Not the Treasury View...

In preparing for the lectures this coming term, I've been looking over Chapters 14 to 17 in Sloman, the textbook we use. Particularly Chapter 16 looks at the development of macroeconomics, and the role the UK Treasury, alongside John Maynard Keynes, played in this development.

It's a fascinating story that we'll think about much more in the first few weeks of term. In the meantime though, it reminded me of an excellent blog that I subscribe to the posts from, called Not the Treasury View, and is written by Jonathan Portes at the National Institute of Economic and Social Research. The name harks back to what was the Treasury view back in the time of Keynes, around the Great Depression of the 1920s and 1930s - namely to balance the budget and trust that in the long run the economy would return to equilibrium and growth.

Keynes provided the alternative view, namely that government could, and should do more than this, and actively intervene in the case of deficient demand, as it was argued was the case back then. It's argued by many (for example, see another interesting blogger, John Quiggin here on unemployment) that Keynes was the founder of macroeconomics as we know it, pointing out that the economy as a whole could experience long periods of disequilibrium, characterised by high unemployment.

I'd really recommend subscribing to the RSS feed from Not the Treasury View. You may initially think Portes to simply be a leftie hence a critic of Tory policy, yet if you dig far enough back you'll find he's critical of all government policy that flies in the face of simple economic theory and evidence. Part of the course this term is to start forming coherent analyses of government policy - you can do much worse than become an avid reader of Not the Treasury View.

Assignment 2...

Depending on how much you enjoyed the alternative arrangements now in place for classes on econ101b, you'll either be delighted or daunted by the fact that Assignment 2 is now on WebCT...

The first question asks you to look at a plot of unemployment rates for the UK and a few other countries. In there is both the claimant count unemployment rate, and the standardised rate - two ways of measuring unemployment. As you'll see, the two do differ; the plot of unemployment on the assignment is:

The red lines are UK data, as the legend (top left) shows. The solid red line is the standardised rate, the dotted line the claimant count, and as was discussed in class, often (but not always), the claimant count is below the standardised rate - often considerably so - in 2005 the standardised rate was nearly 5% while the claimant count was just over 2.5%. What drives these kinds of differences?

Moreover, what has unemployment done in the UK over the years?  There's a fascinating discussion of unemployment in the UK on the blog Not the Treasury View, which looks at structural unemployment and something they call the unemployment gap. The blog talks about factors that have influenced unemployment in recent years, and may help you think about this. When was unemployment high, and why might it have been high? When was it low, and what helped it to become so low?

Moving on to inflation, the plot for the second question on the assignment is:

We have data here for CPI inflation for all goods. We could restrict it to core inflation, which excluded energy and food prices - if you're keen, you could search for that data on the OECD Statistics website and compare it to these inflation rates. What you may well find is that core inflation rates between countries differ a little more - the inflation rates we've plotted here include energy and food prices, which are globally traded items and hence a high price of energy in one country is a high price elsewhere too.

Why has the UK had a particular inflation history? What factors have influenced the UK? What about the recent inflationary history, since around 2006 or so?

I'm looking forward to reading your blogs - do let me know links when you've set your blogs up and don't be shy - making your blog more publicly available is a real asset and something that'll look great on your CV in years to come, and will help create even better discussions amongst your class mates.

Enjoy assignment 2 and your classes in weeks 5 and 6!

Monetary and Fiscal Policy

Later in term we cover these two things in detail - for now we just hint at them, and having looked at inflation in yesterday's lecture while thinking also about unemployment and yesterday's surprising GDP growth figures announced by the ONS, last night Mervyn King (Governer of Bank of England) made a speech in Newcastle about the UK economy.

In it he mentioned the problems he faces as the head of the Bank of England, which is in control of fighting inflation: He expects inflation to rise to 5% in 2011, yet the Bank's target is 2% (plus or minus 1% so a range of 1-3%). Yet GDP growth was negative in 2010Q4, and is not expected to perk up any time soon.

The problem is that high inflation would usually be met by the Bank of England with higher interest rates, yet growth is weak: And higher interest rates would hurt growth (we'll study the interest rate transmission channel from interest rates to economic activity later in term).

The fundamental problem is that of the two basic types of inflation covered yesterday, demand-pull and cost-push, the UK is suffering cost-push at the moment: The weak exchange rate imports inflation, and commodity prices are high at the moment - both factors that makes inputs more expensive.

However, as also mentioned, inflation can come simply from expectations becoming reality. If people start expecting higher inflation then they will attempt to build that into their wage settlements, particularly if and when the economy begins to recover. Then with more money in the economy, this will likely translate into higher actual inflation. So the current cost-push inflation may turn into demand-pull inflation, and this is what the Bank of England is seeking to avoid.

It seeks to avoid it precisely with speeches like this, attempting to show us that it knows what it is talking about when it comes to the economy...

Unemployment Numbers

Another in the long list of things we'll look into next term in econ101b is Unemployment - joblessness. Unemployment almost always refers to workers out of work, although others have talked about unemployed houses recently, amongst other things.

But we usually think about workers being unemployed - not employed, not put to work. Every month the UK statistical agency reports unemployment figures for the UK and they are usually pored over with great interest, particularly in times like the current (will we have a double dip? Can we blame the Tories yet?) ones. Apparently the number of people being employed (hence leaving the state of unemployment) increased by nearly 200,000 this last month.

This would seem to be great news, but as Stumbling and Mumbling points out, things ain't always as they seem. Most of all, the numbers of people becoming employed are not necessarily coming from the pool of unemployed workers. Many other things are possible: People who were not previously actively seeking work (hence not counted as unemployed, e.g. mothers returning to the workforce after raising kids or the retired) may have taken jobs, or immigrants may have taken jobs in the UK (not likely at the moment thanks to the incoming government's arbitrary caps).

The bottom line is: Much of these numbers are people becoming self-employed or taking part-time work. In fact, full time employment has fallen in these latest released numbers.

It most certainly isn't a particularly encouraging story about UK Plc...

Nobel Prize in Economics

The final Nobel Prize announcement each year is economics - that happened just now. The winners of the 2010 economics Nobel Prize are Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides. Tyler Cowen at Marginal Revolution is posting about each of these guys: Their common link is search models in labour markets, and search theory more generally.

If you're seeking a British angle on this, Pissarides is at the LSE and is British-Cypriot. The other two are American. All of them promote ideas relating to something we'll learn about next term in macroeconomics: Frictional unemployment. People often change jobs, and this doesn't happen instantaneously, hence some of the unemployment at any given time will be frictional as people search for jobs. Once they find a job they are matched.