Marking myself to market: my predictions for 2012, revisited

Brad Delong calls for economists to "mark their beliefs to market" - that is, reassess their position when the facts suggest that they might have been wrong - and commendably shows us the way here.  He is also very hard on economists who fail to do so; I only wish the UK media would be equally critical of those whose analysis has proved wanting (I could suggest a few names..).

But I was talking about me, of course.  I have just despatched my reply to the usual end-of-year email from Chris Giles at the FT asking for my economic predictions for 2013. You'll have to wait until very early next year to read them and those of others; but I thought it was worth looking back at what I said in December 2011 (to the FT and separately to the New Statesman), which I reproduced here at the time.

What Is Wrong with the UK Economy? A guest blog by Adam Posen

[This article. by Adam Posen, Director of the Peterson Institute for International Economics, and formerly a member of the Bank of England's Monetary Policy Committee, originally appeared here on the Peterson Institute website. He has very kindly agreed to allow me to reproduce it here as a contribution to the UK policy debate. Obviously the views below are his, not mine or NIESR's, although for what it's worth I am, as readers of this blog will know, in broad agreement.]

The British economy is lacking productive investment, but not for want of investment opportunities.  Banks and large corporations are sitting on cash, households are holding back on large purchases (including of housing), and the public sector is slashing its investment flow.  This shortfall reflects the deficiencies of the British domestic financial system, some of them longstanding from well before 2008, as much as lack of confidence in future prospects, and responsible macroeconomic policy can address both problems.  The current British coalition government’s economic policy program, however, instead is intended to address a lack of savings, not of investment, and is pursuing that mistaken priority in a self-defeating way.  The economic issue facing the UK therefore is not just one of Plan A versus B, or of the amount and pace of austerity versus growth – the issue is that the UK needs investment friendly structural reform and stimulus, not fiscal consolidation as a goal in and of itself.

"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: 

Indexing benefits to inflation is not "unsustainable"

In the Autumn Statement the Chancellor decided to cut working age benefits and tax credits, thus reversing his previous (sensible) policy of allowing the "automatic stabilisers" to operate, and ignoring the advice of the IMF.  More on the macroeconomic issues here. He justified this change thus: 

But we have to acknowledge that over the last five years those on out of work benefits have seen their incomes rise twice as fast as those in work.  With pay restraint in businesses and government, average earnings have risen by around 10% since 2007.  Out of work benefits have gone up by around 20%.

That’s not fair to working people who pay the taxes that fund them.  Those working in the public services, who have seen their basic pay frozen, will now see it rise by an average of 1%.  A similar approach of a 1% rise should apply to those in receipt of benefits.  That’s fair and it will ensure that we have a welfare system that Britain can afford.

David Smith, writing in the Sunday Times, repeated the Chancellor's argument verbatim and stated that:

"In five years, out of work benefits have risen 20%, earnings 10%. That is unsustainable.."

Robert Chote on the irrelevance of the credit rating agencies

I have frequently argued two, related, points.  First that, unlike countries in the eurozone, the UK's fiscal policy is not constrained by potential market fears of default; and second, that since the ratings of the credit rating agencies are in principle intended to reflect this non-existent default risk, the UK's AAA rating, and any possible downgrade, is meaningless and irrelevant. For these reasons, paying any attention to the ratings agencies when making policy is a serious mistake.  As I wrote here:

"In the event of nuclear war or an asteroid strike, it is possible the UK government might not pay its debts.   Then we'll have other things to worry about. Otherwise, it will, simply because it can -  and because the consequences of not doing so are dreadful...Saying that there is any meaningful probability that the UK will default on its debt - which is what downgrading the UK means - is not to take a particular view on the UK economic or fiscal outlook. It is simply not to understand what you are talking about...So how should the government, and the markets, respond to the rating agencies?  The former should, and the latter in my view will, simply ignore them."

The Autumn Statement and the OBR's forecasts: recovery postponed, again

Just as talk about a "double-dip recession" after the unusually bad second quarter growth figures was overdone, so was the euphoria about Britain "surging out of recession" after the third quarter figures.  The official forecasts from the Office of Budget Responsibility today are for growth of 1.2 percent in 2013 and 2 percent in 2014; very similar to NIESR's forecast.  These, further downgraded, forecasts mean the economy won't be growing faster than trend until 2015.  So the underlying picture remains much the same as it has for the last two years - slow (or no) growth, and certainly nothing like the sustained recovery we should have seen by now.