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...

Policy Uncertainty

One thing we'll talk about second term is the impact uncertainty can have on economic outcomes.  In other words, if people are uncertain, they do less: They don't take big decisions.  In particular, they don't make investment decisions.

A big thing in the US currently is the impact of uncertainty over government policy, and its impact on the economy.  Tyler Cowen at Marginal Revolution (a blog well worth subscribing to for both terms of your econ101 experience) has this post about it.  Some people suggest that uncertainty over policy is the reason why the US economy is not recovering strongly.  These people are generally Republicans responding to the fact they are out of power and trying to lay all the blame at the foot of the in-power Democrats.

As Cowen points out though, there's much more at stake - not least the restructuring that's going on in the US economy.

The main point I think is: Don't trust anyone who tries to tell you there's a single cause for why the economy is in the mess it's in, either this side of the Atlantic or the other.  There's many, many causes, and a huge number of alternative solutions out there that may or may not work.  The economy is a complicated beast, and far too complicated for single-cause explanations...

The Austrians

A fairly non-mainstream school of thought in economics is the Austrian School of Thought.  Austrians emphasise the price mechanism and its supremacy: Left unconstrained it leads to the best possible allocation of resources.  It may be that the market doesn't lead to be the optimal allocation, distortions are possible; but government intervention won't be helpful - the "dead hand" of government will always lead to a worse outcome.

As a result, an Austrian economist probably doesn't like very much the actual Austrian, or continental European, economic systems - social democracies with high taxes and heavy government intervention in markets.

Funny then that this Austrian economist, Don Boudreaux, seems to be gloating about strong growth in Germany vs the US.  Germany has just reported 2.2% GDP growth last quarter (which is impressive), while the US appears to be toiling towards a double dip recession.

Germany also has been embracing austerity recently, with significant spending cuts to address its large budget deficit, while the US, via Obama and the Democrats, is about the only major economy still attempting to pursue fiscal stimulus policies to encourage economic growth.

So the fact that the US, maintaining strong government intervention, is muddling towards a double dip recession, while Germany, cutting it back, has reported strong growth, is music to this Austrian's ears.

Of course, the story is so much more complicated than that.  Not least: You can't prove anything with one data point.  Then: How quickly do fiscal policies have any effect?  Finally, what is the impact of government intervention in the macroeconomy?  (the answer is it's quite slow with time lags, so the current numbers have nothing to do with recent decisions on austerity vs stimulus spending).

All these things you'll learn more about second term next year when we get to macroeconomics in the econ101 course.

The New Year

It's mid August, but fairly soon the academic year will be starting.

A huge amount has been happening in the macroeconomy over the spring and summer of this year, and so I'll start to make posts on here for keen econ101ab students at Birmingham, and students elsewhere who might be interested.

As a taster, the big debate over the summer has been over austerity vs spending. The Tories have started drastically cutting government spending, waxing on repeatedly, with ad nauseum, about Labour's supposed recklessness. Here's an example I saw today.

Were Labour reckless? Or are the Tories the reckless ones, potentially plunging the UK back into recession? It's the kind of question that gets right to the heart of what economics is. Keep tuned for more...

Nouriel Roubini on Double Dip Changes

Nouriel Roubini is a very well known and respected economist, and he has written recently on the possibility of a double dip recession. Very important reading.

Consider this a warning!

Nope, not related to exam results, but a research paper recently published (for the paper see here, for a blog on the article see here).

From survey data (not perfect but gives a good indication), the time a student (like your good selves) spends studying has fallen between 1961 and 2003 from 40 hours to 27 hours.

Now bare in mind the standard working week is 37.5 hours, and when you were in school you generally had probably over 25 contact hours a week plus homework, something's up here.

Let's just say: If you're spending 27 or less hours a week studying towards your degree, you're a part-timer. You're all due to get your marks soon, and if you did spend nearer 27 than 40 hours a week over your first year, don't be surprised if your marks are a little lower than you were expecting...