British AD soars at a 9% rate in 2011 Q1

Progressives are often their own worst enemies.  Recently they’ve complained that the Cameron’s program of fiscal austerity (which is rather mild so far) has caused the British recovery to stall.  They point to flat RGDP in the past two quarters.  But this observation doesn’t support the Keynesian model; indeed it actually buttresses the real business cycle model of people like Casey Mulligan and Lee Ohanian.

The debate over fiscal austerity involves two separate issues; does austerity reduce AD, and does slower growth in AD reduce real GDP.  In order to see whether fiscal austerity is reducing AD, you need to look at NGDP growth, not RGDP growth.  And the data shows that the British are spending more, it’s just that the growth is showing up in the form of higher prices, not higher output.  Just as the RBC-types would predict.

In fairness to the other side, the first quarter numbers were distorted by higher VAT rates.  If wages are sticky, higher VAT rates look like an adverse supply shock in the simple AS/AD model.  But even so, the Bank of England did provide enough monetary accommodation for 9% (annualized) spending growth.  And this leads to the bigger problem with the Keynesian argument; in a world of inflation targeting, fiscal stimulus/austerity has no impact on NGDP.  The BOE is currently under enormous pressure to stop inflation from rising any higher.  The BOE governors are not particularly hawkish, and some are said to focus on nominal income trends.  But due to political constraints they can only do so much.  A recent article in The Economist points out that right now the BOE essentially offsets any fiscal actions:

He did not mention that a run of bad inflation figures (up to 4.4% in February) has made a fiscal U-turn trickier. Anxiety about the impact this year’s fiscal tightening will have on the economy is one factor that has so far deterred the Bank of England from raising interest rates. Three of the nine-strong monetary-policy committee voted for an increase this month. Any easing in the fiscal squeeze could easily tip the balance towards a rise.

So then what’s holding back British growth, if not the fiscal austerity?  Very simple, it’s the 4.4% inflation.  If you are a real business cycle proponent you’d say that shows stimulus doesn’t work.  If you are a Keynesian, you’d say the inflation reflects special factors like oil and VAT, and that more AD would boost growth.  I’m sort of half way in between for the UK, (and 70-30 demand-side for the US.)  But even if you take a 100% Keynesian position, it doesn’t help the case for fiscal stimulus.  The 4.4% inflation has led the BOE to essentially say; “this much NGDP growth and no more.”  They are at the limit of what they will allow, for both NGDP and inflation.  Just as in the US, the central bank steers the nominal economy.  And nothing Cameron does to fiscal policy will change that fact. 

I should add that things in the UK may not be quite as bleak as the RGDP numbers suggest.  The employment figures have been much more positive:

ONE of the few bright spots in the general gloom around the British economy has been the jobs figures. Today’s data seem like more of the same, at least at first glance. Unemployment fell by 88,000 in the three months to April, the biggest quarterly drop for more than a decade. The jobless rate slipped to 7.7%, which seems almost tolerable given the rates in other debt-ridden, housing-bust economies such as Spain (20.7%), Ireland (14.7%) and America (9.1%). And enough private-sector jobs (105,000) were created in the first quarter to more than make up for government layoffs (24,000).

But they also note that recent unemployment claims data suggests a slowdown in employment growth, so I’d expect the numbers to weaken in future months.

This post was partly a reaction to a Matt Yglesias post, which blamed the UK slowdown on fiscal austerity.  Yglesias made an important error in his argument:

The key policy failure, however, is this fantastical belief in the power of exports:

 .  .  .

Trade just isn’t important enough to a medium sized rich country for this to work. In 2010, exports were only about 5 percent of the UK’s GDP.

The World Bank claims UK exports are actually about 28% of GDP.


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50 Responses to “British AD soars at a 9% rate in 2011 Q1”

  1. Gravatar of Keith Keith
    7. July 2011 at 07:20

    “does austerity reduce AD”

    Why would it? Government austerity is not societal austerity. Since govenments spend income produced by others,if governments spend less wouldn’t the others spend more (all else equal)? Of course, the specifics of spending/demand would change: who, whats, whens and wheres.

  2. Gravatar of Gregor Bush Gregor Bush
    7. July 2011 at 07:46

    Scott,
    Isn’t the important thing from the perspective of the BoE the forecast of NGDP and inflation? So even if the BoE accommodates the VAT hike, this doesn’t necessarily boost expected future NGDP and inflation.

    Right now NGDP in the UK is just as far below its pre-crisis trend as is US NGDP and inflation rates (holding tax rates constant) are very similar (2.8% in the UK and 3.4% in the US). Also, the UK unemployment rate is only about 0.3% below it peak versus 1.0% for the US. So, while I agree with you that there are more structural problems in the UK than in the US, I’m not sure that you’ve made that case convincingly here. If you think the data screams out that AD is far too weak in the US it’s hard not to come to the same conclusion about the UK.

  3. Gravatar of shocking shocking
    7. July 2011 at 07:48

    Hi Prof. Sumner,

    I’m glad that after letting the monetarism soak in for so long, I’m finally becoming a more critical consumer of your analysis. So I think the pressing issue here is not whether fiscal policy actions should be taken to regulate the normal business cycle. As Krugman would say, you have to distinguish between what he dubs a liquidity trap and more normal conditions. Given that the BOE is less hawkish than the Fed, they have more capacity to drive real rates into negative territory. In this respect, the BOE has more monetary “firepower” than the Fed or the ECB, which seems more reluctant to target NGDP and more intent on stabilizing inflation. Even if a liquidity trap is self-induced by institutional constraints (Bernanke’s reluctance to stoke inflation and take really extraordinary measures), it still exists for all meaningful purposes.

    The second issue that I think is worth considering is the composition of growth. Yes, I’ll grant that if central banks deploy all of their potential monetary weapons, the could hit any NGDP target they desire. However, it seems to me like in the case of a supply shocked, post-financial crisis economy, the type of growth monetary policy would generate is somewhat undesirable. While fiscal policy and transfers could capitalize on low interest rates to improve infrastructure, ensure that teachers retain their jobs, and (if properly executed) relieve underwater homeowners, with balance sheet constrained households, easy money seems likely to only generate booming commodity prices and spikes in certain asset prices. What I’m trying to suggest is that fiscal policy might lead to more balanced, real growth under the conditions the global economy is current confronting.

  4. Gravatar of John hall John hall
    7. July 2011 at 08:49

    Though I guess it doesn’t really get at the heart of your post, I agree with Gregor that what really matters is expected inflation. The most recent word is that the 1-year outlook is for around 3% growth and 2% inflation:
    http://www.bankofengland.co.uk/publications/inflationreport/infrep.htm

  5. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 09:16

    Keith, Books can and have been written debating that issue. It depends on what you assume about how the central bank responds.

    Gregor, Those are good points, but . . .

    I recall that the RGDP/NGDP split in the US recovery is about 2.8%/3.9%. Isn’t the UK split much less favorable? Doesn’t that suggest structural problems? And the VAT is only back to pre-recession levels, isn’t it?.

    I did say 50-50, and you’ve convinced me it’s more likely 60-40 AD. So either way they need much more AD. I didn’t mean to suggest otherwise.

    Shocking, You said;

    “Even if a liquidity trap is self-induced by institutional constraints (Bernanke’s reluctance to stoke inflation and take really extraordinary measures), it still exists for all meaningful purposes.”

    But that’s not at all an argument for fiscal stimulus, as the institutional barriers are even stronger from Congress. If the economy weakens in the 2nd half, QE3 is far more likely than fiscal stimulus 3.

