Following publication of revised GDP figures today, Robert Peston writes:
"a particular school of Keynesian economists may choose to re-examine their contention that only a fool or a liar would say there is a legitimate debate about whether George Osborne's policies were good or bad for the recovery."
Sorry Robert, but this is just nonsense: complete and utter nonsense. This "particular school" has never based their assessment on observing what is still the weakest UK recovery since anyone can remember and looking for something to blame. They based it on what macro theory and the great majority of empirical studies tell us would be the impact of the fiscal austerity that happened. At the conservative end of such assessments is the OBR, who calculate austerity reduced GDP growth by 1% in each of the financial years 2011 and 2012. Estimates of this kind are completely independent of data revisions for one period in one country. We might doubt such estimates if they implied that without austerity we would have had implausibly rapid growth, but for this recovery they do not.
The other point completely missing from Peston's account is that the UK's growth performance even with these revisions is still terrible. As I have often pointed out, high inward migration in recent years means you really have to look at GDP per head to make comparative statements about this recovery. As the ONS point out, this new data still shows that only in this year has GDP per head exceeded its pre-recession peak. Assuming recent data revisions have not changed this, average growth in GDP per head between 1955 and 2008 was about 2.25%. Any recovery from such a deep recession should have seen growth rates well in excess of this. Instead the revised data give us 1.1% growth in 2011, 0.5% in 2012, 1.5% in 2013. Only by 2014 had we got near the long term average growth rate. This is still an absolutely terrible performance for a recovery.
That is not some "particular school" talking. That is just basic stuff that any good economic journalist should point out: see Ben Chu for example. I suspect it would also be what Robert Peston would point out if this was not all so political and the government were not breathing down the BBC's neck. The mediamacro problem is still very much with us.
When I reread my collection of BBC articles for the period 2008-15, some of which I have reposted on this blog in the past, I was surprised how well the BBC political correspondent and ex-Tory Party student Nick Robinson came out in his economic reporting compared to the woeful stuff that those BBC correspondents claiming some sort of economic expertise faired.
ReplyDeleteSince 2008, Robert Peston, Stephanie Flanders, Hugh Pym, and Andrew Neil have had terrible economic crises, and it must be more than just governmental pressure that has produced such concentrated ineptitude.
Alas, they are all of the neo-liberal religion; group-thinkers. Peston has never understood the difference between a currency issuing government and a currency using non-government sector. Hence, government financial accounts are totally different to a households financial accounts.
DeleteThey all think that the government has to tax and/or borrow "money", before it has any to spend. Never stopping to think where the people it taxed or borrowed from, got such "money" in the first place.
Politicians and the IFS peddle the same myth. Liars and fakers the lot of them. Stick with the accountants. http://www.icaew.com/en/about-icaew/newsroom/press-releases/2015-press-releases/fall-in-tax-receipts-hinders-progress-in-deficit-reduction-says-icaew
hang on - the IFS peddle myths? Really?! It's clear you really aren't at all familiar with what they do then. I suggest you actually read their work before commenting in future.
Delete"There is no magic money tree: Parties should stop the pretence (sic) that ‘someone else’ can always pay". (Paul Johnson IFS in the Times.)
DeleteHe didn't tell us that the Treasury of a sovereign fiat currency issuing government, has something that does the same job as a money tree; a keyboard. It can be used to buy anything for sale in its own currency, any time it wants. There is nothing it can't afford that is for sale in its own currency.
The practical limit for sovereign (Treasury) spending is the capacity of the private sector to supply goods and services at the point of near full employment. Total spending from both public and private agents, beyond that limit will induce inflation. The Lawson Boom (eighties chancellor) was a classic case of getting it wrong.
So, if you want a new remit for the BoE, it should be full employment AND inflation, just like the US FED. That is if you insist on using a "monetary" solution, rather than a more surgical "fiscal" solution.
Even the revised figures show Osborne's austerity breaking the momentum of Darling's recovery-but it would be interesting to check out how much revisions such as adding illegal activities figure in the revisions and how reliably such tenuous data revisions can be chained anyway. Of course, as S W-L says, the real story is in GDP per head. Given the public threats, and how many more in private, is it any wonder the BBC is terrified of this Government?
