Posts Tagged ‘martin wolf’

Last June BBC 2’s ‘Newsnight’ had a kind of Paul Krugman special. The Nobel Laureate and arch supporter of Keynesianism was on the show for almost its entire duration. And a big hullaballoo it created too.

But one particular piece of controversy, relating to the Baltics and how their experience may provide evidence that austerity can work, won’t die down.

On the show, Krugman debated austerity with venture capitalist Jon Moulton and Tory MP Andrea Leadsom. Krugman made good points, and on balance probably won the argument, but then again, say critics, it was hardly fair, pitching a Nobel Laureate against two humble citizens – an MP and a man whose main claim to fame is that he is merely one of the UK’s most successful investors.

But in the debate Moulton did say something that appeared to stump Krugman. “What about Estonia?” asked Moulton. “Surely,” he said to Krugman, ”even you admit this country had growth while seeing austerity.”

To which Krugman muttered something under his breath, but it was clear he had been caught out. He didn’t know. So there you have it, a Nobel Laureate knew little about an economy as big and important as Estonia.

Ever since then, both Krugman and Martin Wolf – his ally at the ‘FT’ – have not missed a chance to point out why Estonia and the rest of the Baltics do not support the pro-austerity argument. Wolf was at it again, this week.

In essence, the argument presented by Krugman and Wolf is this. Sure, the Baltic economies are growing, but total production is well below peak. Since that is the case you can hardly count these countries as example of austerity working.

The debate rolls on, but to give Krugman credit, he does seem to have come up with a new and pretty impressive argument.

To the point that Baltics have not recovered lost output, the Austerians say that peak GDP was in fact illusionary, and thus you have to ignore the fall in GDP. But Krugman has responded.

If that is the case, and he says he doubts it is, and pre-recession GDP was not real, then that means Estonia didn’t – by definition – fall into depression.

This is an important point. Krugman and co say you can’t recover from depression while imposing austerity. The Austerians say you can, and cite Estonia as an example, but by their very own logic, Estonia never experienced depression in the first place.

Maybe it’s all academic, but it is worth noting.

Another point needs to be mentioned, however. The real problem with austerity is not that it can’t work when applied by a small country – maybe it can – rather it is that when the global economy applies austerity things start to become very dangerous.

© Investment & Business News 2013

It is one of the most quoted economics papers of the last decade. It is cited time and time again by supporters of austerity. It provides the empirical data to support George Osborne’s strategy for the UK. Even critics of austerity, those who support the idea of government stimulus, take on a veneer of uncertainty when the paper is mentioned. Shocking news just in: the paper’s conclusions may be wrong.

Actually it’s a paper and a book. It’s available in good book shops, it sits on a bookshelf less than five feet away from the computer this article is being typed on. It appears the paper has so-called ‘coding errors’. The single biggest academic rationale behind austerity may be in disarray.

It is called ‘This time is different’- the title is ironic. It is really saying this time it is the same as always. It was penned by Carmen Reinhart and Ken Rogoff. Martin Wolf, the leading economics journalist in the world and arch critic of austerity, often prefixes his arguments for stimulus with praise for Reinhart and Rogoff’s findings. It is as if he tries to get his retaliation in first. “Their paper is masterly, but…” says Wolf.

So what was it that Reinhart and Rogoff found? Well whenever a government debt rises above 90 per cent of GDP, the wheels come off the economy. It is as if it is magic. 89 per cent of debt is okay. 89 .5 per cent is okay. 89.9999 per cent is okay. But 90 per cent and it is as if the hounds of economic hell have been released.

The book’s authors hit us with reams of data. They say they have drawn on data going back centuries. From the time of the medieval age onwards, 90 per cent is the level of debt governments must avoid.

There is one obvious snag, of course. How do we know which way the link between government debt and economic disaster works? Is it not the case that rising debt may be a symptom of an economic crisis. Just remember that before 2008 Spain’s government debt to GDP was modest, amongst the lowest in Europe; low enough in fact to make Germany look positively profligate.

But let’s put that snag to one side. A new paper produced by Thomas Herndon, Michael Ash, and Robert Pollin from the University of Massachusetts has … how can one put it politely? … corrected Reinhart and Rogoff’s spreadsheet. One can be impolite, and say it has devastated Reinhart and Rogoff’s findings, but let’s not be rude, and say that.