    In addition, if the Fed is full of inflation hawks, they will neutralize any fiscal stimulus, as (I would argue) they neutralized the 2009 stimulus.

    The Fed does what most economists want them to do. The purpose of my blog and Krugman’s blog is to change the views of economists. So I don’t take hawkishness as a given, but as something to be changed. it’s our job to describe what policymakers should do. Krugman calculated that the fiscal authorities were easier to influence than the Fed–and he was wrong.

    Our views are 180 degrees different on composition of growth. The UK government is close to 50% of GDP, that’s way too big. Monetary stimulus promotes private sector growth, which Britain is far more in need of than more government employees and more government projects. Since Thatcher, Britain has allowed the private sector to do more infrastructure projects. If low rates lead to more private firms to build things like the Chunnel, that’s fine. But I want markets allocating capital, not government officials.

    John, I also agree that expectations matter. My point is that that 5% NGDP growth forecast probably doesn’t depend much on fiscal austerity–it’s driven by BOE policy.

  6. Gravatar of Gregor Bush Gregor Bush
    7. July 2011 at 09:59

    No, there was one VAT cut in early 2009 but two VAT hikes over the past two years which has put the VAT at 20% vs. its pre-recession level of 17.5%.

    Yes, you’re right that the at the NGDP/RGDP split is less favorable at 1.7%/5.5% but the net increase in the VAT is an important factor here. It’s probably accounted for about 1.6 percentage points of the difference between the average growth rate of RGDP and NGDP since the beginning of the “recovery” in 2009Q4 (remember the UK recession lasted for an additional two quarters).

    Also, if you take a look at weekly earnings, hours worked and employment you can back out a crude measure of private sector hourly earnings, which are growing at a extremely slow rate right now – a growth rate very similar to, and perhaps even weaker than, that in the US.

    Finally, if you look at the declines in employment, they are very broad based, with the heaviest losses in retail, manufacturing and construction (financial services and real estate are actually bouncing back quite nicely). The job losses were not quite as severe as those in the US but nor were they in any other country, even those that saw much greater declines in RGDP (Sweden, Germany, Japan). But employment is still far below its pre-recession peak, let alone its trend.

    The broad-based nature of the employment declines and the extremely weak wage growth lead me to believe that the problem in much more Sumnerian (nominal) than it is Kling-Ranjanesque (real). It’s just being masked by the VAT increase.

  7. Gravatar of Matt Waters Matt Waters
    7. July 2011 at 10:05

    Well, if there are massive waves of unemployment resulting from Cameron’s draconian austerity package, they certainly don’t show here:

    http://www.tradingeconomics.com/united-kingdom/unemployment-rate

    As a non-economist, I honestly get lost in talk about AD/AS models and whatnot. I tried once to figure out the Keynes interest rate model and just couldn’t make sense of it. I’ll try one day.

    Still, I don’t see how a 0.5 percentage point decrease in unemployment despite fiscal austerity can be anything except a vindication of the NGDP argument. Even flat RGDP is a victory of sorts. If unemployment stayed at 8%, the negative supply shocks caused by higher oil and VAT should have decreased RGDP, but those supply shocks were offset by the production from all the new workers.

    It would be nice if NGDP targeting somehow kept fundamental oil supply and demand concerns from happening, but of course it can’t. What NGDP targeting does do is put the pain exclusively in inflation without creating another negative RGDP shock through higher unemployment resulting from lower NGDP.

  8. Gravatar of Britmouse Britmouse
    7. July 2011 at 14:30

    Prof Sumner – excellent set of posts, thanks! I’m glad you liked Broadbent’s comments. One of his questioners, Mr Ummuna (a new MP) is Ed Balls’ sidekick, so I was very pleased to see Broadbent channelling Sumnerisms in response.

    Gregor: I commented on this recently, Simon Ward has been making this point: wage growth is low, but non-wage income is making up the slack. e.g. there is a stark divergence between wage income and household gross income.

    http://timetric.com/overlay/2eqBm1ZQSdqZcfKgamP7QQ,jXEItFVvQYyxhbhn646szw/

    I am not sure what to make of these stats; if you could attribute a significant part of that non-wage growth to e.g. self-employment income it would be a good news story.

  9. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 16:19

    Gregor, You are certainly more knowledgeable about the UK than I am, and I mostly agree with your points. But a few caveats:

    1. Even minus the 1.6%, it’s a 1.7%/3.9% real/nominal split, and that’s significantly worse than the US.

    2. Hourly wage data is tricky, it is often much stronger than total wages in a recession. But if you are confident that hourly wage growth is extremely low, that’s a point in favor of your argument. I’ll keep an open mind.

    Thanks for correcting me on the VAT.

    Matt, You sell yourself short–those are very good points. The unemployment rate does look better than real GDP, and suggests fiscal austerity hasn’t hurt very much, if at all. I believe one needs to look at a variety of factors, as any single economic indicator is flawed.

    Britmouse, Thanks for all the helpful information you’ve provided for me. I lack first hand knowledge of what’s going in in Britain, so support from my commenters is essential.

  10. Gravatar of Shane Shane
    7. July 2011 at 22:49

    Is a jobless recovery really a recovery? Is a job-generating slowdown really a slowdown? Topsy-turvy times indeed!

  11. Gravatar of Gregor Bush Gregor Bush
    8. July 2011 at 12:17

    Scott,

    Fair enough. And you’re right about wage data. The measure that I backed out from from the hours worked and weekly earnings series was quite choppy but they still look low. It would be nice to have a cleaner read on wages though.

    Britmouse,

    That’s interesting stuff. Although I’m not sure it’s such a great sign. Self-employment, and therefore self-unemployment income, tend to rise with high rates of unemployment/underemploymnet.

  12. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 16:58

    Shane, Good question.

    Gregor, Agreed.

  13. Gravatar of Cahal Cahal
    9. July 2011 at 00:59

    UK AD has not soared.

    Not only has there been a VAT rise, but numerous stealthy tax increases on other goods (tobacco, alcohol), as well as global spikes in commodity & oil. I believe the BoE calculated that domestic inflation is probably under 1%.

    http://ftalphaville.ft.com/blog/2011/06/22/598406/the-difficulty-of-defining-domestic-inflation/

    Investment and retail sales have been low for a while and look set to stay there:

    http://www.statistics.gov.uk/CCI/nugget.asp?ID=256&Pos=1&ColRank=1&Rank=390

    http://www.statistics.gov.uk/cci/nugget.asp?id=258

    Obviously govt expenditure is also decreasing. Exports went up when the pound devalued but the manufacturing boost looks to have subsided (after all, devaluation can only go so far).

    On jobs, for a start that rate of job growth is nowhere near what we should be expecting. More importantly, if you look beneath the underlying figures, you see wider unemployment (unempt, inactive wanting to work and part-timers wanting full-time job) is 6 million. Claimant count & amount of benefits actually went up in Q1 – to be honest the job growth looks to be little more than a statistical anomaly.

  14. Gravatar of ssumner ssumner
    9. July 2011 at 18:43

    Cahal, I think you are confuisng AD and AS. AD did go up, but the fall in AS that you cite meant that the higher AD was mostly inflation, not real growth.

  15. Gravatar of Cahal Cahal
    10. July 2011 at 09:01

    My point is that people aren’t spending money – it’s all cost push.

