Wednesday, 12 December 2012

"Ubi solitudinem faciunt, pacem appellant"

The FT article that appeared yesterday under the name of Olli Rehn, the European Commissioner for economic affairs, could have been written by a fairly unsophisticated economic cliche-generator: "we must stay the course..light at the end of the tunnel."  What caught my eye (and those of others, including Paul Krugman here and Kevin O'Rourke here) was that Mr Rehn and other eurozone policymakers have been saying the same things for the last two years (so indeed have policymakers in the UK, but that's a different story) and have yet, as Brad Delong would put it, to "mark their beliefs to market". 

I reproduce my letter to the FT in response: 

Sir, The EU commissioner for economic affairs brings us good news: “Since last spring, Greece has demonstrated a remarkable commitment to economic stabilisation – one certain to yield lasting returns. Spain is now also pursuing a broad reform agenda.” Indeed, “Europe’s recovery in the real economy has taken hold and is becoming self-sustaining.”
So the Commission’s strategy is working, it seems.  Except those quotes aren’t from Mr Rehn’s most recent article on your Comment page (“Austerity is working – Europe must stay the course”, December 11, 2012). They are from his article of two years ago: “New reforms can break Europe’s debt cycle”, January 11, 2011.

In this week’s piece, he said: “There is light at the end of the tunnel . . . confidence is returning . . . we need to stay the course . . . ”.  What about the realities of actual economic developments in the eurozone over the last two years? If Mr Rehn had changed a couple of dates, he could probably have saved himself the trouble of writing a new article and simply resubmitted the old one.

What has actually happened in the intervening period? Unemployment in both Spain and Greece has risen to over 25 per cent. Even in Latvia, the Commission’s favourite “success story”, where growth has returned, the falls in unemployment (from a very high level) have largely been the result of mass emigration; employment in Latvia remains about 20 per cent below its pre-crisis peak.  
"Ubi solitudinem faciunt, pacem appellant."  [NB: the FT chose to translate and attribute the quote, but I have more confidence in my readers!]. 
 I thought I'd just clarify the point about Latvia, since both the Commission and the IMF have pointed to it as an "economic success story".   I'm not an expert on Latvia, and I don't want to get into the wider argument about the precise economic strategy followed by Latvia in very difficult circumstances (see here for a detailed challenge to the Commision/Fund line). What I would point out - and hence the Tacitus quote - is that while Latvia is now, after a very deep and painful recession, seeing moderate growth and some job creation, this has been achieved at the cost of mass emigration of young and skilled Latvians.  As the chart shows, employment in Latvia peaked at about 1.15 million; it has recovered to only about 900,000.  



[Source: Latvian Central Statistical Bureau. Note that revised population estimates after the 2011 census mean there is a series break, but this probably reflects underestimated emigration in 2008-11, so wouldn't affect the peak-to-trough fall much].  
Unemployment, however, hasn't risen nearly as much as the fall in employment. So where did all the people go?  The answer is that many left.  We know from the UK National Insurance number registration data that fully 70,000 Latvians - more than 3 percent of the population - registered for work in the UK alone in the 2009-11 period; we also know from other research that the vast majority of those will have been young and relatively highly skilled.  For comparison, imagine that the UK pursued economic policies that led to 2 million young graduates moving to Australia. 

Now, as I've argued before, I think that free movement of workers within the European Union - and in particular the UK's decision to allow free labour market access to the new Member States who joined in 2004, including Latvia - has been a success, with economic benefits for both the UK and the new Member States.   But there is a big difference between migration driven primarily by labour demand, the state of the economic cycle, or individuals perceiving that in the short-term they have greater opportunities elsewhere; and migration driven by a collapsing labour market. 

That doesn't mean either Latvia or the UK would have been better off without these migration flows - they provided a useful safety valve - but it is difficult to see how any economic strategy that has led to this outcome can possibly be described as a success. 

18 comments:

  1. 'But there is a big difference between migration driven primarily by labour demand, the state of the economic cycle, or individuals perceiving that in the short-term they have greater opportunities elsewhere; and migration driven by a collapsing labour market. '
    Forgive me it looks as these 2 causes are 2 sides of the same coin.
    Also, NIESR NOT commenting on today's UK unemployment figures, instead on Latvia we have;
    ' I'm not an expert on Latvia, and I don't want to get into the wider argument about the precise economic strategy followed by Latvia'
    and then some commentary on Latvia.
    Money well spent?

