“For reasons not clear” Krugman ignores aggregate supply

Mark Sadowski directed me to one of the most perplexing Paul Krugman posts that I have ever read. Krugman argues that the slow British recovery was caused by a contractionary fiscal policy, which reduced aggregate demand.  Fair enough.  He’s done that before.  Then he presents absolutely no evidence that AD in Britain has done poorly in recent years.  None.  Instead he presents data for RGDP.  OK, he’s done that before, many times.  And I’ve criticized him for doing this, many times.  And he keeps doing it.

But then something really strange happened; he said this:

The only reason Britain isn’t suffering terrifyingly high unemployment is the fact that, for reasons not clear, productivity has collapsed, so that the shrunken economy is still employing a lot of people.

Of course when productivity “collapses” one expects to see RGDP growth “collapse.”  And Krugman has a graph that shows RGDP growth did collapse.  So presumably the collapse in productivity growth at least partly explains the collapse in RGDP growth.  But Krugman simply ignores this clear implication, and writes the rest of the post as if it’s obvious that “austerity” explains the low growth in RGDP, even as employment in Britain does much better than in America, and dramatically better than in eurozone economies that also experienced banking distress, such as Ireland and Spain.

Don’t get me wrong, I believe Britain has had both an AD problem and a productivity problem in recent years, but not due to austerity.  And I believe the AD shortfall partly explains the low RGDP growth.  And that productivity and AD can even interact in the short-run (but that doesn’t even come close to explaining the UK productivity data, as Krugman himself hints at with his “reasons not clear” remark.)  But you’ll never catch me writing a post claiming it’s a demand side problem, where 100% of the evidence actually presented in the post points to it being a supply-side problem.

The truth is that much of the productivity problem in Britain, and hence the RGDP problem, is due to supply-side factors ranging from lower North Sea oil output to fewer gaudy bonuses paid out in the City of London.  None of that has anything to do with “austerity.”

In this comment Mark Sadowski discusses all this in much more depth, and shows that Krugman’s tendency to confuse RGDP with AD also led him to make serious errors in an earlier post comparing this crisis to the Great Depression.

Krugman also ignores the fact that his own graph shows fiscal policy in Britain getting more contractionary in 2013, and yet growth picked up sharply!


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47 Responses to ““For reasons not clear” Krugman ignores aggregate supply”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    20. December 2013 at 07:37

    Just accept that Krugman thinks in terms of IS/LM and there’s no puzzle here. If the intersection of the two curves is to the left of Potential Y, there’s no point in discussing the supply side.

    There’s nothing to be perplexed about. When your Chicago teachers told you that nobody uses IS/LM, they misled you. That’s all.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. December 2013 at 07:46

    If you’re Mediterranean, tired, poor and yearning to eat lutefisk;

    http://www.norwaypost.no/index.php/news/latest-news/29346-norway-may-expect-heavy-immigration-from-southern-europeans

    ‘The level of education in the countries by the Mediterranean is quite high, and at the same time the financial crisis has harmed many young adults who have gone straight from school to unemployment. As a result, the immigrants who come are well educated and prepared for the work force. Many of them also have the labor skills that Norway is in desperate need of, such as engineers and kindergarten teachers.’

    Norway, where they have their own central bank and currency, finds work for those subject to the ECB’s monetary policy.

  3. Gravatar of Britmouse Britmouse
    20. December 2013 at 07:59

    It’s “supply-side fiscalism” – austerity as a supply-side explanation for reducing output. I posted recently showing that hours worked is 3% higher than expected at the time of the 2011 budget, yet output/hour is 7% lower. This is sufficient to more than explain why RGDP is weaker than was expected at the time.

    http://uneconomical.wordpress.com/2013/12/06/a-uk-supply-side-counterfactual/

    I find it astonishing that Krugman and Wren-Lewis, having done post after post in 2012 describing how the UK does have real fiscal austerity in 2012, are suddenly happy to now argue that a relaxation of fiscal austerity in 2012 is the “reason” for GDP recovery in… erm, 2013.