    I’m increasingly perplexed by the claims of those on the right that UK austerity is a good idea…it’s historically unprecedented and all the data so far shows that it isn’t working.

    It’s all deckchairs on the titanic with the current financial system, I guess.

  16. Gravatar of W. Peden W. Peden
    10. July 2011 at 10:38

    Cahal,

    It’s not unprecedented at all, even in British history.

  17. Gravatar of W. Peden W. Peden
    10. July 2011 at 10:39

    PS: “My point is that people aren’t spending money – it’s all cost push.”

    If people aren’t spending money, isn’t that an issue of demand rather than supply?

  18. Gravatar of Cahal Cahal
    10. July 2011 at 10:52

    “It’s not unprecedented at all, even in British history.”

    AFAIK, there are few or 0 instances of public spending declining for more than two years in a row. What the Coalition are doing appears to be impossible (borrowing has already been revised upwards).

    “If people aren’t spending money, isn’t that an issue of demand rather than supply?”

    Yes…

  19. Gravatar of W. Peden W. Peden
    10. July 2011 at 11:04

    Cahal,

    But ‘cost-push’ refers to supply-side factors, does it not?

    Also, isn’t the goal to reduce borrowing to zero? As far as I’m aware, at no point is public spending going to decline. Also, borrowing is determined by both revenue and spending.

    There’s nothing the coalition is doing that is as ambitious than Stafford Cripps’s fiscal policy, which actually eliminated the PSBR entirely on an annual level at one point.

  20. Gravatar of Cahal Cahal
    10. July 2011 at 11:23

    ‘But ‘cost-push’ refers to supply-side factors, does it not?’

    Yes. My point is this: if they reversed the VAT rise we wouldn’t see the inflation transferred into growth.

    ‘Also, isn’t the goal to reduce borrowing to zero? As far as I’m aware, at no point is public spending going to decline. Also, borrowing is determined by both revenue and spending.’

    Not in nominal terms, no. But as a percentage of GDP. And your second point underlines why i think madcap austerity isn’t the best way to reduce the deficit.

    ‘There’s nothing the coalition is doing that is as ambitious than Stafford Cripps’s fiscal policy, which actually eliminated the PSBR entirely on an annual level at one point.’

    When it was far smaller as a % of GDP. And that was post war, when circumstances were different. You also don’t mention the huge public spending projects that took place after WW2.

  21. Gravatar of W. Peden W. Peden
    10. July 2011 at 11:31

    “You also don’t mention the huge public spending projects that took place after WW2.”

    If what is important is borrowing’s effect on demand, then it is misleading to just look at public spending. The late 1940s were, after all, the years of austerity. In fact, they were a period of loose monetary policy and tight fiscal policy. Where have I heard that proposal before?

    “Not in nominal terms, no. But as a percentage of GDP.”

    Public spending as a percentage of GDP has certainly fallen for more than two years running in UK history. In fact, it fell in every year of Stafford Cripps’s Chancellorship, despite all those “huge public spending projects”. But perhaps I’ve misunderstood you.

  22. Gravatar of Cahal Cahal
    10. July 2011 at 12:08

    We had huge short term fiscal expansion straight after WW2, followed by spending cuts. Right now we’re only having the latter – I just can’t see it working.

    Re: public spending, sorry I was wrong. Since 1950 there have been *two* instances of govt spending declining for more than 2 years in a row, and none of it declining for 5 years.

  23. Gravatar of W. Peden W. Peden
    10. July 2011 at 12:21

    “Since 1950 there have been *two* instances of govt spending declining for more than 2 years in a row, and none of it declining for 5 years.”

    As a percentage of GDP? It fell five years running from 1996 through 2000 and for seven years running from 1983 through 1989.

    “We had huge short term fiscal expansion straight after WW2, followed by spending cuts. Right now we’re only having the latter – I just can’t see it working.”

    Fiscal expansion in terms of public spending or fiscal expansion in terms of public spending less taxes? If the latter, we had a very big (largely automatic) fiscal expansion from 2008-2010.

    But let’s be clear: the issue is not austerity vs. profligacy. It’s trend AD vs. non-trend AD. The UK is totally off its NGDP growth trend and we should have major QE to get back onto the trend of the Great Moderation or at the very least get our NGDP growth up to about 5.5%.

    Labour are right that we need more AD, but wrong that this should come through fiscal policy. The Conservatives are right that we need better public finances, but wrong for not putting ample pressure on the BoE to compensate for the effects of fiscal tightening with more expansionary monetary policy.

  24. Gravatar of W. Peden W. Peden
    10. July 2011 at 12:22

    The Liberal Democrats are wrong about the Euro. Not very relevant, but I always remember this when I think of that party.

  25. Gravatar of Britmouse Britmouse
    10. July 2011 at 14:48

    Gregor; the ONS labour stats have self-employment numbers going up a little (1% yoy), but they have been going up all decade. Not sure what to make of that either!

    W. Peden, good to have you back. It is a little ironic, but the unions are more vocal advocates of loose monetary policy than some parts of the Tory party (John Redwood for example is a “hard money” guy). I think it would be politically difficult for the Tories to try changing the BoE mandate when inflation is “high”. They should have done it in a year ago.

    Cahal. Nominal retail spending is growing well above trend rate this year (+5.5% from 10Q1 to 11Q1, trend is 4%); people really are “spending more”. Are you really arguing the VAT increase has not made a difference to real growth?

  26. Gravatar of W. Peden W. Peden
    11. July 2011 at 00:31

    Britmouse,

    I agree. There’s a respected existing constituency for NGDP/Money GDP targeting e.g. Sam Brittan has wanted NGDP targeting for ages and I’m sure Tim Congdon could be persuaded, since his idea of a flexible money-supply strategy that takes account of changes in velocity is basically NGDP targeting under another name.

    One of the mistakes that Thatcher’s government made in its early years was to focus too much on monetary policy and thus fail to align fiscal and monetary policy. This government is in danger of making the opposite mistake, largely because of a typical New Labour Americanism of giving the BoE independence, as if fiscal policy and monetary policy can be so easily seperated.

  27. Gravatar of Scott Sumner Scott Sumner
    11. July 2011 at 08:13

    Cahal, You said;

    “My point is that people aren’t spending money – it’s all cost push.’

    If nominal expenditures are rising at a 9% rate, then people most certainly are spending money.

    But I agree there are supply side problems. Shifting AD to the right doesn’t necessarily increase RGDP, it depends on the slope and position of AS.

    You said;

    “I’m increasingly perplexed by the claims of those on the right that UK austerity is a good idea…it’s historically unprecedented and all the data so far shows that it isn’t working.”

    But Keynesians keep citing RGDP data, which suggests they don’t even understand their own model.

  28. Gravatar of Cahal Cahal
    15. July 2011 at 10:45

    Hi, sorry I forgot to comment sooner.

    W. Peden,

    I admit I was getting a bit confused there. What I *meant* to say was that there have been very few sustained reductions in borrowing rather than spending. If you look at it historically, reductions in debt have followed fiscal expansion and vice versa:

    http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidation1.pdf

    The Coalition have already revised their borrowing total upwards by £46bn and a well respected think tank recently suggested that they will have to double that again – with growth the way it is, I can only see it going higher and higher. We have to remember that cutting spending =/= cutting the deficit.

    When looking at spending cuts, it’s best to look at departmental budgets, which are being shrunk by an average of 19% IIRC. Also bear in mind the equitability (not a word apparently!) of the cuts themselves – IMO, halving child disability allowance but reducing corporation tax is simply not OK.

