The level of the government’s budget deficit is not the most
important macroeconomic problem facing countries today. In the UK, for example,
the fact that labour productivity has been stagnant since the recession is
potentially far more important. If we fail to regain this lost productivity
growth in the next few years, the average UK citizen will be substantially
poorer as a result, in terms of consumption of both private and public goods
and services. If the budget deficit rises by a few tens of billions,
leading government debt to eventually rise or fall by even ten or twenty percentage points of GDP, the consequences will be negligible by
comparison. To misquote George Osborne, the world will not
fall in.
Yet mediamacro presents a very different picture. When Labour
leader Ed Miliband forgot to mention the deficit in his party conference
speech, the media could talk of almost nothing else but this ‘huge gaffe’. When
Prime Minister David Cameron said nothing about the productivity slowdown in
his party conference speech, no one in the media bothered to even mention this.
One of the fall back positions of the media on issues like this
is that they are only reflecting popular opinion. In the case of the deficit it
would hardly be surprising if this were true. If people are not told otherwise,
they are bound to think about the government’s budget as they think about their
personal budget. The Eurozone crisis was in the news constantly for two years,
and the number of people explaining that the Eurozone was special because of
the ECB was dwarfed by those who suggested it could happen here. A popular fear of
market reaction is also not surprising as we are still suffering from the
impact of the financial crisis.
But is mediamacro reflecting public opinion? Here is a question
that YouGov recently asked in a poll for the Sunday Times (full poll results here, HT Duncan Scott).
Thinking about how the next government handles the issue of
Britain's deficit, which of the following best reflects your view?
A.
The next government should prioritise reducing the
deficit, mainly through making cuts to spending on public services
B.
The next government should prioritise reducing the
deficit, mainly through increasing the level of taxation
C.
The next government should not prioritise reducing the
deficit, and should spend more on public services or cutting taxes to try and
promote growth instead
(A) could be described as the Conservative view, (B) as maybe
the Labour or Liberal Democrat view, and (C) is the position taken by some nutty
academics. Of those that chose one of these three options, 27% went for option
(A), 25% for option (B) and 48% for option (C).
So around half said not only that cutting the deficit should
not be a priority, but also agreed that fiscal policy should be used to promote
growth. For these people, none of the major political parties represent their
position. Of course Labour’s positioning could still be shrewd politics. It may
be correct in thinking that this 48% will still prefer to vote Labour because
they intend to reduce the deficit by (a lot) less than the other parties, but
by pledging to make cutting the deficit its first
priority it may attract some of (B), and also get mediamacro off their back.
The other implication is that maybe forgetting to mention the
deficit is not, for many people, quite the gaffe that mediamacro thinks it is.
Of course a large part of the UK media decided it was a major gaffe for purely
political reasons, as another stick to beat Ed Miliband with. If the
non-partisan part of the media went along with this because they thought
reducing the deficit should be the
top macroeconomic priority, they are simply wrong, as most economists will tell
them. If they went along with this because they thought they were just
reflecting public opinion, then maybe they should think again. If mediamacro
continue to obsess about the deficit, the only conclusion to draw will be that
we have a media consensus driven by a partisan press.
Some nutty academics, and a few financial bloggers too.
ReplyDeleteLet's hear it for nutty academics and the few financial bloggers we have in the UK. We should form a political party based on MMT as per Bill Mitchell at the University of Newcastle, NSW Australia; and the MMT team at University of Missouri at Kansas City, USA. (Is there a UK University into MMT ???)
DeleteThe standard of economic reporting (distinct from "markets" reporting), in the UK is abysmal. At it's lowest, first thing in a morning with Radio5's "wake-up-to-money". Not one of them has any idea how a sovereign floating fiat currency economy works; or, that it is the system we have been using since 1971. The "mediamacro", like the laissez faire, neo-liberal Conservatives, still think we are on the Gold Standard and the deficit has to be funded with bars of Gold.
PS. Frances, where is it written that "think tanks" can't be political? If, as Simon says above, 48% chose Option C, that is a lot of potential donations.
regards, Acorn.
Good Day,
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Expecting the media to focus on productivity is daft as there are no substantive policy differences between the parties in this regard. I don't think anyone has any substantive suggestions on what to do (save the usual guff about supply side reform). Indeed, I have not read anything by you on this matter either.
ReplyDeleteIf you do have any suggestions on major changes we should be making to improve productivity, I would be very interested in them.
