Thing Versus Blob!

Here’s an example of the great floppy weight of conventional wisdom. And it’s about Francois Hollande, so I guess it’s Epic Blob vs. The Thing, a fine B-movie title. Andrew Rawnsley notes that Hollande doesn’t seem to be doing so well, and Ed Miliband should learn from this.

Astonishingly, though, his conclusion is that Miliband should set out a plan to “deal with the deficit”, i.e. to double-down on failure and join George Osborne hunkering down in the bunker. This is exactly the policy Hollande has adopted!

The French government has pivoted, as they say, to reducing the deficit as the top priority above all else. They have chosen to do so by taxing the rich, which is probably better, but this is a marginal distinction. Hollande’s popularity is slipping precisely because unemployment is up and the economy is going nowhere. It is going nowhere because the European economy is going nowhere.

And Hollande’s options are minimal. He can’t do anything with monetary policy, trade policy, or the exchange rate because he doesn’t control them. He can’t do much with the budget because, thanks to the six pack (aka “I can’t believe it’s not a balanced budget amendment!”) he doesn’t really control that any more.

Of course, this isn’t true of a hypothetical Miliband government.

Fortunately, nobody’s expecting anything from expansionary contraction or internal devaluation any more. But that just leaves what I call sad donkey economics – muddling through and hoping something turns up. The problem here is that it might not. Further, if it doesn’t matter who the hell you vote for, you may as well not, or you may as well vote extremist.

The ultimate development of elite consensus is politics with the politics taken out, the notion that it shouldn’t matter who is in charge. This is of course very close to the vision of the European project as defined by the elite. The Thing beats the Blob, but by then the two are indistinguishable.

Probably the best blog post you’ll read this year

Eli Rabett publishes a translation of Stefan Rahmstorf’s superb German-language discussion of what climate scientists expected from a world with unusually low spring maximum sea-ice cover, what their computer models forecast, and just how closely the forecasts correspond to the weather North-West Europe is putting up with.

That’s what you get if you plug the expected results for surface pressure into a weather forecasting model. Red is unusually hot, blue is unusually cold. And here are the observed temperatures:

Bloody freezing.

Does Emigration Put Spain’s Health and Pensions System At Risk?

According to the Economist’s Buttonwood, “desperate times require desperate measures”. I am sure this is right, times in Spain are certainly getting desperate and many of the measures being implemented in Brussels, far from representing radical and innovative solutions look much more like continually closing the barn door after the horse has bolted.

The issue Buttonwood draws our attention to in the blog post which accompanies this statement is that of migration trends within the Euro Area and the impact these have on trend GDP growth and structural budget deficits in the various member countries. This is an important issue indeed, since such movements seem to be an unforeseen and largely unmeasured by-product of the current monetary and fiscal policy mix being pursued by the EU and the ECB, yet the consequences they have shape the long term future of the whole Eurozone, and with it the sustainability or otherwise of the component states. Continue reading

The End of the Automatic Stabilisers

An extremely radical and dangerous policy is embedded in the UK’s otherwise no-change budget. It has serious implications.

To understand it, let’s pull up this post from Sky News economics editor Edmund Conway. Government spending in the UK is broken into two major categories for management purposes – departmental expenditure limits (DEL) and annually managed expenditure (AME). DEL is determined by the regular, inter-agency Comprehensive Spending Review process and includes things that can be planned in advance, although it can be adjusted via the annual budget.

AME includes the other stuff, like the costs of the social security system, which can’t be planned in advance as they fluctuate with the behaviour of the macroeconomy, and the operational costs of defence, which can’t be planned in advance as they are driven by events, dear boy. The austerity budgets since June 2010 have mostly affected DEL, for the excellent reason that DEL is the stuff the government has discretionary control over. As a result, they have fallen very heavily on capital investmnt and construction, which I believe to explain why it’s gone so bad so quickly.

On the other hand, people like Fraser Nelson went through a phase of denying that any cuts had happened because AME went up in cash terms. “In cash terms” is a tell, of course, as part of this was just inflation, but the real point was that the UK has been experiencing the austerity trap – the budget consolidation didn’t work because it hammered the real economy, reducing tax revenues and increasing payouts to the unemployed.