    Scott,

    Here is the point I’m trying to make:

    If the VAT rise were reversed I highly doubt the BoE could keep NGDP at its current level. Personally, I think they are ‘pushing on string’, which is obviously where we differ. If you look at NGDP growth, it was very high when the Coalition took over (> 6% I believe), went down in Q4 then went back up after the VAT rise. This seems to support my hypothesis.

    Also, as I said above, looking at aggregates isn’t always helpful. The way the cuts are falling is regressive as hell, which is not OK in my books.

  29. Gravatar of ssumner ssumner
    16. July 2011 at 10:07

    Cahal, The pushing on a string argument was debunked long ago in economics. For instance, they could depreciate the pound. Or do negative interest rates on bank reserves. Or set a higher inflation target. They have lots of options. In all of world history, no fiat money central bank ever tried to inflate and failed. Indeed the BOE is under pressure for an excessively inflationary policy. Being unable to inflate is the last of their worries.

    The UK government is spending 50% of GDP, mostly on social programs. Britain has lots of problems, but not spending enough on social programs is not one of them.

  30. Gravatar of Cahal Cahal
    16. July 2011 at 10:18

    I don’t want to start debating the whole of monetary versus fiscal policy, but I will say this:

    Again, you are looking at aggregates and basing what government spending ‘should’ be on some arbitrary line you have in your head. Cutting child disability allowance and corporation tax at the same time is simply not OK. I have no idea how anybody can justify the Cameron austerity drive in its current form, whether they advocate a smaller state or not.

  31. Gravatar of W. Peden W. Peden
    16. July 2011 at 10:25

    Cahal,

    Aren’t we coming off a pretty big fiscal expansion? In fact, we have had spending running ahead of revenues from 2002 onwards, despite a continuous economic expansion from 1992 to 2007.

    There have been very few sustained reductions in borrowing, but the Brown Boom & Bust was a historic case of sustained increases in borrowing. We’re not in Kansas (or, rather, Harvey Road) anymore.

  32. Gravatar of Britmouse Britmouse
    17. July 2011 at 13:00

    Cahal, that Chick/Pettifor paper is either a spoof or it is embarrassingly bad, I am not sure which. Coalition fiscal plans count as “expansionary” under that analysis, because nominal fiscal spending will be increasing every year.

    w.r.t. dept budgets, many are getting whacked because NHS spending was protected, and education is barely being touched, and that’s £150bn out of the £300bn/year across all depts. The 25% cut to the “Culture, Media and Sport” department is not going to keep me awake at night, anyway. A shame we couldn’t cancel a few invasions (or white elephants) and cut defence a bit more.

    The corporation tax cut will lower costs for consumers, right? If we presume the incidence of VAT is entirely on the consumer, why is the corporation tax any different?

  33. Gravatar of ssumner ssumner
    17. July 2011 at 17:02

    Cahal, I know nothing about the specifics of the Cameron cuts, and obviously have no opinion. But when I lived in Britain (during the Thatcher period) it was obvious the welfare stake was way too big. I knew a single man who went for years without working, just living off the dole. And he was perfectly capable of working. Australia has a perfectly adequate welfare state with far lower taxes and spending.

    As I recall, university students got a free ride through college, whereas in America I had to work my way through college.

  34. Gravatar of Cahal Cahal
    18. July 2011 at 11:39

    ‘There have been very few sustained reductions in borrowing, but the Brown Boom & Bust was a historic case of sustained increases in borrowing. We’re not in Kansas (or, rather, Harvey Road) anymore.’

    Meh. There was expansion, but it wasn’t enormous:

    http://extranea.files.wordpress.com/2011/02/uk-debt-continues-to-grow1.gif

    I’m not here to defend the Labour party, so don’t get me wrong – they should have been running surpluses. But I wouldn’t really call a modest deficit ‘fiscal expansion’ in the same way as public works/housing projects and founding the welfare state was.

    ‘Cahal, that Chick/Pettifor paper is either a spoof or it is embarrassingly bad, I am not sure which. Coalition fiscal plans count as “expansionary” under that analysis, because nominal fiscal spending will be increasing every year.’

    What? No, they include real, nominal and % of GDP figures and discuss them all. It’s not exactly going to win the nobel prize, but it gives a decent historical analysis of fiscal expansion/contraction.

    ‘w.r.t. dept budgets, many are getting whacked because NHS spending was protected, and education is barely being touched, and that’s £150bn out of the £300bn/year across all depts. The 25% cut to the “Culture, Media and Sport” department is not going to keep me awake at night, anyway. A shame we couldn’t cancel a few invasions (or white elephants) and cut defence a bit more.’

    Well, I agree with the last two sentences, but bear in mind that NHS spending is ridiculously hard to cut. In general they have taken a ‘let’s randomly shrink departmental budgets’ approach, which is stupid because of Baumol’s cost disease. If they are going to eliminate welfare, they should eliminate corporate welfare first, then payments to the poor.

    ‘The corporation tax cut will lower costs for consumers, right? If we presume the incidence of VAT is entirely on the consumer, why is the corporation tax any different?’

    Because VAT is a tax on revenues and corporation tax is tax on profits? Corporations currently have large surpluses, and the way the corporation tax legislation has been structured means that it is not pro growth at all – it’s simply a transfer of money to the financial institutions.

    http://duncanseconomicblog.wordpress.com/2011/07/12/osbornes-corporation-tax-failure/

    ‘Cahal, I know nothing about the specifics of the Cameron cuts, and obviously have no opinion. But when I lived in Britain (during the Thatcher period) it was obvious the welfare stake was way too big. I knew a single man who went for years without working, just living off the dole. And he was perfectly capable of working.’

    That is anecdotal evidence. I had a similar view of the welfare state until I started reading ‘diary of a benefit scrounger’, a blog by somebody on disability allowance. There is fraud, sure, but it’s at a level that any company would be satisfied with. I should add that I actually support the general consolidation of benefits, and would like to see a move to NIT in the future.

    ‘Australia has a perfectly adequate welfare state with far lower taxes and spending.’

    Australia have a huge, booming economy because of their ridiculous amounts of gold etc. They also have a housing bubble.

    ‘As I recall, university students got a free ride through college, whereas in America I had to work my way through college.’

    Well, you do pay it back – it’s just an investment.

    Overall, I am happy to support NGDP targeting and I accept the strangeness of arguments to tighten monetary policy but expand fiscal policy. But I just don’t like the Coalition’s approach of ‘let’s solve a crisis of neoliberal economics with the biggest dose of it yet’. Labour may be a left party by name, but they were simply big spending conservatives – the UK remains the second least regulated country in the developed world.

    The problems with the UK economy are far deeper than ‘too much government’ and should be treated as such. But the Coalition are framing the deficit as the central issue and financial reform as periphery, which is dangerous. IMO the biggest risk to UK public finances lies in another financial crash.

  35. Gravatar of ssumner ssumner
    19. July 2011 at 08:52

    Cahal, You said;

    “That is anecdotal evidence. I had a similar view of the welfare state until I started reading ‘diary of a benefit scrounger’, a blog by somebody on disability allowance. There is fraud, sure, but it’s at a level that any company would be satisfied with.”

    I wasn’t accusing anyone of fraud.

    Your comments on Australia are not well-informed. The Aussie economy has done well for many years, not just during the commodity boom. And the story of the so-called housing bubble in Australia is really getting ridiculous. Even if prices fell 20% tomorrow the housing bubble theorists would have been completely wrong about Australia. I really wonder whether people even know what a bubble is. People claimed bubble in 2005, when prices were far lower than today. Let’s say prices return to 2005 levels. Would that make the predictions of bubble true? No, they’d still be flat out wrong.