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  2. Perhaps NIESR might stop taking it's cues from Krugman who CLEARLY does not understand what makes an economy work and might look at recent better news on the UK unemployment numbers and ask HOW this has been achieved. Is it possible AT ALL that the UK governments mild austerity (for that is what it is) is actually the most sensible approach out there. it is milder than Irelands', Spain's, greece's etc... but avoids the end game that the US now faces, an end game that I warned blanchflower about but he was far to pompous to understand!
    Will NIESR comment on any positive UK news? doubt it as it is so politically neutral it only comments on bad news.

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    1. "Is it possible AT ALL that the UK governments mild austerity (for that is what it is) is actually the most sensible approach out there."
      No, not possible AT ALL. In a depressed economy characterised by a chronic lack of AD, where the private sector is deleveraging (so consumption is down),our major trading partners are doing likewise (net exports are down), businesses have little/no confidence to invest (Investment is down), you would know (as any basic undergrad textbook will also tell you) that the last thing the government should be doing is austerity( reducing G, raising T) of any sort, as then all of the components of AD will be down, ensuring that economic growth remains depressed, precisely as the GDP data shows - a modest improvement from the bottom of the trough, but generally flatlining growth which has remained below the pre-crisis peak for over 4 years now, which as you will know is actually longer than the Great Depression.
      "mild austerity (for that is what it is)". Words which can only be uttered by someone who hasn't lost their job/home, directly or indirectly as a result of this governments policies; or learnt they must work in extremely challenging (physically/mentally) jobs until they are almost 70, whilst having to pay in considerably more in order to receive a considerably reduced pension. Many 100s of thousands of people would not consider it 'mild'.
      In just the brief time taken to write this, Paul Krugman will have forgotten more about economics than you will ever know, and the NIESR comments so frequently on bad news simply because there is so much more bad news than good. All thanks to the most wrong-headed, ill-conceived, ideologically driven economic policies which many people and institutions, including those who originally endorsed them (such as the IMF), now categorically say have proven to be unsuccessful.
      "recent better news on the UK unemployment numbers and ask HOW this has been achieved"...look up the term "underemployment" for your answer.

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    2. Simon
      'you would know (as any basic undergrad textbook will also tell you) that the last thing the government should be doing is austerity( reducing G, raising T) of any sort'
      Hehe... undergrads tinkering with the economy, just what we need right now although I think we've seen those results with Brown and Balls.. May I suggest you go and read some books on Dynamical systems and THEN on Chaos theory (in that order). You will then understand how little people like Krugman know about economics. Ultimately you might even come to understand that it's not even a science and the associated implications in that statement.
      In the meantime, I totally understand that because of you're inability to break ingrained neural pathways (1960's economic textbooks)and you're seeming emotional interpretation of my motivation;
      'Words which can only be uttered by someone who hasn't lost their job/home, directly or indirectly as a result of this governments policies'
      when in fact you have absolutely NO IDEA of my background or circumstance, then i understand that it is unlikely you will carry out even the most glancing analysis of your prejudice. Underemployment is the answer to recent employment numbers you say? My point was that NIESR were't commenting on that, instead on Latvia!
      As for Krugman, well, he's so clever he has a nobel prize for econmomics!

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    3. Oh dear Robert. Much like Mr Portes' initial response to your original post, this one is so nonsensical and incoherent it is difficult to know where to begin. You're clearly very agitated and angered by the evidence based analysis by people like Portes and Krugman which highlights the dire economic mismanagement of the current government. I'm no supporter of Brown,Balls or New Labour (and never have been). Their economic (mis)management was disasterous; but I never thought their successors (whoever they might have been)could ever have made an even bigger hash of the economy in terms of response/ attempted recovery as the current clowns in office are doing right now. Your suggestion of "undergrads tinkering with the economy" would be a vast improvement compared to the efforts of Messrs Cameron & Osborne.
      "You will then understand how little people like Krugman know about economics".Do feel free to back up your statement with evidence please (of the major areas where his analysis is so wrong).
      "Ultimately you might even come to understand that it's not even a science and the associated implications in that statement".
      Did I say I thought economics is a science somewhere? I don't think it is.
      "In the meantime, I totally understand that because of you're inability to break ingrained neural pathways (1960's economic textbooks)"
      Your very own words are most suitable here: "in fact you have absolutely NO IDEA of my background or circumstance, then i understand that it is unlikely you will carry out even the most glancing analysis of your prejudice".
      I've never read a 1960s economic textbook, though have read many others across the range of schools of thought.