  4. Gravatar of Kira Kira
    20. December 2013 at 07:59

    As Krugman has an ideological tendency to see the problem from the demand side, Sumner have an ideological tendency to see it from the supply side. And the knowledgeable reader knows he can not trust too much on either. That you said about fewer gaudy bonuses paid out in the City of London seems very strange, you should explain more

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. December 2013 at 08:03

    Paul Krugman on ‘austerity’, ‘Nevermind’?

    http://online.wsj.com/news/articles/SB10001424052702304367204579270003162012122

    ‘The U.S. economy grew at a healthy 4.1% annual rate in the third quarter, revised figures showed Friday, boosting hopes that the recovery is shifting into higher gear after years of sluggishness.

    ‘The Commerce Department previously pegged the annual growth rate from July through September at 3.6%. But new data indicated stronger gains in consumer and business spending over the summer.

    ‘Friday’s new estimate showed gross domestic product, the broadest measure of all goods and services produced in the economy, expanding at the fastest pace since the fourth quarter of 2011 and the second-fastest since the recovery began in mid-2009.’

  6. Gravatar of Michael Byrnes Michael Byrnes
    20. December 2013 at 08:19

    Kira wrote:

    “As Krugman has an ideological tendency to see the problem from the demand side, Sumner have an ideological tendency to see it from the supply side.”

    Huh? Are you confusing Sumner with someone else? Direct quote from above:

    “Don’t get me wrong, I believe Britain has had both an AD problem and a productivity problem in recent years, but not due to austerity.”

    That’s not someone who sees the world through supply-side glasses.

  7. Gravatar of DanC DanC
    20. December 2013 at 08:22

    I now this may sound stupid, but why would government austerity lead to a reduction of RGDP? Is government spending more productive then private sector spending? Is employment in the public sector better for the economy then increased employment in the private sector?

    If money is left in the private sector does the velocity of money slow? Does calling government spending an investment in the future really change “investment and spending” in the economy? Why is the government better at finding investment opportunities then the private sector?

  8. Gravatar of W. Peden W. Peden
    20. December 2013 at 08:24

    Britmouse,

    I was also surprised by this change of heart by Simon Wren-Lewis recently. I don’t remember him praising a Plan B in 2012…

  9. Gravatar of ssumner ssumner
    20. December 2013 at 08:38

    Kevin, You missed the point. Potential is based on the labor market (which is strong in the UK.) Productivity collapses reduce POTENTIAL.

    Patrick, Good observation.

    Britmouse, I suppose one could make a supply-side argument for fiscal stimulus, but I’m 99% sure Krugman thinks in demand side terms. I was going to mention 2012, and completely forgot, thanks.

    Kira, You said;

    As Krugman has an ideological tendency to see the problem from the demand side, Sumner have an ideological tendency to see it from the supply side.”

    I presume you weren’t trying to be funny, so I assume you are new here.

    DanC, The argument is that it affects employment, not productivity, but the data for Britain shows the opposite.

  10. Gravatar of PJ PJ
    20. December 2013 at 09:13

    Off topic, but I look forward to your reaction to Cochrane’s most recent post. Your title will be “Never reason from a price change example number #”. Actually, that might be all you need to say about it.

  11. Gravatar of Mike Sax Mike Sax
    20. December 2013 at 09:39

    “The depressing effect of austerity in a slump is, in short, as clear a story as anything in the annals of economic history. But the austerians were never going to admit their error. (In my experience, almost nobody ever does.) And now they’ve seized on the latest data to claim vindication, after all. You see, some austerity countries have started growing again. Britain appears to be experiencing a significant bounce; Ireland has finally had a decent quarter; even Spain’s economy is showing faint signs of life. And the austerians are holding victory parades.”

    http://www.nytimes.com/2013/12/20/opinion/krugman-osborne-and-the-stooges.html?_r=0&hp=&adxnnl=1&rref=opinion&adxnnlx=1387560395-vBcpL8Wn94AoGEN9tDxq9g

    Yes, it must be frustrating to have him rain on your parade.

    “Britain’s recent growth doesn’t change the reality that almost six years have passed since the nation entered recession, and real G.D.P. is still below its previous peak. Taking the long view, that’s still a story of dismal failure — as I said, a track record worse than Britain’s performance in the Great Depression.”

    Is this really worth crowing about? Still haven’t caught up to the pervious peak and this is a victory for full monetary offset? If you believe that it is anything less than 100% MO then it would have been better with less fiscal austerity-preferably none at all as far as I’m concerned.

