It is a measure of the state we are in that the latest quarterly growth number for the UK, at 0.3% (1.2% annual rate) for 2013Q1, should be regarded as a political plus for the Chancellor. [See postscript at end.] So here is the first chart:
This extremely weak growth from a starting point of a deep recession should spell disaster for employment. But it has not, as this second chart from the Bank of England’s February Inflation report shows.
The upside of this incredibly poor productivity performance is that employment has been much more buoyant than the GDP numbers would normally imply. However a moment's thought reveals that this could be really bad news, because it might imply that the recession has led to a permanent reduction in what the UK economy can produce. I say ‘could’ and ‘might’ advisedly, because the reasons for this productivity disaster are almost totally mysterious, as I discuss here. Yet it helps explain why inflation has remained above target, and gives us a reason (although not in my view a justifiable one) why monetary policy has not been more expansionary.
Is this a reason for thinking that in fact policy in the UK has not been too bad, and that really we are suffering from some unexplained malady that the usual medicine (continuous monetary expansion and fiscal stimulus) could do nothing to cure? So we come to my third chart, which is UK unemployment (source ONS).
Despite strong growth in private sector employment, which with stagnant GDP gives us our second chart, unemployment remains high. Low earnings growth suggests that this level of unemployment is keeping real wages low, so there is no suggestion that this increase since the recession is in any way structural. (The wages Phillips curve in the UK continues to work as normal, with a natural rate way below 8%.) It reflects in part a significant increase in labour force participation (again quite different from the US), but that is no excuse to allow it to remain high.
So policy clearly has not and is not doing enough to expand demand. If it did do much more, with any luck productivity would start growing again and catch up some of the ground it has lost, but even if it does not this third chart shows us that expansion is the right policy. What has been happening instead is that fiscal policy has been working in the opposite direction, contracting demand, and monetary policy has been unwilling or unable to offset this. It is indeed one of the major UK macroeconomic policy errors since the second world war.
As an illustration of this sad state, the normally excellent Stephanie Flanders describes 0.3% as "good news". A better description would be pathetic. How can an annualised growth rate of 1.2%, in an economy that pre-crisis had a trend growth rate above 2%, and at the bottom of a deep depression, be described as good news! If you think I'm biased, read John Van Reenen.
Having watched Newsnight last night, our problems are all rooted in "psychology" didn't you realise?ReplyDelete
A gentleman on there was trying to chastise Joseph Stiglitz for his "irresponsible" views when Stiglitz said that we shouldn't be so obsessed with immediate and rapid debt reduction, given that austerity had been shown to be so harmful to economies around the world.
He carefully explained that the economic problems were "psychological" with economists not paying enough attention to pschology; then misrepresenting Keynes, quoting 'animal spirits' and 'sponaneous optimism' by neglecting the fact that current policies of rising taxes and reducing public investment and welfare programmes destroy any chance of 'sponaneous optimism', and that Keynes argued against such policies in recessionary times!
He then told us that the recession in the UK in the early 1980s was solved by austerity, adding that the 1980s austerity policy produced a 'strong recovery'. It didn't. Unemployment remained very high for years over the decade.
Turning his expert insight to Europe, the reason behind Spain's, Greece's and Italy's economic woes is, apparently "negative psychology" which has collapsed "business confidence".
Again no mention of austerity policies contributing to the lack of business confidence - its all "psychological".
So snap out of it people; just think positively and all our problems will be over!!
As long as those who decide austerity measures do not suffer their negative impact, we will always have these measures.ReplyDelete
Excactly how big should the deficit go before it is big enough to see it start reducing?ReplyDelete
Keynes answered that when he said “Look after unemployment and the budget will look after itself.” In other words given private sector caution, a biggish deficit will be needed. And given private sector exuberance, a small one will be in order (or even a surplus).Delete
In short: we should ignore the deficit and concentrate on maximising employment.
Don't look at deficits, look at interest rates. The only way deficits can cause problems is via an increase in interest rates. As long as the cost of borrowing remains low, it's a good idea to borrow in the short term, so long as it's spent wisely. The free market will decide when borrowing is excessive, by requiring greater interest, and borrowing should be stopped then as uneconomic.Delete
Implying that policy makers can determine, a-priori, an optimal level of debt or deficit regardless of all the unknown things in the future that might happen, is a bizarrely statist delusion from people espousing reduction in government action. At this time, all the indicators from the broader economy is that investors *want* the government to borrow more.
1) But there isn't a free market in an age of QE and central bank bond purchases.Delete
2) Stop borrowing when interest rates rise ? Fine as a theory but totally impractical in real life. Unless you think you can reduce a 12% deficit to 0% overnight. the last few years of austerity show that eveb reducing spending by 1% a year is tricky.
