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. 

Tuesday 17 April 2012

Who wants to tax and spend? the IMF, that's who.

[This piece appeared first in the Independent here]

I noted at the turn of the year that the IMF, since Christine Lagarde took over, had made it more and more obvious that it thought a number of countries, including the US, Germany and (by implication) the UK, were tightening fiscal policy too fast.  In January, in its quarterly update of the World Economic Outlook (WEO), the Fund said
"those [advanced countries] with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation. Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.

Good news: Work Experience works

Six weeks ago I wrote here and here that:
"the debate on work experience seemed almost entirely divorced from the evidence of whether work experience actually improved the employment opportunities of jobless young people. "
"DWP [the Department for Work and Pensions] should attempt to produce a proper counterfactual analysis that would allow us to come to a considered judgement on the programme's success. "
DWP has now done just that, publishing today an impact assessment of the Work Experience programme.  The analysis compares participants on the work experience programme with "comparable" (as determined by sophisticated statistical techniques) non-participants. 

Friday 13 April 2012

Stuck on the dole: why has long-term JSA receipt among young people tripled in less than a year?

[Figures in this paragraph, and chart, updated April 19, 2012]

As recently as 2008 there were fewer than 6,000 18-24 year olds who had been on  Jobseekers' Allowance for more than a year. That number is now 55,000 -  nearly ten times as many.  This is not just the recession and its aftermath: after falling back somewhat in the year to May 2011, the number has more than tripled, as shown in the chart below.  The same is true for the proportion of claimants who have been claiming for more than a year.

[Source:  ONS Labour Market Statistics, April 2012.  Chart by Holly Curl]

Wednesday 11 April 2012

The European Commission is doing its best to drive Spain to disaster

[Updated 11 April 2012 with this preface]

Unfortunately, the Spanish government has largely failed to take the advice set out below. Instead, it is pressing ahead with an additional budget cuts of 10 bn euros. This has, predictably, been welcomed by the European economic policy establishment; ECB Council Member Ewald Nowotny said:

“The Spanish government is taking the necessary steps which will contribute to help calm the markets”.
Equally predictably, this is proving to be complete nonsense; markets are not stupid. As the FT says here
"Investors fear that tough new austerity and economic reform programmes in Spain and Italy could hold back growth, undermining the ability of these countries to reduce debt levels. "
The arithmetic of this is set out in Andres and Domenech's contribution to the Vox debate: see also my contribution, and that of Brad DeLong.

The original article from El Pais, 29 March 2012, co-authored with Ana Rincon-Aznar, also of NIESR, is here.  Here is the English version: 

Rajoy has to be more prudent than Cameron

The economic policies of the European Commission of the last two years have been mistaken. The objective of reducing Spain's deficit by 4% of GDP is absurd and unrealistic

Just after the last UK election, Sr. Rajoy told El Pais "El plan de Cameron da confianza; yo haría algo similar en España". [The Cameron plan has given confidence; I will do something similar in Spain]. In doing so he was following the fleeting intellectual fashion of the time, that somehow accelerated fiscal consolidation would restore “confidence” and hence growth.

Tuesday 10 April 2012

Is austerity self-defeating: of course it is. My contribution to the VoxEU debate

My contribution to the VoxEU debate "Has austerity gone too far?" is here. Since it is in large part a critique of Giancarlo Corsetti's piece here, best to read that first.

Briefly, I argue that Corsetti's article is misleading, and, if taken seriously by policymakers, potentially damaging, for three reasons. First, it fails to distinguish between eurozone countries and those that have monetary sovereignty, for which these tradeoffs, at least in this form, simply don’t apply. Second, it fails, for the former, to correctly identify the source of sovereign risk, and hence risks prescribing policies that will be ineffective if not damaging.  And third, it treats individual countries as if they were making independent policy decisions –when, of course, this crisis is a eurozone crisis and needs to be addressed as such.

Consequently, the question posed by this Vox debate – “Is austerity self-defeating”? – more or less answers itself, when looked at a European level.  Of course it is. The much more difficult task for European economists is to convince European policymakers that this is not the question they should be asking at all.

Thursday 5 April 2012

Long term interest rates and confidence, continued..

I still seem to have difficulty getting across the very simple point that the historically low level of long-term interest rates in the UK (gilt yields) reflects primarily protracted economic weakness rather than, as the government persists in asserting, confidence in the government's economic strategy.   Maybe this chart will do the trick:

The chart shows the value of the FTSE-250 (a somewhat better reflection of the UK corporate sector than the heavily international FTSE-100) against 10 year gilt yields.  The correlation is pretty obvious; higher equity prices have gone along with higher long-term interest rates. Both reflect the fact that, since the turn of the year, the economic news has been better, with business confidence clearly improving, even it is yet to show through in the official data. 

As I explained to the Treasury Committee here 
"Either you believe that we are going to return to normal economic growth reasonably soon or you believe that gilt yields should be very low, but you cannot believe both. If you believe that economic prospects are reasonably good, the current level of gilt yields just does not add up."
The markets agree.  Will the government and other commentators finally recognise the overwhelming evidence, both theoretical and empirical? I'm not holding my breath. 

Monday 2 April 2012

The European Commission asks the wrong people the wrong questions. No wonder it gets the wrong answers

Last week representatives of the European Commission came to see me and colleagues at NIESR to discuss the economic prospects for the UK.  We had a sensible discussion, during which time I expressed my view that slowing fiscal consolidation would boost growth and employment without posing any significant risk to fiscal credibility, and that in this respect the Budget was a missed opportunity. When I made this point, the head of the delegation said that they had seen the ratings agency Fitch that morning, who took a different view.