  12. Gravatar of JohnB JohnB
    20. December 2013 at 09:42

    I’m so sick of Krugman, and other’s paraphrasing him, using the word “collapse” to describe slight deceleration in an upward trend. That word shouldn’t even apply to small outright reductions. A collapse in RGDP or inflation should mean something like -10%. Krugman is just trying to use dramatic words to mislead his readers and I don’t know why people who know better blindly follow along.

    Examples of collapses: U.S. government spending after WWII, real GDP from 1929-1933, prices in 1920, GDP of post-Soviet economies in the 1990s, the Greek employment market, real GDP in some Eastern European countries in 2009 (-14% in Estonia for instance). A drop in inflation or real GDP growth from 3% to 1.5% is not a collapse.

  13. Gravatar of Travis Allison Travis Allison
    20. December 2013 at 10:02

    Scott, how does PK’s graph show that fiscal policy got more contractionary in 2013? Maybe you were thinking of Wren-Lewis’ table which shows govt consumption growth going from 2.6% in 2012 to 0.4% in 2013(forecasted)?

    I am actually not even sure what years PK’s graph is actually data for. Is the date 2013 for Jan 2012-Dec 2012? Or is it for Jan 2013-Dec 2013 (forecasted)?

    It is amazing and disheartening to see PK and WL tie themselves up in knots trying to shoehorn Britain’s fiscal policy history into their intellectual framework.

    On the bright side, at least we can finally all agree now that Britain had an expansionary fiscal policy in 2012 ;-) Eeegads. Economics advances one funeral at a time. It’s pretty sad that the funeral needed is going to be PK’s.

  14. Gravatar of Kevin Donoghue Kevin Donoghue
    20. December 2013 at 10:52

    “Productivity collapses reduce POTENTIAL.”

    That’s sort of true; but:

    (1) if the IS/LM equilibrium Y is below potential Y, all the collapse does is narrow the output gap;

    (2) it’s only sort-of-true because, in a slump, firms hoard labour which reduces observed productivity.

    Both these points will be familiar to regular Krugman readers, which is why I say that there’s nothing perplexing here. He may be wrong, but he’s not saying something that would cause John R. Hicks to wonder, what is this bloody man doing with my IS/LM model?

  15. Gravatar of Brian Donohue Brian Donohue
    20. December 2013 at 11:25

    JohnB,

    Amen.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. December 2013 at 12:31

    Kira,
    “As Krugman has an ideological tendency to see the problem from the demand side, Sumner have an ideological tendency to see it from the supply side.”

    With no harm intended, this is without doubt the funniest comment I’ve read all day. Both Krugman and Sumner see the problem from the demand side. It’s just that Krugman believes in the liquidity trap which means monetary policy is impotent, and thus he recommends fiscal stimulus. Sumner doesn’t believe in the liquidity trap (nor do I).

    And I would argue that Sumner far more assiduous than Krugman in separating demand from supply side effects, with this post being an excellent example. Thus, in this sense, Sumner is actually the more consistent demand side economist.

  17. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    20. December 2013 at 12:36

    I thought ‘austerity’ meant two things: higher taxes and higher spending. Naively I would think that ‘higher taxes’ might affect supply as well.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. December 2013 at 12:44

    Travis Allison,
    “Scott, how does PK’s graph show that fiscal policy got more contractionary in 2013? Maybe you were thinking of Wren-Lewis’ table which shows govt consumption growth going from 2.6% in 2012 to 0.4% in 2013(forecasted)?”

    As Krugman says:
    “What I plot below is the change in the cyclically adjusted primary balance — a measure of the extent to which fiscal policy is being tightened.”

    In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB) (something Krugman very much agrees with). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature.

    Thus, when looking at Simon Wren-Lewis’ OBR data, government consumption growth is *not* the best measure of fiscal policy stance, changes in the cyclically adjusted deficit *are*. And note that the OBR data shows that the cyclically adjusted balance increased from (-5.9%) of potential GDP in financial year 2012 to (-5.1%) of potential GDP in financial year 2013 or a change in the cyclically adjusted balance of +0.8% of potential GDP. Compare that with the previous change in cyclically adjusted balance which was +0.1% of potential GDP.

    “I am actually not even sure what years PK’s graph is actually data for. Is the date 2013 for Jan 2012-Dec 2012? Or is it for Jan 2013-Dec 2013 (forecasted)?”