      I'll be sure to email Paul Krugman to inform him of his second nobel prize, this time for "econmomics!"
      For further informed analysis (guaranteed to get your blood boiling), have a read of Wren-Lewis, Brad DeLong and Chris Dillows which J Portes has helpfully provided the links to on the right-hand side. But I suppose all of the independent data they use and all of their analysis is wrong?

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    4. 'Evidence based analysis' hehe... as i said, try and read something on dynamical systems and then the chaos theory- if you are not formally schooled try some Taleb- you may also wish to consider the roots of the word analysis.
      Glad that you don't consider economics a science at least! Difficult to square that with your fervent belief in the 'evidence based analysis' though- have you considered that when IR are at 400 year lows, the very models being used are questionable? Do you understand or does Wren-Lewis consider, as an 'establishment' thinker' that the recent market gyrations of the last 5 years herald a 'changing of the old guard' in some way? Did Portes (or Krugman), or any of the names you cite, see the recession coming, or the depression? Yet you accuse me of being nonsensical and incoherent hehe.. try reading some Heidegger in that case!
      As for the economy, corporates are sitting on plenty of cash and as opportunities become available they are beginning to take advantage. There has been a period of stabilisation and the new Canadian man is mopping out the last of the ineffectuals at the grand old Lady... Your interpretaion is that the current govt is making a hash of things despite Lamont and Lawson in broad agreement on current policy, and no matter what your economist pals think, they've never rescued a UK economy- arguably, they aided in it's decline by not standing up to Brown!

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    5. Again Robert, where to begin? Jonathan Portes nailed it first time in his brief response to you. To which I might add, is that the problem generally with a person committing non sequiturs, logical fallacies or more general incoherent observations is that they are usually unaware that they are doing so. So when people (like Portes) point them out, the perpetrator often doesn’t recognise the fallacies and will continue their arguments using them.
      Jonathan Portes didn’t know where to begin with you for reasons known fully to him, but which I observe are:
      1. “Perhaps NIESR might stop taking it's cues from Krugman…”
      Evidently untrue. A comprehensive trawl over the topics discussed by NIESR and Krugman on their respective websites shows that they seldom discuss the same topics, or in precisely the same way, and even when they do the NIESR has a UK/European slant, using its own or externally verified independent data to draw inferences from. When NIESRs topics/findings might agree with Krugman’s, it doesn’t mean the NIESR has taken its “cues from Krugman”. Rather, both are commenting on the major economic events prevailing, and both (usually through separate data sources and methods) draw similar conclusions given the evidence to hand.

      2. “(Krugman) who CLEARLY does not understand what makes an economy work”.
      Almost all of the evidence: papers written, academic peer reviews, predictions and analysis which are often shown or proved to be correct over time (though not all, of course) show this claim to be untrue. The aforementioned evidence suggests that whilst he is not always correct (which he happily admits), he CLEARLY has a better grasp than most of what makes an economy work, though far from perfect as economics is far from a precise science, as we both agree.

      3. “Will NIESR comment on any positive UK news? doubt it as it is so politically neutral it only comments on bad news.”
      An obvious non sequitur. As Portes pointed out to you, and to regular readers of his blog, they do comment on positive UK news. However, over 4 years into the recession, most of the economic news is unsurprising bad and it is therefore prevalent, so NIESR comments on it – with their findings and analysis usually confirming the ‘bad news’.
      Most importantly and to highlight the non sequitur is that a prevalence of comments by NIESR on ‘bad news’ does not in any way question their political neutrality as you infer, if it is true that most of the economic data, indicators and therefore ‘news’ out there IS bad.
      Likewise, during boom years, if most of their comments are on ‘good news’, this does not mean they are politically biased – they are merely reflecting the economic times.
      It does not follow that NIESR frequently reporting bad news means they are not politically neutral. They may remain politically neutral whilst reporting the current abundance of bad news.