That the government is itself an actor in the market doesn't mean the market doesn't exist and doesn't provide useful information about what sort of debt is, and is not tolerable. The point overall is that economic policy needs to be reactive to the state of the wider economy, and not preset.Delete
Interest rates wouldn't rise overnight, without warning. Spending cuts are incredibly difficult at this point in time, because we are in the middle of a recession, and any discretionary spending cut is immediately offset by both automatic stabilisers and reductions in tax revenue. They will be much easier once we're out of the recession - indeed we'd lose a lot of deficit automatically, which co-incidentally would be the same point at which we'd expect interest rates to rise.
Even if we accidentally overshoot, the excess deficit we incur would be small in terms of their interest costs, in any case, and we can offset it by continuing to cut spending to incur a surplus for a short period of time.
To add, if QE has any effect at all here, it would be to increase inflation and so the interest rate. That interest rates and inflation remain nevertheless low, means the market is more resilient under this sort of intervention than people think it is.Delete
It's a planned implosion, all the while they tell us all is well.ReplyDelete
1. It is better than expected. That is positive. Like that it is against the European trend. With Europe the less convergence the better.ReplyDelete
However it still doesnot look stable. It simply looks like next Q or the one after that could again be negative or close to that.
Not even to mention that it is on top of a 10%ish deficit. To have a stabil situation that at least will have to be substantially decreased as well.
2. Unemployment. It is clearly (like the growth) against the European trend.
Like the US I would expect that structural unemployment has risen. A move to more higher skilled work. Difficult to see this will be different in the UK. Outsourcing combined with robotisation. UK probably a bit behind the US and pretty far with robots.
But to what? The US figures have a lot of funny stuff in it so might not really answer that question.
My guess would be lower than the US probably more 6.5% ish. Imho in the US it is higher, 1% or so.
As such not that bad seen the world and the European economy.
3. Labor productivity. Imho it might have something to do with deleveraging. Pre-crisis the UK economy grew for a substantial part by structurally overborrowing. Which worked largely as a sort of stimulus (simply a lot of it ended up as extra money spent. Ending up in (also artificially) higher productivity.
There probably was some room for extra borrowing but simply not so much as was taken. So imho the total process will not be completely reversed.
This process looks now to be reversed, but as said not completely.
Assuming a move to better educated/skilled workers it also means that the productivity gap might even be bigger.
4. I also got the idea that demand is the problem. However more on a worldscale than a pure UK scale. The middlegroups wages are under pressure mainly, because of competition from al over the globe. For the UK it means that 2 things colide. Competitiveness and lack of demand.
Competitiveness in the way that in that middle group UK wagescosts still look considerably too high. Difficult to see how to solve that. Should basically be solved on a worldscale.
Meaning also that UK only measures will likely be relatively uneffective.
As I watch the austerity debate, I am reminded of the man with a hammer to whom everything looks like a nail.ReplyDelete
People will debate in favour of austerity or against it, but their hidden assumption is that austerity is the key issue, when in fact it may not be.
There are plenty of hints here. Similar policies in the UK and US have led to very different outcomes. "Real" austerity in the euro-zone has led then to the edge of disaster, but calling the UK's policy "austerity" is a bit of a joke, by comparison.
I think this debate would be improved if people would at least allow themselves to think of other factors producing slow growth in the UK. For example, I've read that growth in export markets that take the majority of UK exports has been slower than World growth. Consumers have been deleveraging, the personal saving rate rose from around 2% in 2007 to 7% today, retail sales since 2007 have been up and down but basically flat over the long run.
Blaming the Coalition for this is tempting, precisely because that is such an easy thing to do, but we really should not imagine that Osborne has a lever in his office that he can push to make the economy go fast or slow. In good times, he almost does, because interest rate changes have some effect, but as economists never tire of telling us, right now the normal mechanisms don't work.
Nor, for that matter, do the abnormal mechanisms. QE1 worked great, but by rescuing the Banking sector. QE2 and QE3 worked to some extent, but mainly by raising asset prices.
If running a fiscal deficit of 6.5% counts as "austerity" and consumers remain on strike, it just isn't as simple as austerity/no-austerity.
Looks like stocks of the unemployed have reached a permanently high plateau.ReplyDelete
Sure hate to see what bad news looks like.
I noticed the comment about unemployment, and that is another possible paradox. The unemployment rate in the UK is 7.9%, which looks high, but total employment gives a different picture, because from a low of 31m in 2010, we are back to a shade under 32m, which is very close to the peak in 2008.ReplyDelete
This doesn't really support the "businesses are hoarding labour" picture, because businesses are hiring workers, and have been at a rate of about 300k a year.
Nor do I think this supports the "declining productivity" picture either, because that would require you to believe that businesses are hiring extra workers to offset declining productivity among their existing workers.
Oh, and by some magic, "declining productivity" results in a record high in GDP/head PPP at $36.5k.
Simon you have made it again.ReplyDelete
Can I thank you from downunder for the quality of your articles.
hopefully more people down here wil read them. Keep it up!