For one thing, it appears the original data put unusual weighting on downturns relative to growth. So in their paper Reinhart and Rogoff, or so it is now being said, assigned the same weighting to one year of bad economic performance as to several years of good performance. It appears that in the original paper some countries, such as New Zealand, which suffered from high debt but strong economic performance were excluded from the data.

When the report looked at low US growth immediately after World War II it did not take into account, or so say the critics, that millions of women opted to leave the work-force, after working during the war, thus reducing output. Apparently, or so say the critics, once these factors are taken into account, very different conclusions are the result.

This does not mean the economic underpinning of austerity economics is dead. But right now, it sure looks to be in intensive care.

For more see, Dean Baker’s piece: How Much Unemployment Was Caused by Reinhart and Rogoff’s Arithmetic Mistake?  and Paul Krugman in the ‘New York Times’: Holy Coding Error, Batman 

©2013 Investment and Business News.

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The hurricane delayed things. The latest report on US consumer confidence was due on Tuesday, but in the end it had to wait until Thursday. When it saw the light of day, the news was good.

Last month US consumer confidence, according to the Conference Board, hit its highest level since February 2008. If these things interest you, the index hit 72.2.

Actually, QE may have something to do with it. When the Fed goes out and buys bonds via quantitative easing, it forces up bond prices. As a result, equity prices rise (probably) and house prices stop crashing (maybe).  US consumers like it when their equity holdings rise in value, hence the jump in their confidence.

But there was more good news from the US. The latest Purchasing Managers’ Index (PMI) from ISM was out yesterday too, and while it was not exactly the stuff that runaway booms are made of, it wasn’t half bad either. In fact the headline index rose to 51.7, from 51.5 in September and 49.5 in August. Okay, they’re just numbers.  “How are you feeling today?” “Today I feel three?” It makes no sense. Consumers’ confidence is 72.2, manufacturers’ 51.7. You might ask 51.7 what? Wishes perhaps?

But it’s the history that makes these numbers mean something. For the PMI, any score over 50 is meant to suggest growth, and the reading for October was the highest score since May.

This evening (2 November) the latest US jobs report will be out. The last one had US unemployment falling to 7.8 per cent, pretty much back to the level it occupied when George Dubya and Dick Cheney moved out of the White House.  (And someone called Obama moved in). If the data is good, Barack will surely be chuffed.

Not that he must look too chuffed. It does seem as though the world is divided into three. Those who think Barack gets pushed around, does not speak up for himself, and needs to do the political equivalent of punching Mitt Romney on the nose. Then there are those who say he looks Presidential and rises above that kind of nastiness. Then there are those who just don’t like him.

Returning to the US economy, house prices may be the key. Back in 2006 residential investment as a share of US GDP was 6 per cent. In 2012 it stood at just 2 per cent. No wonder Uncle Sam lost a shed load of jobs.

Of course, the fall in US house prices mattered for two other reasons. As prices fell, consumers lost confidence (and by the way in July 2007 the US consumer confidence index passed 110), and it mattered for another reason.

What was it now? Thinking…

Oh yes, that’s right, it led to the subprime debacle, followed by a global banking crisis.

According to Keith Wade, Chief Economist at Schroders: “The number of residential properties in negative equity at the end of the second quarter was 10.8 million (22.3 per cent), down from 11.4 million (23.7 per cent) at the end of the first quarter….around 1.3 million households have moved out of negative equity since the beginning of 2012, although 2.3 million remain in ‘near-negative’ equity (less than 5 per cent equity in the property). For these homeowners the incentive is to pay down debt before looking to borrow again.”

The truth is that US house prices have been rising of late – not much, but the downward trend seems to have reversed. Mr Wade put it down to QE. He said: “Whilst QE may not be stimulating stronger borrowing, it is helping to drive investors out of low yielding cash and bonds and into higher yielding assets such as property.”

Meanwhile, devastating though Hurricane Sandy was, at least America seems to be waking up to the reality that there is something odd going on with the climate. Who knows for sure whether the storm was down to climate change, but there has to be a chance. New York Mayor Michael Bloomberg reckons there is a connection, hence his Road to Damascus type of conversion to back Obama for the election.