Inevitably, George Osborne has drawn precisely the wrong lesson from this. AF447 economics strikes again. It’s impossible to arrive at the right treatment if your diagnosis is itself pathologically crazy. Starting in a few years’ time, he wants to get rid of AME, or rather to create a new management framework that permits of setting a cash limit on it, and Ed Conway, as a good Very Serious Person and News International employee*, has already started with the talking points – note the title of his blog post. “Uncontrolled spending” anyone?

But it is precisely the fact that AME floats that makes it worthwhile. Another way of describing the AME/DEL distinction is to say that it is the distinction between the automatic stabilisers and discretionary fiscal policy. Mike Konczal covers just how much the relatively weak stabilisers in the United States helped to relieve the recession in 2009 and how much they are now helping to restore the public finances in the recovery.

If you decide to impose cash flow controls on AME, though, how can the automatic stabiliser possibly work?

*This is relevant; during the Leveson inquiry, it became known that George Osborne recommended Andy Coulson, on Rebekah Brooks’ suggestion, to the prime minister. Osborne had previously been in trouble and had been spared the full fury of the tabloid press for some reason.

The Case for Balls

First, something amusing:

OK, break’s over. Come, muse, let us sing of Balls! I cannot agree too strongly with Mehdi Hasan when he says that sacking Shadow Chancellor Ed Balls would be madness. Ed Balls is one of a tiny number of people close enough to the Euro-Atlantic policy elite to matter who is not completely wrong about every issue of importance at the moment. Better, he is also in the tinier subset of this group who are trying to win politically, rather than writing letters to the editor or, yes, blogging.

But What About The Crisis?

The first key point in the anti-Balls case is that he bears some special responsibility for the financial crisis of 2007. In so far as anyone articulates this in detail, the idea is that he argued for Bank of England independence in 1997 and the transfer of its regulatory mission to the Financial Services Authority, and the corollary is that the FSA “failed” and that the crisis is all down to that.

The problem here is that the financial crisis was not just a problem of bank regulation in the usual meaning of the term. The financial product that did most of the damage was a bog standard mortgage. There was, as Dean Baker would say, a housing bubble! The number of Balls critics who believe that the UK should have, say, imposed quotas on mortgage lending, massively increased property taxes, changed its exchange rate policy to reduce the inflow of capital, or restricted the growth of the property-lending activities of the City in some other way is vanishingly tiny. In fact, many of the loudest anti-Balls voices, often the very same individuals, spent the mid-2000s yelling that stamp duty was too high and this-or-that Labour initiative was “a menace to property prices” or “a risk to our financial services industry”.

Most of these policies, further, were simply politically impossible in the UK in 2002, say. It is just about thinkable that Gordon Brown might have been convinced that the property boom was getting out of hand. But it is absolutely unbelievable that Tony Blair, the most electoral of prime ministers, would ever have consented to restraining the bubble that was making his key support base so rich. Really.

Of Course, Nobody Else Had Anything To Do With It, Not Me Sir

If letting the Bank of England be an independent central bank with a monetary-policy-only mandate was such a crazy notion, surely its Governor must have had something to say about it? And the broader economics profession? Well, the latter can be dealt with quickly. It’s a broken reed, but I remember 1997 and they lapped it up to a man, and they were still doing so in 2007.

But here’s the Financial Times‘s Chris Giles, profiling Mervyn King, who turns out to be an authoritarian workplace bully who was determined to have nothing to do with bank regulation and to make the Bank’s remaining responsibilities in that line a Siberia assignment for people who fell out with him. I discussed this with two Bank employees who at various times worked for him and worked in bank regulation and they approved every last word.

And the notion of the independent, monetary-policy-only central bank? Well, here’s Brad DeLong on just what a massively hegemonic chunk of global conventional wisdom it was.

But, But, But! What About the Broader UK Economy?

Didn’t the UK go into the crisis with its government debt already spiralling out of control? This is a point which is supported by Iraq-style Very Serious People of all parties and none. As such, it is of course nonsense, but it is nonsense that must be repeatedly cleaned up. Rust never sleeps, so here I am on the middle watch down at frame 73K with the intellectual angle grinder. The UK government net debt did not increase as a percentage of GDP between the .com boom/crash and the great financial crisis.

Here’s a chart of the annual surplus/deficit:

Here’s one of the stock of debt:

Further, the UK government’s debt in 2012-as-forecast broke down as follows: 47% the impact of the crisis, including 4% discretionary stimulus, 37% existing stock, and 16% for the “structural deficit” up to 2010. One lesson from the UK post-2010 is that the structural deficit is whatever you say it is, being deeply assumptions-dependent. But either way, 47 is lots more than 16.