If you are looking to give some policy suggestions for the EZ this is probably the time to do it.ReplyDelete
1. Germany as the last man standing has moved to zero growth. They themselves think it is short term and it might be that way. However the situation is highly unstable so it looks at least as likely that it is the last one to take to the hit to at best moving sideways for a longer period of time.
2. If German growth takes a long or med term hit (or is likely to) there is room for a policychange.
Also there it is no absolute certainty as Merkel is rather focussed getting a balanced budget. But she will most likely give in to voter demand at the end. Again not that it is absolutely certain that German voters will demand stimulus when they move sideways for some time.
3. Anyway there is a decent chance that there will be discussions serious ones (not the moronic ones we see with 90+% of the analyst, that are never are going to happen). It needs a gamechanger to change policies this might be one. If you as a standard analyst first react when it is that far you are likley too late.
4. As the present situation shows when the oil tanker has set course it is nearly impossible to change that again. Simply practical with 17 countries involved, but also politically. Public eye policies are very difficult to change. A politician defended it before and doesnot want to be exposed as an idiot in the public eye, by admitting it wrong.
So basically as said you need a gamechanger (like here Germany and so the whole junkyard going under water growth wise).
5. Influence you get best at the beginning of that process when people still didnot make up their mind. Even close before the final decision is made is much worse as most people have already made up their mind at that time.
6. Basically now looks like a good time to do it.
There are already analysts galore with plans but 90+% look totally unrealistic. Very unlikely to happen.
Seen nothing yet that includes Germany and would fit in the legal set up and the political climate.
7. Their main problem in general that the plans/ideas simply in no way fit in the legal and political set up/context of (in this case) the EZ.
So: ECB stuff let them stay as much as possible within their mandate and take their political limitations into consideration. No use going for a double mandate. Simply will not happen in this crisis.
8. Re Fiscal policies. Take account of the political situation. Identify decisionmakers (real ones not the formal ones) and see how they tick.
9. Try to find an answer and a proper one for the questions that many people will ask. Like mentioned earlier med term effects of high debt ratios (short term it looks ok, if there will be a problem it will be med term).
Take eg care of inflation worries. Simply something that is playing.
Take problems serious even if they are not. You hardly piss off anybody more than with statements that he hasnot got a clue.
This is mainly public domain stuff and not an academic discussion.
Problem with the current analyst proposals, is they are too abstract, not paying attention to important details (which are academically details but politically not), not giving answers to main worries, getting the decisionmaking process completely wrong (and a few more). In a nutshell not fit for purpose. Nearly impossible to use them in poractice and if they are bumping full force into interests of main players. In other words totally unrealistic.
One more thing.ReplyDelete
You have a tendency to focuss completely on your homecrowd. Which is pretty unproductive. They are already likely in your camp. The ones to convince are the swingvotes/real decisionmakers.
In other words it is fine that Messrs Ed agree with you, but it is totally unuseful if Messrs Osborne and Cameron make the decision.
For someone whose blog I've followed for quite awhile now because of its consistently perceptive take on pressing economic issues I'm once again more informed by this visit having read and understood what analysis you've presented. Thank you.ReplyDelete
However I'm also more perplexed; how can someone who so consistently sees through the mist and fog of economics to discern the looming mountain describe Flanders as 'normally excellent'? It beggars belief.
Another interesting graph is to see GDP compared to previous trend rate of growth. graph at top: http://www.economicshelp.org/blog/7391/economics/the-uks-weak-recovery-what-counts-as-success-these-days/ReplyDelete
Could this productivity issue also explain (partly) the poor current account performance of UK since 2008?ReplyDelete
One problem with the productivity discussion is that labour productivity is a derived number, not a primary input. So if hours worked goes up and GDP appears to stall, you will calculate that labour productivity went down. It's not an independent variable.ReplyDelete
Another thing that puzzles me is that during the mini-recession at the beginning of 2012, the BoE's charts 3.11, 3.12 appear to show the participation rising and unemployment falling. Pretty odd behaviour for a recession. Chart 3.7 appears to show the same thing.
And that is confirmed here.
We usually think of an "economic recovery" as a period of above trend growth which returns growth to trend. This was the pattern in the post war recessions. So one way to read the current state of affairs is that the positive growth in 2009-2010 was above trend and returned up to the new long-term trend which is zero growth.ReplyDelete
I'm convinced by those people who point to private sector debt as the problem. High household and business debt are stifling demand as people pay of debt. Chronic low demand leads to saving rather than investing. It makes no sense for a business to invest under current conditions.
Unemployment isn't an observed variable any more, it's a controlled variable. There are probably over a million people who are in unpaid and compulsory placements or else in bogus self-employment. I blug: http://www.harrowell.org.uk/blog/2013/03/03/the-transition-towards-a-low-trust-society/ReplyDelete
The "demand" that's missing is the illusiory debt-financed nonsense from 2000 onwards. This is reality. Brown's pre-crisis "boom" was the fantasy.ReplyDelete
As long as the cost of borrowing remains low, it's a good idea to borrow in the short term, so long as it's spent wisely.ReplyDelete