But moving away from the US economy, while Sandy might have given a shock to climate change sceptics, the ‘Daily Mail’ recently ran a piece rubbishing the whole idea of manmade climate change. Apparently global temperatures have not risen since 1997. Except of course, the data was distorted by an El Nino at the beginning of the period in question and La Nina at the end of the period. Strip out the effects from the El Nino and La Nina from the data, and in fact global temperatures have very much been on an upwards trajectory since 1997. Anyway, talking about rubbish, here is a link to the ‘Daily Mail’ article, see: Global warming stopped 16 years ago, reveals Met Office report quietly released… and here is the chart to prove it

And here is a rebuttal from the Met office:

The ‘Mail’ makes the case for some kind of censorship of the press in pretty impressive fashion.

And finally, here is a piece by yours truly covering a rather shocking idea to put forward by Martin Wolf at the ‘FT’. He has suggested that the Bank of England needs to start buying foreign bonds so that sterling will tumble in value. See: Is it time the Bank of England started buying foreign debt?

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

As the earthquakes became worse, the ancient Minoans demanded blood. Clearly the gods weren’t happy, so it was time to make more human sacrifices. Of course, there were occasions when a blood sacrifice was followed by less seismic activity, which was cited as proof positive that the policy worked.

Except of course, from our enlightened position in the 21st century we get causation. Any fall in natural disasters following a religious ritual was a coincidence. There may have been a time when a leader of a country was also a priest, charged with appeasing angry gods, and such people were held responsible when the gods wreaked havoc, but these days we are a touch more sophisticated.

Perhaps you could, at a pinch, blame hurricane Sandy on manmade global warming, but it would be stretching credibility to blame any individual for the storms hitting the US East Coast. Some people across the pond are very anti-Barack Obama, but it seems not even they blame him for hurricane Sandy.  Although Obama they say can do his election prospects some good by looking presidential.

Yet the logic that says Obama was responsible for the poor US economic performance of the last few years is not much different from blaming a Pharaoh for lack of rain.

Two economists who have led the charges against Obama are Professor John Taylor and Glen Hubbard.

The argument runs like this. In the past the US has seen much more rapid recovery from a recession. This time recovery has been slower, ergo, Obama is to blame. Some go further, and say ergo Obama is the Devil, meaning maybe he was responsible for hurricane Sandy after all.

Martin Wolf, the ‘FT’s’ economic guru, has been crossing swords with Professor Taylor. The prof says that even in the 1930s, the US saw sharper recovery than it is now. ‘Duh’, replies Wolf, ‘that was because after 1929, when US authorities messed up, failed to support banks, and made cutbacks, the resulting contraction in the economy was enormous. Of course growth was higher in the aftermath because it had further to grow from’. See: You can’t measure an economy’s performance on recovery alone http://blogs.ft.com/martin-wolf-exchange/2012/10/29/you-cant-measure-an-economy-on-recovery-alone/#axzz2AjECcdQW

Professor Taylor then compared the US performance today with its recovery in the late 1800s. Wolf countered with the argument that surely it is more realistic to compare the US today with other economies across the world, such as Japan, the UK, the Eurozone, or even China.

It takes an extraordinary level of arrogance about the superiority of your country to think the fact that the rest of the world is suffering a very severe economic shock bears little or no relevance to your country.

Over at the ‘New York Times’, it’s been a case of daggers at dawn between Nobel Laureate Paul Krugman and Glen Hubbard.  According to Hubbard, the US recovery should have been V shaped.  In the UK – where the debate is over whether the economy will be W, An elongated L, or even a letter than hasn’t been invented yet – the idea of a V shaped recovery feels like a pipe dream. Krugman says the Romney team is ‘waving’ little things like facts away, because it is politically convenient to do so. See: More Financial Crisis Denialism http://krugman.blogs.nytimes.com/2012/10/28/more-financial-crisis-denialism/

The fact is, of course, that the US economy has been posting figures that we in the UK envy. It may well be that the US recovery has been stronger because it has had less austerity. It is certainly absurd to say that if Obama had been Austerian in his approach, the US recovery would have been stronger.

But where both Krugman and Wolf may have it wrong is not conceding that there is any benefit to creative destruction at all. Recession can correct bad habits, remove poor practice, and ensure only the very fittest companies with truly strong business models can survive.

The snag is that right now the debate between economists is black and white. Either we need to let the economy correct via allowing failure, or we have a really massive Keynesian push. There seems to be no middle group. Maybe what we really need is both, and economists are so blind to their adversaries’ opinions that they are forcing us to make a choice, when what we really need is the best of both worlds.

©2012 Investment and Business News.