    I suppose some people thing if you close you eyes and scream bubble bubble bubble over and over again, and if prices fall ten yours later–you will be proved right. All markets go up and down, even those lacking bubbles.

    If you don’t like Australia, how about Canada, which also has government spending levels far below Britain.

    I also wonder how you can claim the current crisis is s crisis of neoliberal economics. Governments around the world have virtually nationalized the entire liabilities side of our banking system. That used to be called socialism. Banks knew that and behaved exactly as you’d expect. And that’s called “neoliberalism”?

  36. Gravatar of Cahal Cahal
    19. July 2011 at 12:23

    ‘I wasn’t accusing anyone of fraud.’

    Claiming benefits whilst being able to work? Sounds like fraud to me. Bear in mind means testing wasn’t even introduced until 1986 so it was probably *was* worse when you were around – but Labour were actually pretty strict with benefits.

    U.S. citizens, even smart ones like yourself, really do seem odd to Europeans. You seem to detest government efforts made to help the poor, enjoy the fact that a large amount of your population live in fear of bankruptcy through either a large medical bill or losing their jobs, and that you work many hours longer than us. We do not really care about the ‘size’ of government in Europe, so we are perplexed by this.

    ‘The Aussie economy has done well for many years, not just during the commodity boom.’

    Australia have a great tourism industry, high population growth and a large amount of space into which they can expand. Honestly, without their natural resources (both aesthetic and mineral) I highly doubt they’d be doing well at all.

    Having lived in Australia, I can safely say they have a far more heavy handed government than the UK, even if it doesn’t show in GDP statistics (article from James Kwak on the follys of looking at the ‘size’ of government here:http://www.theatlantic.com/business/archive/2011/07/what-do-you-mean-government-is-too-big/242093/)

    They are also more tightly regulated than the UK:

    http://flipchartfairytales.files.wordpress.com/2011/06/oecd-regulation-index.png

    ‘And the story of the so-called housing bubble in Australia is really getting ridiculous. Even if prices fell 20% tomorrow the housing bubble theorists would have been completely wrong about Australia. I really wonder whether people even know what a bubble is. People claimed bubble in 2005, when prices were far lower than today. Let’s say prices return to 2005 levels. Would that make the predictions of bubble true? No, they’d still be flat out wrong.’

    The government keeps bailing out the houses with their first time buyer schemes. If you look at that stats, house prices are increasing above trend and it is primarily fueled by debt. I’m not claiming to predict anything with any level of accuracy; all I know is that house prices never stay above trend indefinitely and people always deny bubbles.

    ‘If you don’t like Australia, how about Canada, which also has government spending levels far below Britain.’

    And a far better regulated financial sector! Look, there are examples of successful countries with low government spending; there are examples of successful countries with high government spending. Economies vary and trying to make the UK economy more like Australias/Canadas obviously makes no sense.

    The main reason for high government spending in Britain is to prop up the former industrial areas that were decimated by Thatcher in the 80s. Labour continued the trend; let London go wild, tax it and throw it at the North. It’s not so much the abstract size of government that is holding Britain back, just a lack of coherent policy.

    ‘I also wonder how you can claim the current crisis is s crisis of neoliberal economics. Governments around the world have virtually nationalized the entire liabilities side of our banking system. That used to be called socialism. Banks knew that and behaved exactly as you’d expect. And that’s called “neoliberalism”?’

    I’m not sure what you mean by ‘nationalised’ – to me that would mean that they were run and owned by the government. But they have been bailed out and given a slap on the wrist, if that. And ‘Socialism’ has two main meanings – either public ownership or worker ownership of the means of production. Neither of these have happened.

    The banks collapsed because they were not regulated, and because marginal tax rates were halved which encouraged their rent seeking (people seem to have forgotten their George!). To me, the deregulation was inspired by neoliberal economics.

    Again, I am confused by people who claim that ‘free markets’ has not been the orthodoxy for the last few decades, considering we have had mostly conservative governments (even if not by name), Milton Friedman is probably the most memorable economist from the period, and the stuff is taught in every economics department in the Western World.

  37. Gravatar of ssumner ssumner
    20. July 2011 at 09:04

    Cahal You said;

    “U.S. citizens, even smart ones like yourself, really do seem odd to Europeans. You seem to detest government efforts made to help the poor, enjoy the fact that a large amount of your population live in fear of bankruptcy through either a large medical bill or losing their jobs, and that you work many hours longer than us.”

    That’s such a stupid comment I won’t even respond. It speaks volumes about your character.

    You said;

    “Australia have a great tourism industry, high population growth and a large amount of space into which they can expand.”

    Then why were they doing poorly before their economic reforms? And why was Britain doing so poorly before Thatcher?

    You said;

    “If you look at that stats, house prices are increasing above trend and it is primarily fueled by debt. I’m not claiming to predict anything with any level of accuracy; all I know is that house prices never stay above trend indefinitely”

    Wrong, In post war America houses have stayed permanently above pre–WWII trends.

    You said;

    “I’m not sure what you mean by ‘nationalised’ – to me that would mean that they were run and owned by the government”

    Let me give you an example. If I deposit $1000 in a US bank, it is covered by deposit insurance. That means it’s functionally equivilent to lending it to the US government, and then having them relend to the bank.

    You said;

    “The banks collapsed because they were not regulated,”

    Actually, banks in America are heavily regulated, and always have been. We probably have far more regulations than the Canadians, they are just less effective. Canada had no branching laws, and as a result no bank failures during the Depression. They didn’t even have deposit insurance until 1966.

    In general your comments just seem to go with your gut instincts, which isn’t good enough in economics.

  38. Gravatar of Cahal Cahal
    20. July 2011 at 12:44

    ‘That’s such a stupid comment I won’t even respond. It speaks volumes about your character.’

    Eh? No need for personal attacks – I was just pointing out something that is clearly true. Medical bills are a huge problem in the U.S. and you have a longer average working hours than the euro area, as well as fewer social welfare programs. The ‘seem to enjoy’ was idiomatic for me, and was not intended to be offensive so I take it back.

    ‘Then why were they doing poorly before their economic reforms?’

    http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_mktp_kd_zg&idim=country:AUS&dl=en&hl=en&q=australian+gdp+growth

    I am unable to identify a period of poor performance here, although you may mean pre 60s?

    ‘And why was Britain doing so poorly before Thatcher?’

    http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_mktp_kd_zg&idim=country:AUS&dl=en&hl=en&q=australian+gdp+growth#ctype=l&strail=false&nselm=h&met_y=ny_gdp_mktp_kd_zg&scale_y=lin&ind_y=false&rdim=country&idim=country:GBR&hl=en&dl=en

    The 50s & 60s are widely deemed to have been a golden age, and the 1970s stagflation was obviously not a problem unique to Britain. Other than that, this actually seems to show worse performance under Thatcher, so I’m not sure of your point.

    ‘Wrong, In post war America houses have stayed permanently above pre–WWII trends.’

    Incomplete. They returned to only about 10% above ‘pre-war-depression-war’ trends after WW2:

    http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    ‘Let me give you an example. If I deposit $1000 in a US bank, it is covered by deposit insurance. That means it’s functionally equivilent to lending it to the US government, and then having them relend to the bank.’