(Source: Lib Dem economist Giles Wilkes and the IMF)

This is important, because it is literally impossible to get to a sane economic policy from pretending that the national debt hurtled upwards in 2005 and the economic event of 2007-2008 was a massive sell-off in government bonds. Similarly, you couldn’t get a sane foreign policy in 2005 from pretending that things in Iraq would be OK in a couple of Friedman units or perhaps a Chote.

But, But, But, But! Wasn’t It All An Illusory Consumer Binge?

The answer is no. As John van Reenen and others at the LSE pointed out (monster PDF), Labour productivity in the UK grew at an annualised rate of 2.8% from 1997 to 2010, even counting in the crisis. Productivity growth in the UK was better than France or Germany and as good as the United States during the so-called productivity miracle. About 0.4% of this was accounted for by finance, and the definition of the metric excludes changes in the value of real estate.

In fact, if there was a problem, a large part of it was that the growth in productivity didn’t make it into wages and therefore didn’t get near the consumer economy. Ex-housing, consumption didn’t grow faster than productivity.

Correct Actions on the Stall Warning

Also, the UK’s policy response to the crisis was, it now becomes blindingly obvious, a huge success. Here’s the flight-data recorder tape that shows the real economy hitting the crisis, and importantly, when:

The blue line, on the left-scale, is unemployment, the green line, also on the left-scale, is youth unemployment, and the red line on the right scale is the employment-population ratio. Watch it plunge in 2008! I use this metric because it was precisely what David Blanchflower was watching that year on the Bank of England’s monetary policy committee, while he repeatedly argued for interest rate cuts and Mervyn King thought everything would be cool in a Friedman unit or two.

In the winter of 2008, Gordon Brown, Alistair Darling, and Ed Balls reacted correctly to the stall warning – they dealt with the banks, allowed the automatic stabilisers to kick in, let the pound devalue, got King to act, and also chucked in a (relatively small) fiscal stimulus. Darling and Brown also did something else which is undervalued in all this, which is that they changed the composition of public expenditure as well as its quantity, by bringing forward capital investment and especially construction projects.


The economy was growing again by the end of 2009, and strongly. It was creating jobs. The public finances were improving, and repeatedly surprised on the upside. Too much recent British politics is explained by the fact that the forecasts of 2009-2010 were based on the horrible month of December, 2008, the depths of the recession and structurally usually a weak month for UK tax receipts.

And now, well:

It’s snowing; I presume that’s going to be the explanation for something in due course.

The Man Who Was Wrong vs AF447 Economics

Ed Balls was wrong to think the British economy of the mid-2000s was fine. As we have seen, there was plenty to be said for it. However, there were serious problems, notably the housing bubble, the dangerously big banks, and problems of regional and class inequality. But at least Balls believes that he was wrong. The continent of Europe is crawling with economists who know they are right.

This is where the Iraq-style Very Serious Person phenomenon kicks in. The best way of spotting a VSP is to look for the man whose policy advice never changes in substance from the average of other VSPs, whatever has happened in the false world of reality. So we have people like ex-Labour spin doctor Hopi Sen.

I’ve repeatedly crossed swords with him on precisely this issue, and here I go again. Back in 2010 he believed Labour shouldn’t risk disagreeing with George Osborne on economic policy, and certainly shouldn’t let Ed Balls near it, because Osborne was right and Balls had spent all the money before the crisis. Later, he believed Labour shouldn’t risk disagreeing with Osborne because there was a chance it might turn out OK in a Chote or two and that would be tactically embarrassing. Now, he argues that the OBR’s forecasts are so menacing that Labour shouldn’t risk disagreeing with Osborne’s policy because there is no alternative.

Of course, the OBR’s forecasts are based precisely on the continuation of current policy. Further, the OBR’s forecasts have repeatedly turned out to be worthless, but that is a secondary issue. The key point here is that the VSP never wavers from the elite consensus in terms of the final net-net output, whatever the input. (It will surprise no-one that he was wrong about Iraq.)

The upshot is what I called AF447 economics; the crew of Air France flight 447 were a highly specialised group of experts, respected and trusted by society, who blew it so comprehensively it took years to gather enough evidence to prove that they blew it and the aeroplane was entirely functional at the moment of hitting the sea.