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“You can see the computer age everywhere but in the productivity statistics,” said the economist Robert Solow once. It’s odd.  Did you know that if the family saloon car from the 1960s had seen its top speed increase at a trajectory consistent with Moore’s Law, today it would be able to reach speeds in excess of the speed of light. This newsletter would not be sent by email, it could be hand delivered to every reader. Yet despite all that, there is precious little evidence of the revolution that is the computer age creating new wealth.

This has led some economists to argue that the modern day computer revolution is not great shakes.

One such economist is Robert J Gordon. He reckons there have been three industrial revolutions. The first once occurred between 1730 and 1830. The second one occurred in the late 19th century, and the third one began 50 years ago.

Of the three Gordon says the second was the most significant. Martin Wolf, the ‘FT’s’ guru on the economy, took a look at Gordon’s report, and paraphrasing him said: “Today’s information age is full of sound and fury signifying little. Many of the labour-saving benefits of computers occurred decades ago. There was an upsurge in productivity growth in the 1990s. But the effect petered out.”

Well, Mr Gordon makes some interesting points, but he just happens to be wrong.

The topic of this second industrial revolution has been covered here before. According to Vaclav Smil, in his book ‘Creating the Twentieth century: Technical innovations of 1867-1914 and their lasting impact’, the period between those two dates saw the foundation of nearly all of the 20th century’s innovations put in place. Smil says: “Neither the pre-1860 advances nor the recent diffusion and enthusiastic embrace of computers and the Internet are comparable with the epoch-making sweep and with the lasting impacts of that unique span of innovation that dominated the pre-WWI generations.” Smil calls this period the age of symmetry.

But Professor Gordon, Martin Wolf and perhaps Vaclav Smil overlook some pretty important issues.

Here are two points that get forgotten, Point one: the internet is the greatest tool for creating collaboration ever invented. Innovation occurs via collaboration, as ideas build upon ideas. Thanks to the internet, and providing patent law doesn’t get in the way, we are set to see a new revolution in innovation that will made Smil’s age of symmetry seem more like the age of the snail’s pace.

The second point is Moore’s Law. Computers are still doubling in speed every 18 months or so, see this article on the latest wonder material graphene, which could mean an acceleration in Moore’s Law: Manchester researchers unveil ‘graphene roadmap’

Bandwidth speeds are rising at a similar pace. Breakthroughs in our studies of the genetic code are following a Moore’s Law type trajectory.  Even solar energy is becoming more efficient all the time. The key thing here is to bear in mind that when something is doubling every 18 months to two years, we might not even notice it at first. The science fiction films and novels of the 1950s envisaged computers in the distant future that were less advanced than the computers with which we are all familiar today.

Double one pound and you only still only have two pounds. But double one pound twenty times and you have one million pounds. Double it 45 or so times, and you have a number which is greater than the world’s total GDP.

Cynics say technology is not creating growth, and the age of growth is near its end. They are as wrong as you can be.

See an example of how Moore’s Law works. Consider this interview with John Scully, the man who Steve Jobs recruited to run Apple, but who then fired Jobs.  John Sculley On Steve Jobs, The Full Interview Transcript

Scully says that Jobs had this dream of a combining consumer electronics with computers. “In the 1990s,” said Scully, “with Moore’s Law and other things, the homogenization of technology, it became possible to begin to see what consumer products would look like but you couldn’t really build them. It really hasn’t been until the turn of the century that you sort of got the crossover between the cost of components, the commoditization and the miniaturization that you need for consumer products.”  In other words, Apple struggled, because technology was not powerful enough to realise Job’s dream. But when, thanks to Moore’s Law, that changed in a very short time frame Apple went from almost bust to being the largest company in the world.

See it in terms of a metaphor: the super cooling of water. It is generally assumed water freezes at zero. This is not true, rather ice melts at zero. Pure water can freeze at temperate round minus 48 degrees. But when it does freeze, it does so instantly.

Cynics say technology is not transforming the economy. But the point is that, thanks to Moore’s Law, within 18 months of technology leading to a modest rise of GDP, it will lead to a much bigger rise. Within five years of that moment, technology’s impact on the economy will be profound indeed.

Anyway, it was rather good to see an actual economist make a similar point. Looking at Robert Gordon’s report, Paul Ashworth, Chief US Economist at Capital Economics, said last week: “As far as the information processing revolution is concerned, Moore’s Law provides us with a critical reason why we should expect the benefits and innovation in the second 50 years of this revolution to be much bigger than what we saw in the first 50 years…The constant doubling is deceptive because it is initially unremarkable, but there comes a point in the exponential progression when the information processing abilities of computers suddenly appear to explode, making it possible for computers to perform complex tasks that only a few years before still seemed like science fiction.”