ReplyDeleteThe point about GDP per capita being the relevant metric is one I have been making (on twitter) for a long time. Good to see it's finally gaining some traction (albeit for the purpose of claiming austerity is bad, which is an assertion that I cannot (and the majority of the evidence does not) support.)
ReplyDeleteHave a look at Neil's Q2 Sectoral Balance chart and his comment: "We'll see next quarter whether the household debt continues to grow as required to get the 'surplus' the government is insanely obsessed about, and if the pattern of corporate sector saving and household sector indebtedness continues to follow the previous pattern."
DeleteFlow of Funds is a hot topic at the Treasury but don't try sending them suggested chart formats because its computer security will block them. Neil's version tells you the salient facts. http://www.3spoken.co.uk/ . The government deficit is basically paying for the imports at the moment and the household sector is borrowing to supply the savings of the non-financial corporations.
Austerity is evident in increasing household debt as government spending is being withdrawn. Keep in mind that the blue bar is supposed to go above the 0.00% line before the end of this parliament. Fat chance of that happening IMHO.
So. who is going to pay for the imports (the rest of the world red bar). Foreigners are amassing train loads of Pounds Sterling in their UK bank accounts; how many Chelsea mansions can you buy? Which other countries take Pounds Sterling?
They could exchange it for their own currency and take it home to pay there own workers. But that would force down the value of the Pound and make the stuff they are flogging you expensive in Pounds, and you would stop importing there exports.
I do wonder whether striving for impartiality means that the impression is given that there are two equal and opposite sides to an argument, when in very many cases, one side is just wrong.
ReplyDeleteI have a modicum of sympathy with Peston's situation (not his views). When I first started work my boss, quite a well known economist in the City, advised me never to get into a debate about economics with non-economists, which I thought was a really odd thing to say. It quickly became clear. I specifically remember a meeting twenty years ago where a senior banking exec and I had one of those debates over a very trivial issue relating to prices and supply and demand, it was econ 101, chapter 1, page 1. The senior exec was stridently confident in his mixed up views.
ReplyDeleteThis was the first of many such instances including a classic when another exec tried to tell me that the World Bank was where the UK govt was getting its deficit funding from, apparently he hadn't made the connection with gilts.
The point i'm trying to make is that if the people that employ you have an agenda (likely) or have limited understanding of economics (almost definite) it gradually wears you down. So in the end, if they are paying your salary, you just end up talking the stupid bo**ocks they want you to. That's why I don't believe Peston believes in what he wrote, and your conclusion about the politics is right. If he does believe it then he's gone nuts.
Anyway, had to get that off my chest. Please keep up the good work with excellent blogs and good luck with the Labour policy thing.
Oh I dunno. Krugman and SWL have issued quite stinging criticisms of Peston in the past. It's not hard to imagine that what looked liked a way to get a jab back floated past his desk and...
DeleteI hope, as per BBC editorial guidelines, he's offered Krugman and SWL a right to reply.
Peston's MO seems to be to talk to his network of contacts in business and politics (but not academia) and then report. Which is fine as far as it goes. But economics is also a technical subject - and it really hurts the quality of the conversation if that component is missing.
Anonymous: That's very insightful for those of us trying to figure out where all the nonsense comes from. Thanks for sharing.
DeleteThis all underlines what the Master said all those years ago
Delete“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back” (The General Theory of Employment, Interest and Money)
@ Jason – your point about getting a jab back occurred to me when I read Peston's article. But why pick a fight on such ludicrous grounds? He's left himself open to ridicule. Is that a deliberate choice on his behalf?
DeleteHere's my wacky theory – he wants to write left wing stuff, employer says no, so he writes right wing stuff that is just bonkers. It works for me.
That right wing stuff is widely disseminated and widely believed. People make important decisions like what policies to pursue and what government to elect based on it. If you thought it was bonkers, why would you add to that?
DeleteSurely the simplest explanation is that he buys the 'I've got very serious things to say' shtick and thinks he's being mainstream, sensible and moderate.