    Krugman states that his data is from the October 2013 IMF Fiscal Monitor which you may find here:

    http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

    The years are calendar years. Thus in calendar year 2012 the CAPB changed by (-0.2%) of potential GDP, and by +0.9% of potential GDP in calendar year 2013. The numbers come from the bottom half of Table 2 on page 70.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. December 2013 at 12:50

    Mike Sax,
    Please don’t tell me you missed the whole point of this post. I know you’re not that thick.

  20. Gravatar of Britmouse Britmouse
    20. December 2013 at 12:59

    Travis, Krugman’s graph shows the year-on-year change in the cyclically adjusted budget deficit, so positive values (2010, 2011, 2013) are supposed to represent “contractionary” fiscal policy for the given year.

    Kevin, the UK had total hours worked growing at multi-decade highs in 2012, peaking above 2.5% y/y. The labour market looks like the late-80s Lawson Boom. And yet output is basically flat.

  21. Gravatar of Britmouse Britmouse
    20. December 2013 at 13:01

    … and so “labour hoarding” is surely irrelevant.

  22. Gravatar of Vivian Darkbloom Vivian Darkbloom
    20. December 2013 at 13:24

    Just a hunch, but I suspect that the mysterious “collapse” in UK productivity may have something to do with the UK financial services sector. That sector comprises a larger percentage of overall UK GDP than most countries and I suspect that the level of reported overall productivity is highly sensitive to developments in that sector.

    Prior to the financial crisis the financial services sector was growing more rapidly than GDP and thus likely boosted measured productivity significantly. After the financial crisis and until recently the financial sector fell more significantly than GDP.

    It may also have something to do with the difficulties of measuring output from that sector, as reported here, which surmises that financial services contribution to GDP (and therefore productivity) was overstated prior to the crisis:

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110304.pdf

    It also suggests as of third quarter 2011 that the financial service sector recovery was slower than the rest of the economy (see, in particular, Chart 1). When the financial sector is doing well and bankers are earning “gaudy bonuses” this likely has a very positive effect on reported “productivity” (a much greater effect, I’ll bet, than purveyors of fish and chips). The reverse is also likely true.

    But, what does that have to do with “austerity”?

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. December 2013 at 14:06

    Tyler Cowen has linked to this post:

    http://marginalrevolution.com/marginalrevolution/2013/12/sumner-on-krugman-on-the-uk.html

    “…Read the whole thing. I also would note that the demand-side secular stagnation meme also seems to be gone or at least shelved in the cupboard, as today Krugman wrote: “Economies do tend to grow unless they keep being hit by adverse shocks.”…”

  24. Gravatar of ssumner ssumner
    20. December 2013 at 15:17

    PJ, I couldn’t make much sense of it.

    Mike Sax, Sometimes I wonder if you are a complete moron, or just pretending to be one.

    I wonder if you realize that quoting Krugman saying the current British slump is worse than the Great Depression simply makes him look bad. You aren’t doing him any favors

    Travis, The graph shows fiscal policy getting more contractionary.

    Kevin, You said:

    “(1) if the IS/LM equilibrium Y is below potential Y, all the collapse does is narrow the output gap;

    (2) it’s only sort-of-true because, in a slump, firms hoard labour which reduces observed productivity.”

    The first point in no way exonerates Krugman, rather it just shows he’s wrong. Declining North Sea oil production lowers output in any plausible model. The LRAS and the SRAS curves both shift left. If people are using models so insane that lower North Sea oil output doesn’t lower RGDP, then I hardly consider that an “excuse.” And the second point can’t come close to explaining the productivity slowdown AS EVEN KRUGMAN ADMITS.

    Pietro, You and I know that, but Krugman doesn’t believe that.

    Mark, Don’t assume he’s not that thick, he’s done this sort of thing too many times to count. He actually thought the post was about monetary offset, I kid you not. He’s becoming a liberal Geoff.

    Britmouse, Good point.

    Vivian, Yes, I thought it was oil and finance.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. December 2013 at 17:29

    Scott,
    “I wonder if you realize that quoting Krugman saying the current British slump is worse than the Great Depression simply makes him look bad. You aren’t doing him any favors.”

