GDP Growth Announcement

Every three months or so, the Office for National Statistics releases the numbers for Gross Domestic Product (GDP) for the previous quarter (three month period). Today it released its first estimate of what GDP was for the UK in 2010Q3 (the third quarter of 2010) which is based on about a quarter of all the information available to them.

Next term we'll talk quite a bit about GDP but the BBC's economics section has quite a nice description of it if you're not familiar.

In 2010Q2 the UK economy grew by 1.2% which was surprisingly high, but it is often the case that as an economy starts to emerge from a recession that it grows strongly. Growth in 2010Q3 was expected to be much slower with many pundits expecting about 0.4%. Today though that number came in at 0.8%. It means that for 2010 as a whole, growth is likely to be just shy of 2%.

Does this mean the economy is up and running and all is well? As the BBC article makes clear however, there are other reasons to be a little bit pessimistic about future growth: Retail sales fell in September, and house prices are falling (these are seen as a barometer of economic activity). Furthermore, the impact of the Coalition government's steep spending cuts will start to take effect soon, something else that is likely to depress future growth.

What do Central Banks do?

I'm lecturer for second term (econ101b), which is macroeconomics. Currently Martin Jensen is lecturing you on microeconomics, and so when I post I'll be pointing you towards macroeconomic events and news and how that links in to what we'll look at next term.

One thing we'll ask next term is: What do Central Banks do? They are always in the news, particularly around Monetary Policy Committee (MPC) meeting times in the UK. The Bank of England is the Central Bank for the UK. In the US, a system called the Federal Reserve System operates in place of a single Central Bank, and there are Federal Reserves of a number of regions in the US - Minneapolis, New York, Philadelphia, San Francisco, etc. But they all hang together under the Federal Reserve, naturally headquartered in Washington. Their equivalent of the MPC called the FOMC, or the Federal Open Market Committee.*

But what do these Central Banks actually do? Generally they are given responsibility for monetary policy in most economies: The MPC sets interest rates to achieve an inflation target, the idea being that if inflation is kept low and stable, the macroeconomy will stay roughly in order. In the US, the objective of the Federal Reserve is a little wider than just inflation and includes the wider macroeconomy.

There have been many criticisms over the years about whether targetting is the right thing: What's the right target? Why just inflation? Why not asset prices? What is the effect of different targets? An alternative school of thought, pushed more than most by an economist called Scott Sumner, is that Central Banks should target nominal GDP (that's GDP in the actual prices we pay before any correction is carried out for inflation).

It turns out that in its most recent meeting the FOMC hinted it may well begin such a targetting exercise. Next term we'll consider much more what this actually means, other that at the basic level it means that the Federal Reserve would target a particular level of nominal GDP (NGDP) and hence choose interest rates and other monetary tools in order to achieve this aim, just like currently the Bank of England chooses interest rates to achieve 2% inflation.

*: Despite the prevalence of Wikipedia links in this post, the advice is: Don't rely on Wikipedia. Anyone can edit it and hence put false information in there. Rely instead, if you need to for referencing, on something like the New Palgrave Dictionary of Economics. If you refer to Wikipedia in any assignments you hand in, you'll likely incur the wrath of your tutor!

Economists and Immigration

There's little doubt that one of the major news topics of recent years has been immigration.  It was an election issue, and will no doubt be a recurring issue.  Ed Balls is chipping in as he bids for the Labour leadership.  Politicians are falling over themselves to sound more and more like Joe Bloggs on the street, who is very concerned about immigration.

The Coalition government has taken steps to introduce its promised cap on non-EU immigration, and would, given the opportunity, do more.

But is this good for us?  What does economics tell us here?  It can tell us many things.  First, it begs the question: Why restrict?  By restricting the free movement of factors of production to their most productive uses, we must therefore end up with a less optimal solution.  The same or inferior output at higher cost, as we throw out the non-EU worker who was selected as the best person for that particular job.

Hard headed and brutal as it is, there simply is no economic argument for restricting immigration.  Let's think a little more about the consequences of restricting.  Poor quality British workers get jobs, they're protected, and have little incentive to be anything other than mediocre - they won't be replaced by that more highly skilled Aussie or Canadian because they are now ineligible for the job.