    Well, yes, but the money then goes into private hands. It’s one sided Socialism, to say the least.

    ‘Actually, banks in America are heavily regulated, and always have been. We probably have far more regulations than the Canadians, they are just less effective. Canada had no branching laws, and as a result no bank failures during the Depression. They didn’t even have deposit insurance until 1966.’

    I take your point to be that you have more laws but inferior enforcement? That doesn’t detract from my point.

    You seem to be taking the view that government guarantees are what precipitated the crisis, and I might even agree with you there. But that doesn’t mean we should take away guarantees; it just means we should prevent them from being exploited. I fail to see how anyone who disagrees with this premise can support limited liability laws.

    ‘In general your comments just seem to go with your gut instincts, which isn’t good enough in economics.’

    I have linked to a fair amount of evidence and am currently in my final year. I am basing my views on what I have been taught, my political beliefs and books/economists that have influenced me, not merely my ‘gut instincts’. Your comment is completely unfounded.

  39. Gravatar of ssumner ssumner
    21. July 2011 at 07:43

    You said;

    “Eh? No need for personal attacks”

    Yes, that’s right.

    You seem to know nothing about my personal views. I favor universal health coverage. Why would I favor that if I enjoyed seeing the poor suffer?

    You said;

    “The 50s & 60s are widely deemed to have been a golden age, and the 1970s stagflation was obviously not a problem unique to Britain.”

    You may be younger than me, and don’t recall what Britan was like in 1979. There was garbage piling up in the streets, SOEs in manufacturing that were toally uncompetitive, coal strikes. London looked like a dump. Britain had fallen well below France and Germany in per capita GDP (down to Italian levels.) It has since caught up, and is well ahead of Italy. That didn’t just happen.

    Every country in the world (almost) grew fast in the 1950s and 1960s, even the Soviets. (Read Tyler Cowen’s TGS) The key is that countries that did neoliberal reforms slowed down much less after the 1970s than those that didn’t. Look at the countries on the Mediterreanean.

    Your housing argument is flawed because fluctuations in housing prices are basically land price movements. I doubt NYC and SF prices will ever return to their original real price level.

    On banking I agree, it is only 1/2 socialist. That’s what I said. So about that failure of laissez faire?

    You said;

    “I take your point to be that you have more laws but inferior enforcement?”

    No, the laws are enforced. We have more laws but less effective laws. Deregulation is not the issue. It’s ineffective regulation.

    I would take away the government guarantees. They make the problem worse. I’d require 20% down on mortgages. Maybe 25% on refi’s. I’d abolish the GSEs.

  40. Gravatar of Cahal Cahal
    22. July 2011 at 08:50

    Scott,

    It is at this point I have realised how divergent our worldviews are. Reconciling them would be hard enough as it is, but on an internet comment thread? Impossible. In any case, I’ll respond to your most recent points.

    I have read Tyler’s TGS, and I was unconvinced for several reasons:

    - The evidence Tyler relies on has a strong focus on government investment, something he glosses over/ignores.

    - If you take a view of the last century or two, the ‘great stagnation’ seems to be well within normal fluctuations.

    - Cowen’s uni is funded by the Koch brothers, and I’m sure it is in their interests to exempt ‘free market’ style policies for any responsibility for inequality/crashes etc. You might accuse me of being excessively cynical, but I’m simply applying public choice theory to the world of academia.

    - Overall, Michael Hudson’s narrative seems to be more believable and fits in better with the evidence. (I won’t go into it here; I’m sure you’re aware of it).

    ‘On banking I agree, it is only 1/2 socialist. That’s what I said. So about that failure of laissez faire?’

    This is where we differ greatly. For me, when government guarantees seem to incentivise fraud/looting, I blame the fraudsters and looters. You blame the guarantees. I do not use terms like ‘laissez faire’ and ‘free market’ because they are basically meaningless – again, would limited liability laws fit into these criteria? You could probably attribute the crisis to these if you think about it.

    ‘No, the laws are enforced. We have more laws but less effective laws. Deregulation is not the issue. It’s ineffective regulation.’

    I disagree. The repo market is (was?) entirely unregulated, as was the hedge fund Magnetar, who pushed between 35-60% of the demand for CDOs. Alan Greenspan also commented that there was ‘no need for laws against fraud’ in the run up to the crisis.

    Bringing it back to UK austerity, I’d just like to comment that borrowing in June was up on last year, and Q2 borrowing was basically the same as 2010 (slightly below). I do not merely oppose austerity because it is inequitable and badly timed, I do so because I don’t think it is the best way to reduce the deficit. Recent evidence seems to bear this out, but we’ll see.

  41. Gravatar of Britmouse Britmouse
    22. July 2011 at 15:01

    “Q2 borrowing was basically the same as 2010″

    In nominal terms! The important metric is relative to NGDP, hence why NGDP growth is so important.

    10Q2 had a boost from the unrepeated 2010 bank payroll tax, also, so the 11Q2 result was not (relatively) so bad; other revenues grew enough to offset that.

  42. Gravatar of Cahal Cahal
    23. July 2011 at 02:07

    ‘In nominal terms! The important metric is relative to NGDP, hence why NGDP growth is so important.’

    They still failed to meet their targets, and their borrowing forecasts keep getting revised upwards. About 20% of UK debt is inflation linked, too, so inflating our way out of it isn’t that easy.

    ’10Q2 had a boost from the unrepeated 2010 bank payroll tax, also, so the 11Q2 result was not (relatively) so bad; other revenues grew enough to offset that.’

    This excuse is getting old, because if they cared that much about borrowing, they’d simply have extended the bonus tax. But they don’t care about borrowing.

  43. Gravatar of ssumner ssumner
    23. July 2011 at 08:16

    Cahal, I’m glad you don’t have any problem with laissez-faire or free markets. (Because there is no such thing.) So exactly what economic system are you critical of, and what do you call it?

    You said;

    “Cowen’s uni is funded by the Koch brothers, and I’m sure it is in their interests to exempt ‘free market’ style policies for any responsibility for inequality/crashes etc. You might accuse me of being excessively cynical, but I’m simply applying public choice theory to the world of academia.”

    Wow. Provide a list of the people who are less corrupt that Tyler Cowen. Please include yourself if you see fit. BTW, you do realize that lots of libertarians (most?) disagree with Tyler Cowen, don’t you? And that he often takes positions opposed by the Koch brothers (global warming, etc.)

    And how are the Koch brothers different from Soros? Is everyone on the left also corrupt?

    Making risky loans isn’t really looting, it’s responding sensibly to government incentives, indeed government requests.

    You said;

    “I disagree. The repo market is (was?) entirely unregulated, as was the hedge fund Magnetar, who pushed between 35-60% of the demand for CDOs. Alan Greenspan also commented that there was ‘no need for laws against fraud’ in the run up to the crisis.”

    None of these things caused the crisis. The financial crisis was caused by lots of bad loans (not just subprime, BTW.) derivatives just shift the losses around, they don’t change the total size of the loan losses.

    You said;

    “Bringing it back to UK austerity, I’d just like to comment that borrowing in June was up on last year, and Q2 borrowing was basically the same as 2010 (slightly below). I do not merely oppose austerity because it is inequitable and badly timed, I do so because I don’t think it is the best way to reduce the deficit. Recent evidence seems to bear this out, but we’ll see.”

    The best way to promote stable NGDP growth is easier money. Do that and fiscal austerity doesn’t increase the deficit. Don’t do that and the UK is screwed with or without austerity. You may recall the economy did very poorly under the Labour “non-asuterity” policy that Krugman thought so highly of.