    I just looked up the UK employment/unemployment figures from the Great Depression (the Excel file of the BOE’s “Three Centuries of Data on the UK Economy”):

    http://www.bankofengland.co.uk/publications/Pages/other/monetary/mpreadinglistf.aspx

    Employment peaked in 1929 (19.01 million) and it took until 1934 (19.21 million) before it exceeded its previous peak or five years. In the Great Recession employment peaked in 2008 (29.36 million) and it took until 2012 (29.43 million) before employment exceeded its previous peak or four years. It reached 30.1 million in 2013Q3.

    The unemployment rate rose from 7.1% in 1929 to 15.4% in 1932 and fell to 11.7% by 1934 (year 5). The unemployment rate rose from 5.6% in 2008 to 8.0% in 2009 and is currently 7.4% (year 5).

    The only respect that the current UK recovery is worse than the Great Depression is productivity and there’s virtually nothing that monetary or fiscal policy can do to fix that.

  26. Gravatar of JohnB JohnB
    20. December 2013 at 18:54

    I challenge the notion that reducing government is contractionary, monetary policy being equal or held constant. Indeed I don’t think the “contractionary” term even makes sense except as a rhetorical device used by those that favor ever-increasing amounts of government spending. This is obviously not a subject that will ever be settled through empirical argument due to the number of moving parts in an economy.

    The question of whether adding government spending is “expansionary” really just amount to asking whether the government spent the money better, in a way that created more value, than the private sector would have. GDP (Gross is a total misnomer) being a net value added rather than a gross approach Given that the incentives for the government are political rather than economic, revenues come from forced taxation rather than consumer choice, and there are no financial penalties for failure, it is very unlikely that government spending creates more value per dollar than what would have happened had they not intervened and confiscated money and resources from other uses. In fact, more government spending equals less value other things equal.

  27. Gravatar of Mike Sax Mike Sax
    20. December 2013 at 21:16

    I sometimes wonder if you are anything more than an adolescent throwing around facile insults. However, luckily I don’t have to wonder very long. Of course you aren’t. Do you even know in what sense Krugman means that? There are some numbers that were worse now. As you are always saying you shouldn’t criticize what you don’t understand maybe you ought not to criticize him here.

    Britain still hasn’t even caught up to the previous trend so how exactly is this some victory for full offset.

    IF after 5 years of recession we’re still behind trend how is is that fiscal policy has no scope? Can you answer this question rather than what you usually do which is focus on some peripheral point to go for a cheap zinger?

  28. Gravatar of Mike Sax Mike Sax
    20. December 2013 at 21:19

    I mean if you can’t even explain how 5 years and counting and still behind trend is this indisiputable Market Monetarist victory what’s the point?

  29. Gravatar of Mike Sax Mike Sax
    20. December 2013 at 21:20

    Try answering the question rather than lying about my intellgience-nobody who’s anybody thinks I’m a moron and I don’t care about your opinion on it anyway.

  30. Gravatar of Ray Lopez Ray Lopez
    20. December 2013 at 22:49

    http://www.researchgate.net/post/Are_Real_Wages_procyclical_and_if_such_what_are_the_causes_behind_procyclial_movements_in_real_wages

    the key to this debate is to observe real wages are not procyclical but acyclical. Likewise, and related, since real wages and productivity are linked, productivity actually depends on demand not supply, at least in the short run. This means productivity will increase during boom times. Perhaps this is due to people being more motivated and less risk adverse during boom times? Sumner does seem to allude to this in his post above (“And that productivity and AD can even interact in the short-run (but that doesn’t even come close to explaining the UK productivity data, as Krugman himself hints at with his “reasons not clear” remark.”)

  31. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 04:12

    “’m so sick of Krugman, and other’s paraphrasing him, using the word “collapse” to describe slight deceleration in an upward trend.”

    That’s not just Krugman. That’s standard economics. If after 6 years you’re still beneath trend it’s a pathetic economic performance. As Britain is still beneath trend they could still use some fiscal spending now.

  32. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 04:19

    Scott here I’ll do Krugman the favor of actually getting the context of why he says 1930s Britian was better-it’s GDP performed better.

    http://krugman.blogs.nytimes.com/2013/12/15/if-only-it-were-the-1930s/?_r=0

  33. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 04:19

    Scott here I’ll do Krugman the favor of actually getting the context of why he says 1930s Britian was better-it’s GDP performed better.

    http://krugman.blogs.nytimes.com/2013/12/15/if-only-it-were-the-1930s/?_r=0

  34. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 04:30

    Mark the whole point of this post is what it always is: there’s nothing wrong with austerity as long as there’s whatever MMers say is appropriate monetary policy.

