Posts Tagged ‘paul krugman’


Here is your starter for ten points. Who was Chancellor of the Exchequer when the UK re-entered the gold standard? Bzzzz. Yes, that’s right, it was Winston Churchill.

Now for your next question, who was chancellor in the 1930s, and adopted economic policies not dissimilar from those being applied in Japan today, and with very impressive results? Not sure? Well, it was Neville Chamberlain.

It is quite ironic. Churchill was a brilliant war time leader, but he was a disaster as a finance minister. In the case of Chamberlain, it was the other way round. So what did Chamberlain do and what are the parallels with today?

Back then the UK was in what Nobel Laureate Paul Krugman calls liquidity trap conditions. Interest rates were about as low as they could go, but still the economic performance was awful.

Chamberlain, let’s call it Chamberonomics, went for zero – or near zero – interest rates, a weaker currency and a targeted price level entailing some inflation. Economist Lars EO Svensson calls it The Foolproof Method

The point to remember here is that if the economy is seeing deflation – as it did in the UK during the early 1930s, as it has been in Japan over the last two decades, and as may well in the Eurozone over the remainder of this decade – it becomes very difficult to reduce government debt to GDP.

Think about it, if prices are falling, the economy can be expanding even if GDP measured in pounds shillings and pence is contracting. So if the nominal value of GDP is falling, in order to reduce debt to GDP, it is necessary to make even more severe cuts, or impose even higher tax rises.

So by trying to create some inflation, Chamberlain was able to create the conditions for economic recovery. And at least to an extent this policy worked, with GDP expanding by an average of 4 per cent between 1933 and 1936.

And all this pretty much describes the policies being adopted by Shinzo Abe, Japan’s new (ish) – and by the way he has held the position before – Prime Minister.

They call Abe’s approach Abeonomics, but maybe they should call it Chamberonomics. And by the way, the success enjoyed by the UK during the mid-1930s was also helped by a house building boom – something George Osborne says he is trying to create with his Help to Buy scheme – although whether he is in effect trying to bribe the electorate with an artificial boom in house prices is a moot point.

© Investment & Business News 2013

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

According to data from Lloyds TSB, the sales of homes worth over one million pounds hit 7,397 in 2012, which was the highest level since 2007. Is this a sign of a recovering economy or is it a case of economics for the one per cent?

Nobel Laureate Paul Krugman excelled himself this time. In his latest column for the ‘New York Times’, ‘The one per cent’s Solution’, he said: “The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top one per cent wants becomes what economic science says we must do.”

He continued: “The years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The one per cent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.”

And finally: “We have a policy of the one per cent, by the one per cent, for the one per cent.”

Do you agree with that? Or is Paul Krugman getting a bit extreme?

To change the mood a little, Lloyds TSB says: “The total number of sales of properties that cost at least £1 million in Great Britain rose by 2 per cent from 7,270 in 2011 to 7,397 in 2012.” By the way, in case you are interested, in 2007 sales of one million pound plus houses hit 8,233.

The growth in sales of these more expensive homes has been skewered towards London. Lloyds TSB said: “London and the South East continued to account for the overwhelming majority (85 per cent) of all million pound sales in Great Britain in 2012. Million pound sales are a much greater proportion of the market in London than elsewhere in Britain, representing 5.6 per cent of all sales in the capital in 2012. Scotland (14 per cent), the East Midlands (12 per cent) and Greater London (6 per cent) were the only regions to see a rise between 2011 and 2012.”

It continued: “The remaining eight regions in Great Britain recorded a fall in million pound sales in 2012. Wales saw the biggest drop in million pound sales (-71 per cent), followed by the north east (-40 per cent).”

So how do we interpret these figures? Are they a sign of Krugman’s theory about an economy that only seems to be benefitting the one per cent – although in London, of course, one million pounds for a home is not that out of the way. Alternatively, are the figures just indicative of the London/South East divide with the rest of the country? Or maybe, just maybe, it is a sign that the housing market is turning; after all past housing market booms have begun with the more expensive properties.

© 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.

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


The Dow Jones finished yesterday with a new all-time high closing price with a reading of 14,673. During the day it hit an inter day high of 14,716.

To be frank, the rise was too small to give a specific reason. Once the Dow hits an all-time high, it only needs to rise by a fraction of one point to hit a new high.