"never to get into a debate about economics with non-economists"
DeleteAnonymous I know exactly what you are talking about. I got into a not terribly pleasant discussion with a Goldman Sachs partner once who said that large capital account surpluses were caused by large current account deficits. Impossible to explain that accounting identities do not reflect causative relations and tell us nothing about the mechanisms involved. Mind you he studied economics at Oxford as an undergraduate, I hope that is not reflective of the teaching there and things like Says Law types of fallacies of composition are properly explained.
Bearing in mind there have been changes recently to how GDP is calculated...are these changes now being read back into the old figures?
ReplyDeleteSadly I am a non-economist so according to the ideas of the last commenter I probably shouldn't be posting but these possible statistical anomalies interest me.
Anyone have any ideas on this matter?
https://www.linkedin.com/pulse/ultimate-paracord-survival-kit-review-navin-kumar
ReplyDeleteWith 1 in 5 Americans suffering mental illness(es) and the class of psychiatric drugs the 2nd-most prescribed for patients of all stripes, a basic knowledge of these pharmaceuticals may come in handy. Perhaps you, a friend or a loved one may benefit from knowing and understanding psychotropic medicines...
Steady. I think accusing Peston of being clinically insane is going too far.
DeleteI think Simon is somewhat guilty of deliberately conflating two issues - poor productivity growth, and unemployment levels - to exaggerate the apparent impact of George Osborne's deficit reduction on the rate of 'economic recovery'.
ReplyDeleteSince 2008 productivity growth has been poor, and I think (without checking) negative at times; the reasons for this are not well understood. This is a different issue to the level of employment, making 'economic recovery' a somewhat imprecise phrase. Indeed I believe it is this poor productivity growth that is largely responsible for the poor GDP growth figures that Simon quotes, because in terms of job creation, the recovery has been reasonably brisk.
I think it is possible to argue that there were other ways' economic recovery' might have been hastened- such as enforcing further recapitalisation of banks and building societies; more aggressive QE, or negative interest rates, and it is a fair comment that 'a school of macro-economists' were fixated on the option of more expansionary fiscal policy.
There are a number of studies showing that recessions tend to reduce productivity (or slow productivity growth), often attributed to the reluctance of many employers to cut manpower as fast as demand falls, perhaps because of the difficulty in increasing production once demand recovers.
DeleteThat the decline has this time been much worse, and productivity has failed to recover as output has risen, is in my view at least partly due to the direct and indirect subsidies to labour brought in with the praiseworthy intention of slowing down the rise in unemployment. These subsidies include the obvious, like working tax credits, and less obvious like increases in pension age or reduction in union bargaining power.
I am surprised that the impact of these various measures has never been highlighted in discussions on the productivity problem. Of course, it is legitimate, and perhaps correct, to argue that the benefits of waged work are such that subsidies are appropriate, but we cannot expect them to be cost-free in terms of output per worker or per hour.
@ David Sweet.
DeleteGreat comment
I too was shocked at the simplistic and economically illiterate point being made by Peston in his article. Even if GDP growth was higher than thought as the revised figures suggest, in no way does it imply (and one cannot conclude) that Osbornes policies were not a significant and costly drag on growth. The revised GDP growth figures provide no indication as to whether growth would have been higher in the absence of austerity policies. As SWL rightly points out, the numerous empirical studies which address this point (GDP growth with/without austerity policies) largely find such policies have had a significantly negative impact. As others also suggest, Peston's article appeared to me to be a snipe at SWL and others, and it seems as if the political capture of the BBC is almost complete.
ReplyDeleteA more general comment:
ReplyDeleteWe have learnt from bitter experience that initial data, particularly on output and GDP, are subject to sizeable revisions. How reliable are these revisions? Is there a point at which we can be pretty certain we know what happened - two years ago? five years ago? ten years ago?
This is spurred by Peston's qualifier to his 'gotcha' when he notes that despite the better growth figures now announced, tax revenues failed to respond. This suggests either that the growth was not in fact as much better as now stated (on the assumption that tax receipts are much more reliable than GDP estimates) or that Corbyn and his advisers are right in their charges that the current government is in fact being much softer on (wealthy) taxpayers than their public statements suggest, and there is more to be brought in than generally acknowledged.
One of these statements (possibly both) should be true unless there is a third explanation that has not yet emerged.