You will probably notice during your time even as an undergraduate in Birmingham that the overseas students you see amongst you are by some distance the most hard working and keen to learn.  They emerge with the better qualifications and knowledge, and are likely the more employable people.  But they won't be employable legally in the UK.  We'll be poorer as a result.

We'll be poorer because meals in restaurants will cost more and will be delivered by unmotivated, overpaid British waitresses instead of motivated and hard working immigrants.

I could go on.  The simple fact is, there are no good reasons for restricting immigration.  What about overcrowding, you might ask?  Well, there will become a point where migrating to the UK is no longer beneficial to people elsewhere, if we left things unrestricted.  The marginal benefit of doing so would be outweighed by the marginal cost.

We'd have more things produced because the world is not a zero-sum game.  If immigrants take some jobs, there are still plenty of others out there, and those displaced should be motivated to upskill themselves and find a new job.  If they aren't prepared, I don't want to know about them and I certainly don't want to hear their moaning - the kind of moaning that has secured the current anti-immigrant sentiment in this country.

Robert Skidelsky on Deficit Cutting

Robert Skidelsky is a very prominent economist, not least for his biographies of Keynes.  As you can imagine, he is more Keynesian in his leaning as an economist than some.  Right now, with the austerity of the Coalition and others the flavour of the moment, people are much less inclined towards Keynesian arguments.

The feel now is that we need to cut the deficit - this is the big problem, not the fact we're stuck in an anemic recovery from the recession of 2008-9.  Skidelsky has written this article in Project Syndicate on the issue, and I think the punchline has to be:

Events and common sense drove them to deficit finance in 2009-2010, but they have not abandoned the theory that depressions cannot happen, and that deficits are therefore always harmful (except in war!). So now they vie with each other in their haste to cut off the lifeline that they themselves extended.

100 Days of the Coalition

Today marks 100 days since the Tories and the Lib-Dems agreed to join forces in a coalition government in the aftermath of the inconclusive election back in May.

Naturally, the Coalition is trying to put a positive spin on what it has achieved in 100 days.  Most of this is journalists trying to fill space - August is a nororiously dry time for news stories.

Econ101b teaches about monetary and fiscal policy having time lags for implementation, and we learn that the UK government actually has little power over monetary policy these days, having granted the Bank of England independence in 1997.  Given these long time lags, it is probably quite unrealistic to expect that the Coalition can have had any impact thus far on economic outcomes - at least at the macroeconomic level.

It's trying hard though - and another argument we come across in econ101b can give them some credence for trying to argue they've had an impact thus far: Expectations.

Expectations are powerful things.  Investors decide whether to invest or not based on their expectations.  Expect a downturn, and they won't invest - at least not in physical projects.  Why build a new office block if you expect a prolonged downturn?  Can you know you'll fill it?

A central emphasis when the Coalition began was that bond markets were soon likely to turn on the UK - our debt is too high, and our deficit is too high - as high as Greece!  Such talk is based on expectations: Expectations that the expectations of investors are that the UK will default like Greece.

Much has passed under the water since.  Not least, interest rates on long-term government debt have been falling - i.e. it's been getting cheaper for the UK government to borrow.  Kind of runs against what the Coalition had asserted.  The voices of austerity such as the Coalition have been mocked by various sources, not least Nobel Prizewinner Paul Krugman.  Another Nobel Prizewinner, Joseph Stiglitz, has attacked this panic in the face of financial markets: Who is governing, Robert Skidelsky has asked, is it the government, or is it the financial markets?

Of course it's far too soon to judge the coalition; even if I say bond market rates have fallen, there's no reason why they won't rise in the future.  Other unexpected events may mean that despite the austerity, the UK escapes a recession, and unemployment doesn't rise above 3m - something that looks odds on currently.  And even if we have a recession, it still will be too early to judge the coalition - it may be that the cuts are necessary to secure a longer term prosperity for the UK.  I have my doubts, but this may well be the case...