Specifically, they failed to diagnose the original problem, and the worse things got, the more they clung to their original failure to diagnose it, which led them to make everything worse. We will never know what they were thinking as they kept the stick fully back all the way down in a stable stall, but I think it is a fair guess that they had a lot of arguments why they were right and it was going to work any second now.

Very serious people, if you will.

Everything Will Be Fine In Just One Chote Unit

So I said that the European economic situation is basically like the Iraq War. Here’s an example from noted dissident David “Danny” Blanchflower:

Even this OBR [the UK Office for Budget Responsibility – ed] forecast is not credible because it suggests growth will be 1.8 per cent in 2014 and 2.3 per cent in 2015. There is no evidence that consumption, net investment or net trade – which are the main components of growth – will grow any time soon; they aren’t.

The OBR’s belief that all will be well in two years is the same assumption they have made in every forecast – so called “mean reversion” – but this hasn’t happened and isn’t going to.

I hadn’t been aware of that, but it is astonishing. The OBR’s core forecasting assumption is that everything will just revert to trend, and therefore everything is OK. The problem here is that things revert to the mean if, and only if, if there is a trend and some evenly-distributed noise around it. That is to say, they literally think nothing has changed, even though things have changed, and policy has changed. It is very important to identify the moments when the trend has changed, and if you’re the government, to reflect on whether or not you might be the trend.

Further, they have even formulated a well-defined timeframe within which everything will be OK. For the OBR, it’s two years. For Thomas Friedman, everything in Iraq was going to be OK within six months, aka one Friedman Unit, and then you pesky kids with your computer diaries were going to be sorry. In honour of OBR director Robert Chote, I therefore give you the Chote Unit. The economy will be fine by 2012, and failing that, in two years’ time.

Some of my readers will protest and say that Robert Chote is a man worthy of respect, a genuine expert. But one of the readers who is most likely to do that has already answered his own objection.

Yes. This government has a terrible record of co-opting genuine experts, using them like fools, and leaving them weeping by the roadside. As well as a Chote unit it could also be a Budd unit, after the founding OBR director Sir Alan Budd, who also thought everything would be fine by 2012, and who quit the OBR after its first intervention in politics, when it made up the numbers to suit the politicians (don’t ask me, ask me the first, me the second, and me the third). But I’m sticking with the Chote unit, because Chote was warned, and he’s stuck with it much longer than Budd.

The Iraq examples are legion, but the most telling one was the fate of the Iraq Study Group, led by none other than the enduring statesman and personal friend of Georges Bush 1.0 and 2.0, James Baker, which went to Iraq in 2006, and reported back that it was a terrible disaster and the best thing to do was to patch up local arrangements like the Marines did in Anbar and then get out as quickly as possible. This was ignored, and passed to the attack dogs to be denounced as treason. Eventually they ended up following the recommendations, after time and blood had passed under the bridge and the military had worked out the same ideas themselves.

Meanwhile, the high panjandrum of expansionary contraction, Alberto Alesina, has noted that the US stock market is up, and concluded this is down to the as-yet-undelivered golden prospects of sequestration. This is genuinely ridiculous. As the Washington Post points out, actual fiscal contraction in the US didn’t bring about a boom, and neither did much greater contraction anywhere else, yet he claims to believe that the mere prospect of it is firing up the old animal spirits.

(Of course, it can’t be those because animal spirits are thoughtcrime and we say expectations which are somehow different and nothing at all to do with Keynes although nobody really knows how.)

So, you can have contraction without expansion, expansion without contraction, and expansion with only future promises of contraction. Further, looking at the British experience, you can also have contraction that starts with future promises of contraction. In what way is this any better than astrology?

This House Has No Confidence In Olli Rehn, Nor Anyone Else

So here we are again. A peripheral European economy is falling apart, because of its hugely overextended banks. The powers-that-be, being the European Commission’s EMU directorate-general, the European Central Bank, and the German ministry of finance, intervene. This time, rather than letting the government deal with the banks, destroy its credit, and then lend the government money on terms that basically preclude any prospect of recovery – and don’t ask me, ask Deutsche Bank and Edward Hugh about the impact of youth unemployment on long-run productivity – they’ve decided to bill the banks’ depositors under the bail-in directive, and to hit the insured depositors below €100,000 although they didn’t have to, and then anyway impose a structural-adjustment programme of the order of 5.75% of GDP in case the horse sings this time – don’t ask me, ask the IMF. Everyone’s now standing by for Monday and whatever may come.