The overall trend is more interesting. So far this year, the Dow Jones is up 1,569, or by 12 per cent. The year started with lots of euphoria as US jobs improved. US consumer confidence played with a five year high, data from Germany and China suggested a pick-up, and a general feeling that the Eurozone was past its worst dominated sentiment.

Frankly, a lot of those reasons are now gone. The latest jobs report from the US was disappointing, US consumer confidence has fallen sharply, the German recovery appears to have slowed, and news out of China is ambiguous. As for the Eurozone, well: oh dear!

Yet still the markets rise. Part of the explanation is that corporate results continue to belie economic performance. A bigger explanation might be that the markets have given the thumbs up to Japan.

At last, or so they say, Japan is doing the right thing. Nobel Laureate Paul Krugman has described the latest moves out of Japan as very good news.

As for the rest of the markets: the FTSE 100 ended yesterday at 6313, up 36 points on the day before, and up 0.07 per cent so far this year. In Germany the DAX closed at 7637, down 25 points but up by just 0.3 per cent this year – that makes sense. As for Japan, the Nikkei 250 closed at 13,192. It saw modest falls on the day before but so far this year is up a very impressive 27 per cent.

That may just about say it all: Japan up 27 per cent so far this year, Germany flat.

©2013 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

You can look at Moore’s law in more than one way. You can see it in its literal sense, applied to computers doubling in speed every 18 months or so. Or you can see it as a metaphor for any type of technology that sees regular increases in speed or power. The last few days have seen announcements of several new technologies, variously falling into one or even both of the camps. Strap yourself in for a new stage in the evolution of technology.

First there is solar power. Earlier this year economist Paul Krugman was slated by those in the know when he suggested that solar power was seeing its power increase at a rate that was commensurate with Moore’s Law. The mistake Krugman made was to not realise there is a theoretical limit to solar power. It is called the Shockley-Queisser limit named after William Shockley and Hans Queisser, who proposed that the theoretical maximum efficiency of a solar panel is 34 per cent. In short, there is a just a physical limit to how much energy solar power can generate, and we appear to be pretty close to that limit.

Enter stage right the Nano-Science Center at the Niels Bohr Institute in Denmark, which is connected to the University of Copenhagen. It has been working on nano-wires, or what some might call miracle technology.

A nanometre is a billionth of a metre. O.1 of a nanometre is the size of a helium atom. Nano technology is engineering at an incredibly small scale. Nano-wires is an exciting application of nanotechnology.

“It turns out,” or so suggests an announcement on the University of Copenhagen web site, “ that the nanowires naturally concentrate the sun’s rays into a very small area in the crystal by up to a factor 15. Because the diameter of a nanowire crystal is smaller than the wavelength of the light coming from the sun it can cause resonances in the intensity of light in and around nanowires. Thus, the resonances can give a concentrated sunlight, where the energy is converted, which can be used to give a higher conversion efficiency of the sun’s energy.”

The announcement continues: “The typical efficiency limit – the so-called ’Shockley-Queisser Limit’ – is a limit, which for many years has been a landmark for solar cells efficiency among researchers, but now it seems that it may be increased.” The new break-through”, continues the announcements “will have a major impact on the development of solar cells, exploitation of nanowire solar rays and perhaps the extraction of energy at international level. However, it will take some years before production of solar cells consisting of nanowires becomes a reality.”

So that’s Moore’s law at work in solar energy.

But the University of Copenhagen announcement also made reference to nanowires having potential use in quantum computers.

This brings us to Moore’s Law in its original meaning, relating to computers doubling in power every 18 months or so.

Enter stage left IBM. Big Blue has just picked up the Swiss Tell Award for investment in new nanotechnology. IBM stated recently: “Carbon nanotubes and scanning probes derived from the atomic force microscope – cousin of the scanning tunnelling microscope – show particular promise in enabling dramatically improved circuits and data storage devices.” So, in English, the words to note are improved circuits and data storage devices. In short, IBM is working on nano technology to make computers much faster. We may or may not be close to reaching some kind of limit to computer power based on traditional silicon type technology. But IBM is exploring alternatives.

Big Blue put it this way: “IBM’s research into nano-scale structures that self-assemble may one day obviate the need to ’hand-position’ atoms. Nanotechnology will allow the design and control of the structure of an object on all length scales, from the atomic to the macroscopic enabling more efficient and vastly less expensive manufacturing processes and providing the hardware foundation for future information technology.”