There is a major difference between the parties on fiscal policy: which is why the media asks about it. Now, I think the Tories position is ridiculous in economic terms, but that it is adopted for political reasons. They know full well they will never be in a majority government in a position to deliver this.
Maybe Balls and Miliband should be arguing that the deficit doesn't matter very much. It isn't really Robert Peston's fault that they don't, however much you may want it to be. It is the attack line that they would give the Tories that drives the Labour approach.
On polling, we can all cherry- pick them. Look here for the ComRes poll on whether we should go back to public spending at 1930s levels
http://comres.co.uk/poll/1346/itv-news-autumn-statement-poll.htm
We should judge what people really think on how they behave, not on what they say. In relation to both Osborne as Chancellor, and the public in voting, there is a large gap.
1) You have made this point before, and it really will not do. The media did not berate Miliband on not mentioning the deficit because of policy differences, they did it because (in their view) the deficit is really important. What is in fact really important is the fall in living standards that most people have experienced, which is the productivity issue. Labour talk about this all the time, but it is apparently fine for the PM not to mention it.
Delete2) You may cherry pick polls, I do not. I had not seen a poll before which asked this question, and I thought the results interesting. But your penultimate sentence should really be addressed to the media, who frequently use polls as a justification for the line they take.
1) No. They did it because he forgot it. If he hadn't issued a text of his speech with a passage on the deficit, that he then forgot because he was showing off without a teleprompter, nobody would have mentioned it. It was the forgetting it which looked like a Freudian slip, and hence revealing. Notice that the other item that he had in the text but forgot to address was immigration. That is why the media latched on to it.
DeleteIn each of his more recent set piece speeches, Miliband has used a prompter. I am prepared to bet that in future he always does so.
Of course Labour talk about the 'cost of living crisis' all the time. Unfortunately, they don't really have any policies to deal with that, unless you think an energy price freeze in a time of energy price falls, or a minimum wage promise for 2020 which is around 12p higher than the level it would get to anyway count as such.
It may be that the cost of living crisis is caused by the fall in productivity, but they are not synonyms, nor treated as such by Labour.
2) The media base stories upon all kinds of silly things, like the size of Kim Kardashian's bum. They do so because in the world in which they operate, this is what there is a market for. There is no 'entity called the media to which I should address any complaint, anymore than there is an entity called the weather that I can complain to if it rains.
"On polling, we can all cherry- pick them. Look here for the ComRes poll on whether we should go back to public spending at 1930s levels"
DeleteWhich you seem to do here. Because what is remarkable is the public support (33%) for the rather abstract "back to 1930s levels" but they are much more heavily opposing (52%) the more precise "cutting non-protected budgets by 40%", when those two questions are more-or-less equivalent.
As ever, people want inconsistent things. Higher spending, but lower taxes. Cuts in general, none in particular. And so on.
DeleteThat is one of the reasons why representative democracy is better than direct democracy, and why people trying to read too much into polls are being foolish.
I'd agree with you about the polls. Far too much is made of abstract questions like "who would make the best leader" and far too little is made of concrete questions. In defence of Simon, he is quoting a poll on very concrete questions.
DeleteLiving in Switzerland, which is perhaps the most developed form of Direct Democracy, I can say that it keeps taxes down, unemployment down, spending down but living standards and quality of life up. When money is spent, it is not penny pinchingly allocated to 90% of the cheapest tender with huge subsidies and rewrites, redesigns and maintenance needed afterwards, but on the project that over the long term produces the best amortised annual costs, and is often funded by debt.
DeleteRepresentative Democracy as found in the UK results in Governments changing based on the opinions of about 150,000 floating voters spread across the very few Parliamentary seats that actually change party alliances from one election to the next. Most British Constituencies consist of Safe Seats where the choice of MP is down to a small committee of the local Party that may mean less than a dozen people are actually involved in deciding who the MP should be; the electorate votes mostly for whoever Represents the party they always vote for. And that's the problem, in the current UK system of Representative Democracy, the MP is more active in representing his Party than he is in representing his voters. Which might not be so bad if Parties genuinely followed the views of their voters, but they care more about the needs of their financial backers.
If anything, I would say Switzerland cares more about its financial backers and there is little difference between the major parties on the deficit.
DeleteUntil Labour leaders take Osbourne to task on his preoccupation with the deficit at the expense of productivity and growth, he will have a continuous open goal, given his friends in mediamacro.