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    7. Some other examples (from many possible) in your responses to me:
      1. “undergrads tinkering with the economy, just what we need right now”
      A complete misrepresentation (straw man fallacy) of my original point concerning the folly of austerity, where I said “any basic undergrad textbook will also tell you”.
      Clearly this means that you can find the relevant theory (whether you agree with the actual theory or not) “in any basic undergrad textbook”, and in no way could be interpreted as implying that undergrad students should be in charge of the economy, as you suggested.
      An obvious straw-man fallacy.

      2. “Your interpretaion is that the current govt is making a hash of things despite Lamont and Lawson in broad agreement on current policy”
      Well done, another non siquitur Robert!
      It doesn’t follow that current government policy is correct and my interpretation (and many other peoples including the IMF) is wrong simply because Lamont and Lawson are “in broad agreement on current policy”. They might be in agreement, but completely wrong about policy, so it’s not a logical argument that can be used to demonstrate the lack of correctness of my view.

      And for a hat-trick of incoherent/illogical arguments in just one sentence at the end of you post…
      3. “and no matter what your economist pals think…”
      Another one Robert – but this time for a bit of variation it appears to be an ad hominem - there appears clear contempt for economists and economics generally throughout your posts, and it rears its head again here in the disdainful “what your economist pals think”.

      4. “…they've never rescued a UK economy…”
      Yet another non siquitur! This must be a record!
      It doesn’t follow that because a particular group of economists have “never rescued a UK economy” that their understanding, views and solutions are wrong or would necessarily not help to rescue the current UK economy. Even if they had tried and failed before with one particular set of policies, it doesn’t necessarily mean that their current proposed policies can’t or won’t work in this specific scenario. The fact that they have never rescued a UK economy before is no indication of whether they can or can’t.


      5. “…- arguably, they aided in it's decline by not standing up to Brown!”
      Not sure which logical fallacies you’ve covered here, but there’s at least one, if not two in there!
      However, unless they (certain economists you refer to) were part of the Brown government or were close advisors, how would it be actually possible for them to have ‘aided in its decline’ as they wouldn’t have been in any sort of position of influence to ‘stand up to Brown’? Yes, Portes was involved in the Blair / Brown government, mostly at the DWP, but none of the other economists mentioned were. How much influence Jonathan had or whether he 'stood up' to Brown, only Jonathan will know, so it still remains inaccurate to suggest that he didn't 'stand up to Brown' when really we don't know if he did or didn't.

      One more for luck Robert…
      6. “Did Portes (or Krugman), or any of the names you cite, see the recession coming, or the depression?”
      To answer your question, yes, about 56 of them including our friend Krugman. Here’s a link to “an extended list of individuals that appear to have some justification for claims of warning in advance of a housing crash, financial crisis, or a critical aspect of the crisis”, with the supporting link to evidence by their names. http://investorhome.com/predicted.htm


      The latest article on Jonathan Portes’ website makes for interesting reading and seems particularly timely.
      Perhaps you should lay off the chaos theory books, as chaos seems to dominate the structure and logic of your arguments and people won’t always have time to spell them out to you – hence the lack of replies you’ve had from Blanchflower and now Portes, who no doubt simply don’t know where to begin to reply and are probably exasperated by your incoherent, fallacy riddled narrative

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    8. Thank for the extensive reply
      the VERY first post (mine) on this was;
      'But there is a big difference between migration driven primarily by labour demand... and migration driven by a collapsing labour market. '
      to which you and Portes have responded that I was incoherent and guilty of logical fallacy!
      Re Krugman and predictions, I can't believe I took the time to check! I am right though, see http://www.economicpredictions.org/who-predicted-the-financial-crisis.htm. You're link shows him nominated quite low down in a 2010 survey, bit late at that point. He did not predict the crisis or depression in any substantial or meaningful way whatsoever and greenspan (or was it bernanke) stated so.
      Re lawson and Lamont, the intention could never have been to use the fact that they have experience of rescuing the Uk economy as a proof that they are right in their interpretations now-this Sophism is what yourself and Portes are guilty of. It would be akin to saying that the consequent the sun will rise tomorrow morning is logically entailed from any ideas they held today. However, their view is derived from the same data that Portes is using YET differing interpretations are proffered-the difference being that Lawson and Lamont are sage enough to know that claiming data as evidence to a theory is guilty of affirming the consequent.