    You said;

    “The banks collapsed because they were not regulated, and because marginal tax rates were halved”

    And did that also cause the French banking crisis of the 1980s (when the banks were government-owned?) How about the Chinese banking crisis of the 1990s? And how about the Swedish banking crisis of the early 1990s? The Swedes moved strongly in the neoliberal direction AFTER that crisis. How’d that decision work out for Sweden?

  44. Gravatar of Cahal Cahal
    24. July 2011 at 11:10

    ‘Cahal, I’m glad you don’t have any problem with laissez-faire or free markets. (Because there is no such thing.) So exactly what economic system are you critical of, and what do you call it?’

    Rentier capitalism, I guess – I’d like to see 100% reserve banking and land taxes. I’d also like to see a more balanced Germany style stakeholder model – shareholder value maximisation is too short termist and unstable.

    ‘Wow. Provide a list of the people who are less corrupt that Tyler Cowen. Please include yourself if you see fit. BTW, you do realize that lots of libertarians (most?) disagree with Tyler Cowen, don’t you? And that he often takes positions opposed by the Koch brothers (global warming, etc.)’

    I like Tyler and I like his blog. He is certainly the most neutral of the GMU professors. But every so often he makes a post that stands out from the others in terms of rightwingness – I can’t help but feel he wouldn’t do that if he weren’t so dependent on Koch Funding. TGS felt like one of those to me, as do the more recent fannie/freddie posts.

    ‘And how are the Koch brothers different from Soros? Is everyone on the left also corrupt?’

    Well, considering Soros calls for higher capital gains taxes – which would obviously affect him – I think that’s a false equivalence. He also doesn’t buy out universities.

    ‘Making risky loans isn’t really looting, it’s responding sensibly to government incentives, indeed government requests.’

    No I meant looting as in the Akerlof/Romer paper – going broke at societies expense. Government guarantees can be exploited to this end, and in the crisis you had tiny groups of traders exploiting their company, more or less unbeknownst to managers.

    ‘None of these things caused the crisis. The financial crisis was caused by lots of bad loans (not just subprime, BTW.) derivatives just shift the losses around, they don’t change the total size of the loan losses.’

    You think no laws against fraud were not a reason there was massive fraud?

    You forget that the demand for CDOs triggered demand for these bad loans. So yes, Magnetar did make it a hell of a lot worse (for gods sake, they named their fund after a type of star that exhibits noxious gas).

    And you seem to be arguing that derivatives played no role in the crisis? The problem was indeed that they spread risk around, and nobody knew where to. As Mervyn King said, when crunch time came, banks stopped lending to each other because everybody was a suspect. If it had just been bad loans/a housing bubble that wouldn’t have been the case.

    ‘The best way to promote stable NGDP growth is easier money. Do that and fiscal austerity doesn’t increase the deficit. Don’t do that and the UK is screwed with or without austerity. You may recall the economy did very poorly under the Labour “non-asuterity” policy that Krugman thought so highly of.’

    Being someone who currently lives in the UK, I can safely say the economy wasn’t doing ‘very poorly’ under Labour. And monetary policy may be easy, but the banks are not lending – they are hoarding massive surpluses, because of uncertainty about future demand.

    I’m also not sure why you’re bringing Krugman up, but I appreciate it’s fashionable to have a dig at him these days.

    ‘And did that also cause the French banking crisis of the 1980s (when the banks were government-owned?) How about the Chinese banking crisis of the 1990s?’

    For every government-banking crash you bring up I could probably name 2 or more private ones. Mexican peso, East Asian, 1929, S& L, dot com bubble. There were few banking crises in the post WW2 boom, when banks were better regulated, and there have been many more since they were deregulated.

    In any case, citing banking crises that were clearly different in composition does not invalidate the idea that the banks were under regulated in the recent one. I actually can’t believe you’re trying to defend that notion – is this willful ignorance on your part, or are you just being contrarian?

    ‘And how about the Swedish banking crisis of the early 1990s? The Swedes moved strongly in the neoliberal direction AFTER that crisis. How’d that decision work out for Sweden?’

    What? Sweden clamped down incredibly hard on the banks after that, which is (part of the reason) they emerged out of the most recent one more or less unscathed. And neoliberal? They have a higher regulatory burden than U.S./U.K and 60% marginal rates, as well as massive public expenditure. The right always try to deny successful social democratic countries are, in fact, social democratic. It’s a strange sight to behold.

  45. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 07:05

    cahal, You said;

    “I can’t help but feel he wouldn’t do that if he weren’t so dependent on Koch Funding.’

    Maybe when you get older your get a better understanding of human motivation.

    You said;

    “You think no laws against fraud were not a reason there was massive fraud?”

    Wrong on both counts. There was no massive fraud behind the crisis, and there were was against fraud.

    Soros funds left wing groups–so I see an equivilence.

    We do agree on the land tax, however.

    Lots of bad loans were made in the 1980s, without CDOs.

    I agree that moral hazard is a big problem–indeed I see it as the big problem, far more important than the alleged lack of regulation.

    You said;

    “Being someone who currently lives in the UK, I can safely say the economy wasn’t doing ‘very poorly’ under Labour.”

    You don’t think the UK was doing poorly in 2008-10? You must be just about the only one in the world who feels that way. Brown did all that fiscal stimulus, and got much less growth than Germany.

    You said;

    “There were few banking crises in the post WW2 boom, when banks were better regulated, and there have been many more since they were deregulated.”

    In America the government is heavily involved in banking, and the situation has gotten steadily worse. By 1980 the US banking system was in horrible shape, and that occurred under a system Krugman calls the Golden Age of regulation. Only because Volcker quickly brought down inflation were we able to avoid a major crisis. They were earning far less in interest to their 30 year mortgages than they were paying for depositis. You see that as a successful system?

    I don’t agree that privately owned banks are more prone to crisis that state-owned banks.

    Canada had no bank failures in the Great Depression, and its banks were much less regulated than US banks. You seem to have read a lot of left wing propaganda, do you ever read alternative views?

    Cameron would like to move the UK closer to the Swedish model, but I’m told that model is too right wing for the UK voters to accept. (For profit schools, etc.) Sweden’s become far more neoliberal since 1990, perhaps no one told you that.

  46. Gravatar of Cahal Cahal
    25. July 2011 at 11:29

    ‘Maybe when you get older your get a better understanding of human motivation.’

    Urgh. Barely worth responding to – strange how economists are willing to apply their rational self maximiser theories to everyone but themselves.

    ‘Wrong on both counts. There was no massive fraud behind the crisis, and there were was against fraud.’

    What? There is email/phone call evidence of Goldman Sachs
    talking about how they are ‘dumping shit’ (paraphrasing) on investors and then betting against them. That is fraud:

    fraud/frôd/Noun
    1. Wrongful or criminal deception intended to result in financial or personal gain.

    ‘Lots of bad loans were made in the 1980s, without CDOs.’

    Not quite as many as in the 2000s, though! Also directly after a financial deregulation spree, funny that.

    ‘Soros funds left wing groups–so I see an equivilence.’

    He does, but explicitly – things like Project Syndicate are simply not the same as buying out universities and hiding in the shadows. Also consider that the policies he advocates would affect him negatively, whereas the ones the Koch brothers advocate would affect them positively. They just aren’t the same.

    ‘You don’t think the UK was doing poorly in 2008-10? You must be just about the only one in the world who feels that way.’