ReplyDeleteI’ve got the solution to all this: rename the national debt the national giraffe. Then everyone (including Financial Times leader writers) will get worried stiff about the length of the giraffe’s neck and how many spots it has. That’ll do far less harm than worrying about the deficit and trying to reduce it. In fact I think I deserve a Nobel prize in economics for that idea.
ReplyDeleteCan't understand this fetish with productivity.
ReplyDelete( See GDP by Diane Coyle)
''So on this definition, productivity is the amount ...of GDP per person hours worked. This is fine for washing machines or cartons of breakfast cereal. But only a small part of GDP in countries.. consists of physical products. For all of us who are office workers, it will be obvious that measuring our productivity will be hard.''
She goes on to imply that its measurement is a matter of convention.
The decline in living standards that most people have experienced is directly linked to the stagnation in productivity, which is why it matters. No fetish.
DeleteNo disrespect, as I think this blog is great, but would you, please. explain how to us non economists.
DeleteA previous blogger asked, 'When have you seen an equation on this blog?'
Now might be a good time to start. eg.
L=f (x,y,z..)
where
L is living standards.
OK. The GDP identity is Y = Profits + wages x employment
DeleteDivide through by GDP to get
1= Profit share + real wages x employment/output
Employment/output is the inverse of labour productivity.
So if the profit share is constant, each 1% increase in productivity leads to a 1% rise in real wages.
Over the medium term the profit share does tend to be constant. An exception seems to be over the last decade in the US, where it has risen.
“If they went along with this because they thought they were just reflecting public opinion, [...]”
ReplyDeleteOf course the BBC has no business just reflecting public (or mainstream political) opinion anyway. Especially not where there is a perverse consensus opinion rendering 'balance' ineffective. Given their record on certain economic and social issues in recent years I think something like this might be needed.
The academics should present a credible long term view (+25 years) on deficits, increasing debt and productivity.
ReplyDeleteFor example, I agree that the 3% deficit rule in the eurozone area is rather arbitrary. The main rationale seems to be that this 3% is in line with expected long term economic growth and therefore sustainable.
But this was based upon views before the financial crisis and that a country like Japan was an anomaly. These days however the Japan scenario seems more and more plausible for aging European countries too, and the 3% economic growth looks unlikely for a country like Italy.
If the world has changed, what does this mean for long term economic policy regarding sustainable deficits, debt levels and living standards?
If economists can't come up with credible answers that go beyond we don't know what will happen to countries that are in moving to the Japan scenario, than don't be surprised that the public, politicians as the media will remain concerned about debt levels.
The same holds true for the immigration debate, some claim immigration is good as it means higher GDP growth, others claim it decreases living standards because it pushes wages down, and there are people who claim that immigration is not a long term solution because the immigrants age too and you would need perpetual immigration which is not sustainable.
Unless the public gets better answers, they will vote for better safe than sorry policies in my opinion. That means voting against immigration and in favor of lowering debt.
This misses the point. You do not worry about deficits and debt when interest rates are at their lower bound. There is plenty of time to make these decisions when they are not, and when monetary policy can offset the impact of any fiscal decisions. This is a basic principle of macroeconomics, and requires no forecasting. It involves being safe rather than sorry. Nor is it difficult to understand. It just needs more people to be exposed to the logic.
Delete@Anonymous - I agree that Japan may not be an anomaly, but your views on immigrants sound more like fears to be honest. From my experience working amongst immigrants, and being one myself, I can tell you they do not all retire in the host country. About one third come for short term financial gain of less than 5 years. Of the rest, about half to two thirds come for long term financial gain, but retire back to their home countries. Only a small minority actually 'go native'. This makes it very good for the host country which collects their National Insurance money but which doesn't have to fund their expensive care costs in retirement.
DeleteI agree with Anonymous that economists have not produced credible answers for “the public, politicians and the media” who are concerned about “debt levels”. And certainly I don’t see the macromedia brigade being convinced by Simon’s point about “monetary policy can offset the impact of any fiscal decisions”. That’s for the following reasons.
DeleteSuppose there’s excessive fiscal stimulus, i.e. government borrows and spends too much. Interest rates and demand would be excessive. So what can monetary policy do? It can cut interest rates, but that makes demand even more excessive. Alternatively, it can raise interest rates so as to cut demand, but that involves inducing the private sector to hold even more government debt. I.e. in effect the national debt rises. Problem not solved.
