardiff University
Members of the History & Policy network

Tuesday, March 02, 2010

Pre Emptive Economics #3 and some notes on Inflation

I've long been a bit of an inflation dove, and right now I'm quite happy to see Olivier Blanchard at the IMF agreeing with me on the whole subject of dealing with inflation. In particular he's suggesting changing the inflation target from 2% to perhaps 4%. David Smith posts his objections to the idea here. Personally I find this arguments a little weak.

It is wrong because, while I am no inflation nutter, adopting a target that doubles the price level every 15 years seems to me irresponsible. It is wrong because it would endorse every suspicion in the bond market that governments will seek to inflate their debt away, rather than go through the hard job of raising taxes and reining back spending. It would be a surefire way of igniting a huge sell-off in government bond markets.
My problem is not really economic, it's political. My probelm with David's argument is that it approaches the issue with rights of debt holders first and foremost. What I believe we have in this situation is a trade-off  between a government's obligations to it's creditors and it's obligations to it's citizens. Naturally, I believe that in a democracy the latter should come first.

Further to this, I think it's worth considering how outstanding financial contracts will affect economic growth. In the current economic state of affairs the government, corporations and citizens are all heavily indebted. The upshot of this is that we are likely to see low investement and low consumer spending. Debt, as it stands is likely to be a major drag on economic growth, it may even drag the economy back into recessions. The government's creditors might not like losing out to inflation, but it's a damn sight better than the government getting into the situation where it has to default.

...he continues...
Most of all, I think it is technically wrong. Imagine if, over the past 10 years, Britain had had a 4% inflation target. Most of that period, inflation was below 2%. To inflate up to the higher target, interest rates would have needed to have been lower rather than higher. A 4% inflation target might have been associated with a typical Bank rate of 2% or 3%, rather than 7%. The future will be different from the past but perhaps not that much. A higher inflation target would have meant an even bigger boom is asset prices.
I'm not sure about this myself, there are a good few arguments against this. Firstly, it could be argued that low inflation provided an incentive to banks to expand their loan books throught he use of derivatives. The financial crisis was a problem of plentiful money more than one of cheap money. Further to this inflation has the effect of reducing the nominal amount of any liabilities meaning that financial institutions would have had fewer problems with the build up of risk.

At the end of the day, 2% seems a pretty arbitary figure so I don't really see any reason why change would necessarily be a bad thing.