©2012 Investment and Business News.

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A lot of economists don’t get it. Why oh why, oh why? The UK economy has been contracting of late, but employment rising. In Q1 of this year UK labour productivity, measured as output per hour, fell by 1.3 per cent, and UK unit labour costs increased by 1.4 per cent. According to stats out last week, labour productivity in the UK was no less than 15 per cent below the G7 average.

The poor level of UK productivity is not news.  It has been a permanent problem for the UK for decades.

Since the start of the recession in 2007, growth of UK output per hour has trailed that of the US, and the UK’s  productivity has been lagging behind Germany, France and Italy for decades. Since the recession the gap has not grown, but it is still there.

If you give UK productivity per hour a score of 100, then US productivity is 127, French productivity is 125, German 122, Italy’s only marginally higher, Canada’s is the same, and Japan’s is less.

Then there is the riddle of how the UK’s employment rises while GDP falls. Some of the explanation lies in the rise in numbers of part-time workers, but on its own this explanation is insufficient.

Another theory, put forward by the Bank of England’s Ben Broadbent, is that financial markets are broken, and capital is being allocated inefficiently, and therefore business, starved of the necessary funding, is putting cash flow before investment. So rather than investing in new equipment that requires a big up front outlay, businesses are employing more staff. Extending that argument, maybe business lacks confidence. Its lack of certainty means it is reluctant to invest, and therefore hires more staff to meet outputs targets.

Martin Wolf took a look at these problems in the ‘FT’ a few days ago. He also speculated that falling wages may encourage businesses to take on staff, even when the extra productivity generated is not that great.

But then the issue of why the UK lags behind the other major economies has been troubling economists and politicians alike for years. Take this article in the ‘Economist’, from 1998:  The British disease revisited

You may recall that solving the UK’s poor productivity was considered to be something of a priority for the Blair government. One theory doing the rounds at the time when Tony Blair moved into number 10 was that the UK’s poor productivity was down to low investment, and that was down to the erratic nature of the UK economy, drifting from boom to bust. It is quite interesting to look back at Gordon Brown’s claim that he had put an end to boom and bust; it now seems daft. Indeed, his preoccupation with steady growth may have hidden underlying problems. It is just that in 1998, the idea made an awful lot of sense.

Here are some theories.

Part of the reason why labour productivity has fallen in recent years is down to the smaller slice given over to the City in the UK economic cake. You may argue that much of the City’s productivity was illusionary, but the fact is that, on paper at least, it is highly productive. As it cuts jobs, overall productivity falls.

As for why the UK lags behind most of the G7, maybe we need to rewind the clock back to 1997, and ask what the problems were then.

To an extent the comparison with France and Italy was clouded by the fact that employment is much lower in these two countries. Labour laws are so tough, that employers only take on more staff if the productivity gains that result are very significant. There is also anecdotal evidence that workers, and in particular management, work longer hours than they are declaring. So they have certain targets they wish to meet, but there is a limit to how many hours they are allowed to work, so they work longer to meet those targets and lie on their time sheets.

But that does not explain Germany and the US. German unemployment is lower than in the UK. Output per worker is higher. It doesn’t explain higher productivity in the US, where labour laws are of course much looser.

Well, in 1998 McKinsey came up with a theory. So, quoting the ‘Economist’ quoting McKinsey, ”[the problem partly] lies in the effect of regulations governing product markets and land use on competitive behaviour, investment and pricing.” The ‘Economist’ piece continued: “Although British food retailers are world leaders, says McKinsey, they would do better still if planning restrictions did not stop the building of stores on the scale of America and France. Hoteliers are hobbled, say the consultants, because not only are almost half of the country’s hotels more than 100 years old, compared with 3 per cent in America and 14 per cent in France, but they are constrained by planning restrictions. And until recently telecoms regulators kept call charges too high relative to line rentals, discouraging greater use of telecoms.”

And if that sounds like déjà vu, maybe there is a good reason. After all, David Cameron’s call for less dither, and to make it easier to build, is very much targeting this same issue.

It just goes to show that 15 years later, we have completed the longest ever run of economic growth, but we are in the midst of the worse downturn ever, and yet peek beneath the surface and some of the challenges haven’t changed at all.

©2012 Investment and Business News.

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