I suggest MMT analysis is better at allaying macromedia’s fears. In particular:
As regards the fear that a rising debt can lead to catastrophy, MMTers often answer that by pointing out that the national debt is an asset as viewed by the private sector, thus the higher the debt, the higher private sector spending. Thus the debt is self limiting.
As regards interest on the debt, a country that issues its own currency can pay any rate of interest on its debt it likes, as various MMTers have pointed out: at the extreme, such a country can QE the entire debt and thus pay no interest at all. If that proves excessively stimulatory / inflationary, that can be countered by raising taxes and unprinting the money collected. And as long as the latter inflatonary and deflatonary effects are equal, there’s no effect on GDP.
Macromedia can understand that, I suggest.
How about for starters, getting people to understand that there is no such thing as "the" national debt, only hundreds of thousands of national "debts" that we have been paying off easily when they come due for hundreds of years and will continue to pay off easily when.they come due for the next t few hundreds of ears?
Delete''So around half said not only that cutting the deficit should not be a priority, but also agreed that fiscal policy should be used to promote growth. For these people, none of the major political parties represent their position. ''
ReplyDeletethe question did also suggest to cut taxes to promote growth instead of fiscal spending
('and should spend more on public services or cutting taxes to try and promote growth instead')
ofcourse public opinion wants higher growth.
What are the proposals of the political parties how to achieve this growth? And does the public believe these plans?
If Labour would claim: we are going to spend more in order to achieve higher growth, do you think this would attract more votes? I doubt it, as Labour already has the image of being big spenders.
"fiscal policy to promote growth" includes tax cuts as well as spending increases
DeleteHi Simon
ReplyDeleteIf asked, would you be prepared to go on TV or write in the press to try and get this message across?
Doesn't the fact that 48% prefer C undermine the argument that 'mediamacro' is a problem? Will these people not now just vote Labour (as the party perceived, and continually portrayed, to be softer on deficit reduction)?
ReplyDeleteI was chatting to someone this evening who said "You can tell Osborne and Co are out of touch with ordinary people because they are the only ones who want to increase the country's mortgage payments when times are hard but interest rates are low." I'm not sure if his comparison is completely valid, but for the average man in the street a bit of 'handbag logic' seems to be easier to get a grip of than macroeconomic arguments.
ReplyDeleteIt also may be, to an extent, the opinion of elites, including successful and influential members of the media, who care less about the safety net.
ReplyDeleteA thought that I had recently is this:
The US is so far to the right of Europe, yet Europe, especially continental Europe, went much more for austerity and hard money! Partly this reflects the US political system and power at the time; how much a party currently can block, who holds Congress, and so on. But my thought is this:
There's a lot of evidence that how strong a safety net is, and how strong social programs are, is influenced by how homogeneous the citizenry is. In the US, you really see this, where the right very successfully implies the idea that all, or almost all, social spending is going to "those people" who are lazy and just want to sponge off of you.
So, how much of the successfulness of the push for austerity in continental Europe is due to unification and the Euro? Where Europe's right can now claim we have to cut, because "those people" in those other countries are wasting our money and bringing us down. Could unification really cost Europe in its social safety net and public investment? I mean in the US it's getting to the point where the right is just gutting, gutting, public investment, cutting Heckman-style early human development to close to nothing in many states, breaking up roads into medieval gravel – Talk about hurting long run growth! It's frightening. See, for example, here, from today's New York Times:
http://www.nytimes.com/2014/12/15/us/sam-brownback-tax-cuts-not-set-in-stone-as-kansas-faces-budget-shortfall.html
Could unification profoundly cut public investment in Europe? The costs and risks look pretty scary, and "Unification" seems to have really hurt true unification of the peoples of Europe.
Isn't it 'the sky will not fall in'.
ReplyDelete'The world will not fall in' doesn't seem to make sense.
Labour seems to get it to some degree. They are not actually promising to reduce the overall deficit, only the current budget deficit. They're ok with running a deficit to pay for investment. The conservatives have been pointing this out recently - look look they want to borrow to invest! How insanely irresponsible is that!! Also I notice the conservative media line is switching from reducing the deficit to reducing the debt. They seem to be trying to merge the two ideas in the public's mind.
ReplyDeleteLies, damned lies and statistics.
ReplyDelete1: Only 36% of those who gave a view said not to prioritise cutting the deficit, but favoured more spending or more tax cuts. In this instance using 48% as your headline figure is pretty close to hyperbole, it's not an election but policy being discussed here.
