Wednesday, 25 April 2012

On GDP figures today, credibility, and Popperian falsifiability..

Much of the discussion about today's GDP figures has focused on the "surprise" fall in construction, as if this had somehow come out of nowhere and was nothing to do with government policy. And perhaps the figures will be revised. But more broadly, it is hardly surprising that the construction industry is having a hard time when the government has taken a deliberate decision to slash public sector investment - down 25% last year, as Tuesday's ONS figures showed. In fact, virtually all last year's deficit reduction came from investment cuts; the current (non-investment) deficit hardly changed. 

As Keynes may or may not have said, "When the facts change, I change my mind. What do you do?"  Well, we know what George Osborne does.  I will let the Chancellor and the Treasury speak for themselves:
Osborne said: "What you see today, in an uncertain global economic environment, is Britain growing, growing strongly, the strongest growth we have seen in this part of the year for a decade, and also our country's credit rating being secured. That is a big vote of confidence in the UK, and a vote of confidence in the coalition government's economic policies."   Guardian, 26 October 2010
"Fitch revised the outlook on the UK's rating to negative from stable...."this is a reminder of why it is essential Britain sticks to its plans to deal with its debts," a Treasury spokesman said..."  Telegraph, 14 March 2012
George Osborne said: "The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.”  Telegraph, April 25, 2012 
Karl Popper said, cruelly but accurately, of Marxism:
[it] is no longer a science; for it broke the methodological rule that we must accept falsification, and it immunized itself against the most blatant refutations of its predictions. Ever since then, it can be described only as nonscience—as a metaphysical dream, if you like, married to a cruel reality. 
This seems a reasonable description of the current approach.  Is there a credible alternative? Of course there is.  You don't have to be Keynes to think so.  And you don't have to take my word for it. Ask the IMF. Or Martin Wolf at the FT. Or Ian Mulheirn at the Social Market Foundation. Or John Van Reenen at the LSE.  As I said over a year ago, the real hit to credibility comes from sticking to unsustainable policies in the face of the facts.  

George Osborne says that we are all "at the outer fringes of the international debate."  That's clearly false as far as serious economists go. But if he's right in terms of UK government policy, the main losers won't be us: it will be the unemployed, especially the young


  1. Evidence of demand growth being "too slow" with an inflation targeting central bank would be sub-2% CPI.

    The CPI rate is at 3.5%.

    Ergo we do not have deficit demand, we have excess demand growth - or insufficient supply growth. The Bank of England cannot control the supply side, so they must hit the inflation target by suppressing demand growth.

    And lo, still, the Keynesians cry about insufficient demand growth.

    So repudiate the inflation target, please. Or stop crying for fiscal stimulus when the CPI rate is high.

    Tell us a story about how central banks cannot avoid deflation when interest rates hit the zero bound, we all need a good laugh today.

    1. So a cost push shock i.e. a negative short-run aggregate supply shock should be counteracted by tightening monetary policy, suppressing aggregate demand and lowering real output further? If the short-run AS curve shifts to the left, and results in a new equilibrium along THE SAME aggregate demand curve, then there is no excess aggregate demand. Once these TRANSITORY supply constraints such as constrained lending to SMEs, oil price shocks etc work their way through the system we return to the long-run equilibrium if monetary policy is NOT tightened.

      You're right, the inflation target should be dropped, because its an inaccurate reflection of the stance of monetary policy i.e. its affected by supply shocks which a central bank should not respond to. A central bank should only respond to shifts in the AD curve, not movements along it.

    2. Jason is quite right, albeit in more techy language than I would use. Unemployment is far above anyone's estimate of the NAIRU, and even the OBR (who I think are far too pessimistic) think there is a substantial output gap. Ergo, demand is too low.

  2. Golly Mr Impedant, you seem to be asking for an interest rate hike to stop "runaway" inflation. Do you think such actions by the UK would make a difference to the worldwide oil price, and other commodity prices which seem to me to be the driver of the CPI figure you are worried about? If so please explain.

    & I have a question myself as an intelligent (I hope) layperson. On Newsnight earlier this evening Danny Alexander in the course of his defence of government policy talked about our "debt crisis". He claimed that the national debt in 2010 was higher than at any time since the 1940s. I've read elsewhere that our national debt expressed as percentage of GDP was higher than it is currently for most of the last century from 1914 to the early 70's. Is either statement correct? BTW I am aware of the Keynesian arguments for increased government spending in our current predicament, but I would like to know what you think about the language used by our government when talking about the level of debt, words like "catastrophic" and "unprecedented" seem to be quite popular. Are they justified?

    1. Click this link for UK Debt History as % of GDP:

  3. "you seem to be asking for an interest rate hike to stop "runaway" inflation"

    I think that would be insane, but is perfectly defensible under the insane logic of inflation targeting. The insane ECB did that twice in 2011.

    What NOMINAL ANCHOR do you prefer as an indicator for the rate of AD growth, Mr Portes?

  4. A couple of queries. Neither is sarcastic, both are quite possibly ignorant.

    Mr Portas and others say we have "cuts" and "austerity". But govt spending is rising and we still have a significant deficit. How do these square up? Is there increased "bad" spending like interest payments and/or welfare payments directly or indirectly caused by unemployment? (By "bad", I mean things we would prefer not to have to spend money on, not that we should default on debts or stop unemployment benefits). And at the same time, is there decreased "good" spending such as capital/infrastructure spending and/or decreased spending on useful things like maintenance and teachers' wages. (Please, no rants on public sector "non-jobs" - that's a separate question. )

    Second, are there any reputable economists with reasonable knowledge of the UK economy who are recommending cuts in govt expenditure now (as opposed to in the future) and/or arguing against increased infrastructure spending now? If so, who are they? I'm wondering whether the govt thinks it know better than the entire economics profession, or whether I am only reading one side of the debate.

    1. Luke, as for you're first point you're exactly right. The fact the deficit has not come down as was wished is because government policies aimed at cutting spending as fast as possible with no focus on promoting growth result in higher unemployment and increases in automatic stabilizers such as welfare payments. And yes, there has been plenty of cutbacks on discretionary expenditures such as teachers and other public sector workers. The idea is that in cutting these expenditures the private sector steps in, but this just doesn't happen with no short-term plan for growth and the resulting economic uncertainty. Hoover had exactly the same problem at the start of the Great Depression, but was ousted by FDR who did the opposite.

      As for the economists advocating cuts, I can't think of any in the UK off the top of my head. I think the UK government looks for support in the views of the "Ordoliberals" in Germany and the economists in other northern European states (cough), and also some of the right wing economists in the US such as John Cochrane (and many other Chicago School guys), John Taylor and Romney's advisors.

      I should say there are plenty of economists that believe the state should play a smaller role in the economy, but I doubt any would include UK style austerity in a text book as an answer to a lack of growth, particularly when the private sector is simultaneously deleveraging.

    2. Jason seems to have taken over the role of comments moderator/responder here, for which I am grateful. For the record, I agree.