But isn’t this a bit, you know, 2008? If there was any point to the policy of the European powers-that-be, surely it was that this stuff was meant to be over? Instead, we are landed with a sort of permanent state of emergency. Why isn’t anybody sorry? Why isn’t anybody responsible?

Instead, what do we get from the elite?

Attempts at ideological policing. A cocktail of whataboutery and racist dogwhistle – I’m sorry, Professor Sachs, you’re smart enough and ugly enough to know just what is meant by welfare in current US politics. The British prime minister flat-out lying about what his own pet pro-austerity committee says. And I call it that advisedly. We’ve had Olli Rehn’s spokesman descending into playground bullying. We’ve had British chancellor George Osborne telling himself recovery is but a Friedman unit away. We’ve had that American private-equity guy complaining that French workers work three hours a day, when he put them on short-time working at three hours a day. We’ve had Hans-Werner Sinn suddenly discovering intra-eurozone trade imbalances after all these years. Someone has invented a political party to demand that Germany leaves the Euro because it’s not been austeritarian enough.

Clearly, the powers-that-be are as bankrupt as the Cypriot Bank of Horsemeat, and they must go. Paul Krugman is entirely right that the whole story is foully reminiscent of Iraq. The great flabby mess of elite consensus rolled downhill, not so much William Cobbett’s Thing as 1950s B-movies’ Epic Blob, absorbing every punch that could be thrown at it.

So what’s with the most prominent representative of this feeling in Europe, Beppe Grillo? Well, when he’s not looking after his network of offshore companies, or rather, letting his secretary and wife look after them, at least in name, he’s demanding the elimination of trade unionists – that’s a must read piece, by the way. You’ll need to put up with slightly tiresome left-wing-art-collective stylings and I was quite pleased to identify “that lot who called themselves Luther Blissett because he was black, like” before finding out they are indeed the collective author, but it’s damning. Further, even UKIP manage to make sense in flashes.

And after the usual painful negotiations and baboon threat-displays, the intergovernmental leaders managed to agree a budget that zeroed-out EU investment in broadband infrastructure. Obviously! (I agree I’m talking my book professionally there, but you’ll struggle to find anyone who doesn’t think it will do at least some good.)

Clearly, the old motto can be adapted. Tous les mêmes. Tous pourris. Même moi!

But it’s not as if nothing can be done. We still have the economic policy team at the Commission we had in February, 2010. We still have the same Commission President we had in 2004. Evidently, the European public is entirely satisfied and the same broad strokes of policy from the property-boom years are OK. No. Whoops, I took a crazy pill.

So, if you want new methods you usually need new men. The European Parliament has, to its credit, knocked back the budget. Now, it must stand up to its responsibility and knock back the Commission. Amazingly enough, we still can’t just bin Rehn, it’s all or nothing. But it’s been done before, over issues that were far, far less important in their consequences. This quote is a classic:

“It was becoming increasingly difficult to find anyone who had the slightest sense of responsibility.”

If it’s not labeled, did it really happen?

The IMF has published its Financial Sector Assessment Program (FSAP) report for the European Union. Usually FSAP reports are done for countries but this one looked at union level issues and institutions. The above is Figure 7 from it. It’s a chart showing a measure of spillover, which the report defines as the probability of a country being in distress given that other countries are in distress at the same time. Their point is that such spillover has been a feature of the Eurozone crisis since the summer of 2008.

Yet there is one strange thing about the figure. It blacks out two of the labels on the chart. But the imperfect blackout allows through various simple means to determine that the two dates that dare not speak their name are that for the Greek debt exchange and the Outright Monetary Transactions announcement. So clearly as the report went through the review stages, someone was sensitive about seeing these dates explicitly. Was it a claim that the data didn’t imply any clear link between spillover and those events, so putting them in looked like over-attribution? Or was it that the data showed too clearly that the Greek debt exchange failed to calm nerves — despite all the assurance at the time that it was a one-time, one country only deal — whereas aggressive ECB policy noises did? You’d think that this far into crisis, we’d at least be entitled to an airing of views.