2: Why assume that all of the 36% favoured more spending rather than tax cuts?
3: Excuse my ignornance, I am only a part time reader of the column, but can you show me where you have supported tax cuts as fiscal policy? The entries I have read always favour more spending.
What I said was "Of those that chose one of these three options, 27% went for option (A), 25% for option (B) and 48% for option (C)." So why is that misleading? And where did I say that this 48% favoured more spending increases rather than tax cuts? Perhaps you should try commenting on what I actually wrote, rather than what you imagined I wrote.
DeleteThe 48% figure comes from cutting out the neither and don't knows, doesn't seem all that unreasonable.
DeleteOn tax cuts vs spending, I think that the option of either is implicit. SWL's analysis is basically that we are in a liquidity trap type situation so that we need to shift the IS curve to the right. Obviously this could be done through either higher spending or lower taxes.
Personally I prefer higher spending because I can see the effect of cuts and don't like what I see.
Precisely true, broadly caught out.
Delete"C" is also a very biased option, ie leading the witness. If "A" of "B" also had the rider "and to try and promote growth" maybe they would have won more votes.
And what is your answer to my question 3?
Still waiting for your explanation as opposed to assertion that monetary policy ceases to work at the ZLB.
That is because A and B do not promote growth, silly. On (3), read some of my past posts e.g. http://mainlymacro.blogspot.co.uk/2012/09/zero-lower-bound-denial.html
Delete"A" has been accompanied by a good recovery in the US economy, while still at your ZLB. How do you explain this inconvenient truth?
DeleteI have also discussed this in an earlier post - you can find it yourself this time.
DeleteI have spent 30 minutes searching for blog entries on the "US economic recovery" and found no post from you on this success story. All I can find is plenty of hyperbole about austerity and how it will hobble the recovery. Perhaps it has hobbled the recovery, but why has it not stopped the recoveries or caused further recessions?
DeleteYou are never so bold as to make a prediction that austerity will prevent a recovery, but then I struggle to find you making any testable predictions, despite all your bold and confident critiques of everyone in power.
The simple fact remains that the UK and US are at the ZLB, have austerity to varying degrees (the US a lot,the UK a bit), but are recovering well.
A valid answer is that QE is not the best monetary policy but has been effective at the ZLB. Targeting Nominal GDP Forecasts would have been far better. Those countries with a (very) weak variant of NGDP Forecast targeting, like flexible inflation targeting have done better than those without, and haven't hit the ZLB.
Arguably recovering well now
DeleteJames in London - not very good at google :-) http://mainlymacro.blogspot.co.uk/2014/06/the-us-and-eurozone-2012-3.html
DeleteJames, it's a little out of date now but I think Jonathan Portes' historical graph provides a bit of context to the term "recovering well".
DeleteAnonymous and Andreas. Thanks!
DeleteStill very odd of S W-L to not mention QE in the US in that June 2014 piece as at least potentially responsible for the personal balance sheet correction and subsequent fall in the savings ratio. The piece certainly begged that question.
I see I am flogging a dead horse as Mark Sadowski had already tried to bring monetary policy deniers (at the ZLB) like S W-L to some sort of sense with a response linked to in the comment section.
People understand that increased productivity is good for wages or profits. However, for example, how would politicians articulate the currentn failure without appearing to be critical of the British worker? That is not to defend Labour for its craven economic policy. But some events are like massive stones thrown into a political pool, and the politicians will not go against the waves. Without comparing them, peace dominated politics in the inter war years as debt seems to dominate now. It is not a question of economics?
ReplyDeleteThis is a remarkably generous response from Simon, considering that Peston appears not to have understood much of the criticisms made by Simon and Paul Krugman and continues to argue against them, despite his admission that he's only a journalist with not much knowledge of economics, in particular:
ReplyDeletea) he still thinks insolvency can be an issue for the uk, whereas S & P explained why it is not, for a country with its own currency and CB
b) he cites the fact that better growth prospects for the uk have not led to rate increases as a counter-argument, whereas as S&P explain, it is the expected path of short term rates that is significant, not growth forecasts, and of course, with inflation still falling and little pick up in wages, there seems little prospect of a B&E rate rise any time soon.
oops, sorry, this was a response to http://mainlymacro.blogspot.co.uk/2014/12/robert-peston-mr-market-and-me.html
Delete