    As we’re still beneath trend it’s no wonder all you and Scott can do is throw out insults. It’s like “We;re right because Mike Sax is a moron.’

    So much for any actual concern for truth. You cant even answer the questions you just have to play it personal

  35. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 04:48

    If what you mean Mark is that it’s only beneath trend because of A/S I get that argument I just don’t buy it. It’s a great argument for those who love austerity though. We must therefore impose more on them for their own good. This has been the same argument for all the bloodletting in Greece and across the Euro in the last 5 years.

    The austerity argument is like a vampire-the more blood it consumes the worse the patient is the more of its medicine it needs.

  36. Gravatar of ssumner ssumner
    21. December 2013 at 07:08

    Mark, Hopefully Mike Sax will read that.

    Mike Sax, If you just once showed that you understood a post, instead of tossing out insults like a spoiled baby, we might take you seriously.

  37. Gravatar of ssumner ssumner
    21. December 2013 at 07:10

    Mike, You said;

    Mark the whole point of this post is what it always is: there’s nothing wrong with austerity as long as there’s whatever MMers say is appropriate monetary policy.”

    Actually, that has nothing to do with this post, which is about Krugman confusing the supply side with the demand side. The supply side plays no role in monetary offset.

  38. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 10:51

    What I had talked about was nothing personal, no insults, just that as Britian is still not at it’s 2007 trend in GDP I don’t see why there’s no scope for fiscal policy even now. For Cameron and Osborne to take their foot off the fiscal brake would still be beneficial in other words.

    So you’re argument is what-that this is all due to supply problems that have developed in Britain since 2007?

    No matter how you look at it this is a very slow recovery in Britain, in the U.S., in the Euro. So it’s hard so see how things would have been even worse if we had had fiscal expansion rather than austerity during the 6 years since the recession started in 2007.

  39. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 10:56

    Mark you’re looking at employment. Krugman was talking about GDP. What’s interesting is that it never got any higher than 8% in Britain. Even now it’s just at 7.4%. So it’s not even halfway back to it’s 5.8% peak.

    Britain is a very weird economy.

  40. Gravatar of James in London James in London
    21. December 2013 at 11:31

    Mike
    According to Krugman the other day, Cameron and Osborne did take the foot of the fiscal brake in 2012 and we got a speedier recovery in 2013. According to Krugman they put the brake back on in 2013, so we should get a slower recovery in 2014. Right?

  41. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. December 2013 at 11:46

    Mike Sax,
    “Mark you’re looking at employment. Krugman was talking about GDP.”

    Exactly. And he shouldn’t be.

    As Krugman correctly notes the UK has suffered an enormous collapse in productivity.

    Real labor productivity per hour worked peaked at 28.1 pounds (2005 pounds) in 2007Q3 and 2007Q4. After falling to 26.8 pounds in 2009Q1 and 2009Q2, it recovered to 27.3 pounds by 2010Q2 before falling back down to 26.7 pounds in 2013Q3:

    http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055410_QID_-50591C15_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;INDIC_NA,L,Z,0;UNIT,L,Z,1;S_ADJ,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055410UNIT,NAC_HRS;DS-055410S_ADJ,SWDA;DS-055410INDICATORS,OBS_FLAG;DS-055410INDIC_NA,RLPH;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23

    The 5.0% decline in UK labor productivity from 2007Q4 to 2013Q3 is easily the largest such decline in the EU over this period, and compares with an increase of 2.7% in the Euro Area from 2007Q4 to 2013Q3, and a 5.6% increase in the US between 2007 and 2012 according to the Conference Board.

    Thus UK productivity has fallen 7-10% below the productivity trend set by the US and the Euro Area. Obviously RGDP growth is going to weak. More importantly there’s virtually nothing that monetary or fiscal policy can do to change that.