And finally there is a company called Hyperoptic which is set to offer broadband speeds of one gigabit a second to some locations in London. That’s ten times faster than the fastest services from Virgin Media and BT, which are themselves around ten times faster than the service most of us are used to.

Some economists are cynical about the effect technology is having on the economy. Their cynicism may or may not be justified up to now. But the point is that – thanks to Moore’s Law in the sense being used here – technology is set to have an ever more profound impact on our lives and the economy.  This is both exciting and frightening, with unpredictable consequences for jobs, and the way in which wealth is distributed. Economists, in making their forecast for the next few years, are totally failing to factor this in.

©2013 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

Look, you have to be patient. It takes time to repay debt, but once it is repaid, well…yippee. That is one argument.

Others go further, and say things such as: “If it isn’t hurting, it isn’t working.”

Those who support austerity don’t deny it will be painful – except that is for a few nutters in the US Tea Party that seem to think there is an automatic and immediate positive relationship between austerity and growth.  No, the sane austerians are simply saying that it is worth it in the long run: pain today, wealth tomorrow.

And, of course, for most individuals such an attitude is right. Some businesses may argue that the way to deal with debt is to expand, but on the whole, most agree that times of peril mean cuts.

The snag is that when we are talking about the whole economy, things can get very nasty if we all start behaving in the same way. If all those with debts make cutbacks, and as a result there is less demand, and those with savings see the fall in demand, so start saving even more, then the economy will start contracting faster. And supposing that as a result of these cuts, demand shrinks, our income falls, and as a result our debts actually increase. In such circumstances, the more we cut back, the worse our debts.

The National Institute of Economic and Social Research (NIESR) reckons this is precisely what’s happening.

In a report published this morning it said: “As a result of the fiscal consolidation plans currently in train, debt ratios will be higher in 2013 in the EU as a whole rather than lower.”

Its argument continued: “under normal circumstances a tightening in fiscal policy would also lead to a relaxation in monetary policy. However, with interest rates already at exceptionally low levels, this is unlikely or unfeasible.” To put it another way, when interest rates are near zero, the argument that you need to make cuts so that the central bank can then make interest rate cuts doesn’t hold up. Right now, we are in what’s called a liquidity trap. Rates can’t fall much further, but when the economy is struggling like it is, the normal solution is to cut interest rates. Quantitative easing is not proving very effective because people don’t want to borrow more. The Bank of England hopes, by the way, that QE will push up the price of government bonds, meaning other assets will look cheap in comparison and push their prices up, which will make us feel richer, so that we will spend more.

Returning to the NIESR report it stated: “During a downturn, when unemployment is high and job security low, a greater percentage of households and firms are likely to find themselves liquidity constrained.”

NIESR added – and this is the key bit – “With all countries consolidating simultaneously, output in each country is reduced not just by fiscal consolidation domestically, but by that in other countries, because of trade. In the EU, such spill-over effects are likely to be large.”

Now it is only right to point out at this stage that the NIESR director, Jonathon Portes, is very much a supporter of the idea of stimulus. He bats for the same side as Paul Krugman – an out an out supporter of Keynesianism. So given this, perhaps the conclusions of the NIESR report are not surprising.

But then again  austerity can work when applied by individual countries which can simultaneously grow via exports. But when austerity becomes a global thing, it becomes very dangerous.

On the other hand…

The big snag with fiscal stimulus is that sometimes economies need to adjust. There is a danger that a fiscal stimulus can take away the need for change.

Take Japan, as an example. In Japan failure is not popular. In fact, it is seen as something that needs to be avoided at all costs. But as a result, maybe Japan is too slow to change. This morning both Sharp and Panasonic warned of heavy losses in their current financial year.  Truth is, Japanese electronics companies are getting a drubbing.  Being thrashed by Apple, and Samsung and Google and Amazon is bad enough, but now even Microsoft with its Surface tablet is making the once seemingly invincible Japanese giants look like dinosaurs.

Maybe Keynesian is partly to blame. There’s not enough creative destruction in Japan.

So returning to the NIESR, it is right. Austerity is causing damage, and may even be making debt worse, but that does not mean we don’t need creative destruction.

The debate has become polarised. Either you are an Austerian or a Keynesian. Why can’t you be both?

Anyway to finish on a more cheerful note, here is piece by yours truly on some promising news out of China today.

©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