I largely agree with your rebuttal of Peston's article. Particularly "I suspect it would also be what Robert Peston would point out if this was not all so political and the government were not breathing down the BBC's neck"
ReplyDeletePerhaps that's individual optimization in operation... ?
One question I raised (twice now) on Peston's blog is :
"Is it true Michael Kumhof (co-author of "the Chicago Plan Revisited") has joined the BoE from the IMF? Is the IMF no longer mainstream"?
I would be interested to understand what the non-mainstream economics is which drives such apparent drivel from Peston, et al. Is #mediamacro still in a pre-Minsky world ?
The fact that Peston is up for the job of Political Editor of ITN and they would not want a lefty in the job is, no doubt, irrelevant.
ReplyDeleteIt would explain a lot, or perhaps he is considering Sky which has also had some notorious interviews of late. One aspect of the social context that is important to understand here is also the connection between business/financial news and the financial sector. Very often BBC and even CNN journalists and particularly business presenters end up working for City/Wallstreet firms. Naturally they say what they want to hear.
DeletePreston writes
ReplyDelete"In the circumstances of the British economy growing relatively strongly and being powered by consumption, it is intriguing that we didn't suck in more cheap imports - and also that overseas buyers did not apparently regard our exports as poor value for money."
I am generally not convinced by Preston, but I think the above is the key point he is making. If increased demand is not leading to large increases in imports, that suggests there was some positive impact from austerity policies - ie policies designed to improve the competitiveness and efficiency of British industry. This will indeed be good for the future. I am not convinced, however; I think historians agree that Thatcher's tight money and high pound policies did not improve the efficiency of British industry but hastened much deindustrialisation and we lost large parts of the industrial base altogether making manufacturing led recoveries difficult.
However, Preston's key point needs to be addressed.
Is GDP per head the right measure? I'd look at GDP per hour worked. It has been plummeting since the 1970s and gives a much better picture of the problem.
ReplyDeleteIn the words of G.B.Shaw, “All professions are conspiracies against the laity”. I.e. once you’re an established member of a respectable middle class profession, it takes catastrophic levels of incompetence to dent your career.
ReplyDeleteCorrect me if I'm wrong but a recovery is defined as ABOVE trend growth to make up ground lost in the recession. As such, we have yet to see a recovery.
ReplyDeleteAFZ
GDP per head is pretty dismal. But worse than that is the Net National Disposable Income per head (NNDI). The ONS says:
ReplyDelete“NNDI [Net National Disposable Income] has behaved somewhat differently to GDP, particularly since late 2011. NNDI, which represents the income generated by production that is payable to UK residents, has remained broadly flat since Q1 2012. In Q4 2014 NNDI remained 5.1% below its pre-economic downturn level, this is compared to GDP per head which was 1.2% below its pre-economic downturn level in the same quarter.”
I am puzzled NNDI doesn't get much of a mention anywhere. So I wrote a piece on this myself: http://www.blog.rippedoffbritons.com/2015/05/graphs-at-glance-gross-domestic-product.html
Speaking of data revisions, I believe Denis Healey might not have gone to the IMF for a loan if the data had been more accurate.But the bigger question is why he needed to go to the IMF at all. My understanding is that nowadays the UK should never need to go the IMF because it can borrow as much as it likes in its own currency simply by issuing gilts. What was it back then that prevented this approach? Perhaps Healey wanted the loan so he could use external discipline from the IMF to force through economic policies unpalatable to his party.
ReplyDeletePeston often gives the impression of someone who knows all of the words, but none of the meanings, but isn't that normal for a mouthpiece? His latest article must rank as one of the worst of his biased pro-Government propagandas. It does make one wonder if he has turned into one of those writers who only writes what his large band of followers want to hear.
ReplyDeleteI note Peston will retreat to Political chat at ITV rather than Economics. I suspect he will be more at home in the political sector amongst those who know the words, but not their meanings. So many of his writings over the last few months could easily have been written by Conservative Central Office. His father was a Labour Peer too. One has to wonder who the BBC will replace him with - perhaps someone who understands Macro and is more willing to critique Government policy? Some hope!
ReplyDelete