    What monetary and fiscal policy can address is NGDP, and by extension employment/unemployment. Between 2008Q2 (before large scale monetary base expansion) and 2013Q3 the UK’s NGDP is up by a larger percent than every one of the 17 Euro Area members with the exception of Luxembourg and Malta, two very small countries.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. December 2013 at 12:03

    In yesterday’s New York Times column Krugman mentioned Spain and Ireland along with the UK as examples of where fiscal austerity has hurt the economic recovery. According to the IMF Fiscal Monitor the Cyclically Adjusted Primary Balance of the UK, Spain and Ireland has increased by 6.3%, 5.4% and 4.8% of potential GDP between calendar years 2009 and 2013, so the UK has done more fiscal austerity than either of those countries during this time period. Here’s the NGDP of these three countries set to 100 in 2008Q2 (before large scale monetary base expansion):

    http://research.stlouisfed.org/fred2/graph/?graph_id=152389&category_id=0

    As you can see the UK’s NGDP is up by 11.5% in 2013Q3 whereas it is down by 6.7% and 9.8% in Spain and Ireland respectively. The difference is of course explained entirely by monetary policy.

    Now, what has this meant in terms of employment?

    The UK’s employment is up by more (1.4% as of 2013Q3) since its pre-recession peak than every country in the 17-member Euro Area with the exception of only Germany, Luxembourg and Malta. In contrast employment is down by 18.2% and 12.9% in Spain and Ireland from pre-recession peak to 2013Q2.

  43. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. December 2013 at 12:26

    Eurostat is slow to update its data. Fortunately there’s the ECB Statistical Warehouse. And the neat thing about ECBSW is that it comes with graphs.

    Here’s UK employment (minor differences from ONS numbers):

    http://sdw.ecb.europa.eu/quickview.do?node=9484526&SERIES_KEY=119.ESA.Q.GB.Y.1000.TOTEMP.0000.TTTT.N.P.A

    For contrast here’s Spain. Employment is now down 18.4% relative to peak in 2013Q3. In fact employment is now lower than it was in 2002Q1 or 11.5 years previously:

    http://sdw.ecb.europa.eu/quickview.do?node=9484526&SERIES_KEY=119.ESA.Q.ES.Y.1000.TOTEMP.0000.TTTT.N.P.A

  44. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 19:12

    Mark you say UK unemployment is up by 1.4%? I think you before said that their low point was 8.0% unemployment and at present it’s 7.4%-this would only be .6% not 1.4%.

    I find it hard to believe that Spain and Ireland had less austerity than Britain. I don’t think the primary balance always gives the best reading of a country’s fiscal position. A better indicator I think is the structural deficit.

  45. Gravatar of Mike Sax Mike Sax
    21. December 2013 at 19:16

    Krugman linked to a piece by the IMF which showed that the harsher the fiscal austerity the worse the performance in growth terms.

    http://krugman.blogs.nytimes.com/2012/10/11/the-imf-and-the-gop/?_r=0

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. December 2013 at 06:01

    Mike Sax,
    “Mark you say UK unemployment is up by 1.4%?”

    No, I said *employment* is up by 1.4%.

    “I find it hard to believe that Spain and Ireland had less austerity than Britain. I don’t think the primary balance always gives the best reading of a country’s fiscal position. A better indicator I think is the structural deficit.”

    The word “structural” means exactly the same thing as “cyclically adjusted” (in this context). The only difference between the Cyclically Adjusted Primary Balance (CAPB) and the Cyclically Adjusted Balance (CAB) is that the CAPB goes one step further and removes the effects of changes in interest payments. The CAPB is actually better and Krugman uses it more frequently than he does the CAB.

    However, if you want the CAB look at the top half of Table 2 on page 70 instead of the bottom half:

    http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

    The rankings are identical.

    “Krugman linked to a piece by the IMF which showed that the harsher the fiscal austerity the worse the performance in growth terms.”

    The IMF graph has 28 nations of which 16 are Euro Area members and two more are pegged to the euro. The correlation is thus driven entirely by the fact that nearly two thirds of the observations have the same exact monetary policy.

    It’s very similar to the mistake Greenlaw et al made when they claimed that high public debt leverage caused high government bond interest rates using a scatterplot containing mostly Euro Area members.

    And recall Krugman made the same exact mistake in October:

    http://www.themoneyillusion.com/?p=24180

    P.S. The IMF’s “Fiscal Consolidation Forecast” in Krugman’s post is the change in the CAPB. As I said, Krugman frequently uses the CAPB.

  47. Gravatar of ssumner ssumner
    22. December 2013 at 06:37

    Mike, The graph you link to doesn’t show what Krugman thinks it shows, as me and Mark Sadowski have pointed out numerous times. But he keeps using it.

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