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    9. ou agree that Krugman has made many mistakes and that economics is far from being a science- enough said on that I think! As for peer review... seriously?
      You wrote;
      'and in no way could be interpreted as implying that undergrad students should be in charge of the economy, as you suggested. '
      I wasn't- it was a joke pal
      you wrote;
      'Most importantly and to highlight the non sequitur is that a prevalence of comments by NIESR on ‘bad news’ does not in any way question their political neutrality as you infer, if it is true that most of the economic data, indicators and therefore ‘news’ out there IS bad. '
      you're view of non sequitur is predicated on the assumption that all the news is bad... and this, sir, is why I made reference dynamical systems and chaos theory books earlier. There are currently some stats that don't seem to fit with the general context of what we are seeing in the economy. Will GDP need to be revised higher with attendant re-revision of multipliers? Or is the good news on unemployment, contrary to calls by Blanchflower for the last 2 years, due to labour flexibilty that our European neighbours are beginning to put in place? Don't you think that an economist like Blanchflower, an ex MPC man, is so wrong on unemployment yet claimed he had 'evidence' he was right? And if labour flexibility is the Uk advantage, what do we do to stay ahead on that front as the eurozone adopts similar policies (you obviously understsnd that the world of pain some europeans are in will mean that ultimately they will take very competitve terms evntually)? Is NIESR missing some great areas to research into, namely a look at the 'austerity path' that we are on compared to the US (none) and euroland (extreme)... what would the impact be to the UK economy were europe to adopt a less austere path, more like that of the UK- this would surely bolster UK numbers (big trading counterpart), yet I have only ever seen Portes use extreme European austerity as a basis for attacking less extreme Uk austerity! Does it occur that extreme european austerity might be used as a basis for supporting a lesser austerity? read Soros on reflexivity on this for fleshing out
      You then wrote;
      'Likewise, during boom years, if most of their comments are on ‘good news’, this does not mean they are politically biased – they are merely reflecting the economic times. '
      even if the 'good news' is unsustainable? You do understand, please tell me you do, that the worst damage caused by bubbles is that they lead to a misallocation of resources. Risk is priced wrongly in short. You seem to be saying that reasonable critical analysis, in good times, could not spot this misallocation.
      We could go on. My original point was that Portes was not commenting on some good recent numbers on unemployment. Futhermore, recent predictions by some of his closest friends i.e. Blanchflower have been totally wrong, acutely so regarding unemployment, yet the predictions were all 'evidence based'. Why waere these predictions so wrong? were they political?
      As a tax payer I want to know why NIESR does not seem to be doing any work on this beacause in the end it is a lack of work that destroys peoples lives. The data demands it, EVIDENCED by the fact that so many economists recent calls have been so wrong!

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    10. Hi Robert

      We've probably both spent too much time on this judging by the posts above, and no doubt in amongst it all - the good,valid points made and the bad, such a complicated, multi-faceted discussion is difficult to conduct online as its possible (rightly or wrongly) to continuously pick up on points made and take another angle or twist given the sheer depth and volume of the subject matter.
      To correcty consider all aspects of the subject(s) would require books, or volumes of books, hence the lengthy posts made above. So without spending anymore time addressing your latest points raised - some of which I do agree with and would surely make interesting reading, perhaps now its time to end it there, agree we disagree on many things, and wish you a good xmas and a happy new year.

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  3. Difficult to address these rather incoherent observations (mostly non sequiturs) but for the record, I have commented frequently and at length on the UK labour market, for example in the Daily Mail here:

    http://www.dailymail.co.uk/money/news/article-2224508/MONDAY-VIEW-JONATHAN-PORTES-We-afford-invest-jobs-youths.html

    and of course several times on twitter today in response to questions about the most recent figures.

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    1. You are far too polite Jonathan!

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    2. 'But there is a big difference between migration driven primarily by labour demand, the state of the economic cycle, or individuals perceiving that in the short-term they have greater opportunities elsewhere; and migration driven by a collapsing labour market. '
      Forgive me it looks as these 2 causes are 2 sides of the same coin.'
      Not sure what is non sequitur here Mr Portes. Do feel free to back up your statement with evidence please.

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    3. ... still waiting for the explanation of how, in your words Mr Portes;
      'there is a big difference between migration driven primarily by labour demand... and migration driven by a collapsing labour market'
      of how this makes sense, and how it is I in your views who is incoherent...
      Perhaps Simon might enlighten? He seems to consider himself a master of the propositional and predicate calculus.

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