    Everywhere in the Western world was doing poorly in 2008-10, but psst, Labour were in office for 11 years before that.

    ‘Brown did all that fiscal stimulus, and got much less growth than Germany.’

    Actually our stimulus was relatively small – £20bn, iirc, lower than Germany’s 50bn Euros.

    In any case, Germany vs UK is apples and oranges, as they are benefiting greatly from exports to high growth developing countries and a devalued currency. Also, we did actually have pretty high growth until Q4 2010.

    ‘In America the government is heavily involved in banking, and the situation has gotten steadily worse. By 1980 the US banking system was in horrible shape, and that occurred under a system Krugman calls the Golden Age of regulation. Only because Volcker quickly brought down inflation were we able to avoid a major crisis. They were earning far less in interest to their 30 year mortgages than they were paying for depositis. You see that as a successful system?’

    Let’s be clear: the banking system has been awful in the US since the fed was introduced (I’m not against central banks, just the set up). I’m not even sure if fractional reserve is an appropriate term for it, seeing as they aren’t actually reserve constrained. Post WW2 was sort of like having a bull terrier on a decent leash, but it was still a cartel.

    ‘Canada had no bank failures in the Great Depression, and its banks were much less regulated than US banks.’

    The Canadian financial system is very curious. I won’t claim to be an expert on it, but I know it is incredibly resilient, and people have written a lot trying to figure out why. I think simply attributing it to less regulation is a bit glib.

    ‘You seem to have read a lot of left wing propaganda, do you ever read alternative views?’

    I’m here aren’t I? I read plenty of different points of view, although I do find libertarians hatred of government slightly tiring. I don’t really know what you mean by ‘propaganda’ – that evidently means views (and evidence, which I keep citing in response to your assertions that tend to be half-truths or zero-truths), that do not fit with your own.

    It’s funny you say this, because I get the feeling from you that you’ve shielded yourself from explanations of the crisis that don’t fit in with what you say. Recommend me some blogs and books, though (I’ve read all the standard classics: TRS, Capitalism & Freedom etc., as well as various conservative pop economics books like Freakonomics/Undercover Econ).

    ‘Cameron would like to move the UK closer to the Swedish model, but I’m told that model is too right wing for the UK voters to accept. (For profit schools, etc.)’

    Then he should increase marginal tax rates and make welfare far more generous. Fantastic. From what I’ve read, the general consensus on for profit schools is that they haven’t really made a difference either way.

    Sweden obviously has high levels of trust that cannot be replicated, but did you ever stop to think that a large safety net makes people more open to change, to things like for profit schools? Bear in mind Sweden isn’t the only successful social democratic country – Norway, Finland, Netherlands, Denmark.

    ‘Sweden’s become far more neoliberal since 1990, perhaps no one told you that.’

    Sweden have indeed moved to the right, but consider the starting point. The UK moving right isn’t going to make it more like Sweden; it’s going to make it more like the U.S.

    The thing is that Sweden do have a well regulated financial sector, more general regulation, and higher taxes/spending than the UK, though. That much is undeniable.

  47. Gravatar of ssumner ssumner
    27. July 2011 at 08:23

    I get 100 comments a day so I won’t be able to keep up with this much longer. A few brief comments:

    I. I never said Canada had more stability because of less regulation, you are putting words in my mouth. You are right, correlation doesn’t prove causation. You are making the argument that lack of regualtion caused the crisis, not me, so the very correct argument you used agaist the Canadian position you (falsely) assumed I was taking, actually applies to your own argument. The burden of proof is on you.

    2. I don’t agree with your estimate of fiscal stimulus. What is the budget deficit in Germany and the UK over the past 4 years, as a share of GDP?

    3. If you can’t see that Tyler Cowen has a high level of integrity, then you are a very poor judge of people. I don’t retract that comment at all. You also thought I enjoy seeing the poor suffer, which is odd as I often advocate programs to help the poor.

    You said;

    “Sweden obviously has high levels of trust that cannot be replicated”

    Exactly, so why do people on the left advocate the US adopt Swedish style tax rates? Our top tax rate is already near 50%, and Sweden’s only 56% I believe. Yet the progressives in America want much higher MTRs.

    I don’t know a lot about Sweden, but the Heritage institute claims Denmark is the least regulated economy in the world. I make that claim on the following basis. They have ten categories, 2 for size of government, and 8 for regulation/corruption, etc. If you look at the 8 non-soze of government categories, Denmark is most economically free.

    Admittedly Heritage is biased,. but it’s not clear whether they’d be biased in favor of Denmark. And other survey’s also rate Denmark quite high. Is Sweden all that different from Denmark? I don’t know.

    I’d also emphasize that changes can matter for growth more than levels. Obviously the US is still freer than most economies, but things are getting worse. During transitions, growth tends to slow or speed up. Sweden’s had big government, and by the 1980s and early 1990s was performing poorly. This caused major economic reforms, and they’ve had some catch up growth. A perfect example of what I am talking about is China, which in an absolute sense is very poorly governed, and very poor. But in a relative sense, is growing very fast, and becoming much better governed.

    This post explains my idea, if you are interested.

    http://www.themoneyillusion.com/?p=5164

    Regarding reading, you might want to look at empirical studies by right wing economists. Feldstein on taxes, etc.

  48. Gravatar of Cahal Cahal
    27. July 2011 at 09:21

    OK, I’ll stop after this one. Thanks for taking so much time to reply, even though we disagree.

    1. I have cited several examples of where lack of regulation provided instability: magnetar, repo market, fraud. Another one would be mortgage lending – there was a lot of predatory lending in the crisis (particularly in the U.S.). Germany have far tighter mortgage restrictions and they seem to work, as the country has proven to be immune to housing bubbles.

    2. I was talking about the specific stimulus bill. I don’t think deficits are a great estimate of the stimulus – you’d want to look at spending:

    In the UK, it rose by about 5% of GDP around the crisis:

    http://2.bp.blogspot.com/_Z_3bgQQpLBE/TMV76xW_v7I/AAAAAAAAAFQ/8wWb4V8IH9U/s400/ukgs_line.jpg

    Germany’s rose by slightly less than that, around 3% – I couldn’t find any clear graphs for it so I had to do some calculations from various Google sources, you’ll have to take my word for it. Bear in mind, though, that their exports also provide a 100bn (Euro) injection every year.

    3. Look, I don’t want to argue too much about an economist I actually respect. I just feel that the fact he has Koch funding might shift his views a bit in a certain direction, or prompt him to make a post of Kochy nature every so often. The facts seem to bear this out – he does have posts that stand out every so often.

    Come on, 35% isn’t close to 50%. Also, the effective tax rate is actually in the teens I believe.

    For regulation, I am relying on the OECD index, which I feel is more neutral than heritage:

    http://flipchartfairytales.files.wordpress.com/2011/06/oecd-regulation-index.png

    As for why Heritage would be biased towards Denmark, my view is they might simply be biased towards any successful economy, so they can get a positive correlation between their ‘economic freedom’ and growth. The fact they have HK top when the government effectively owns all the land there seems to support this.

    I actually read that post a while ago because it has the words ‘Paul Krugman is wrong’ in it, which comes up if you type his name into Google.

    There is a decent response here:

    http://www.angrybearblog.com/2010/05/why-scott-sumner-is-wrong.html

    Obviously we can debate this point for hours. My main problems with neoliberalism are, however:

    - It all but ignores economic rent, and the role high marginal rates play in reducing this.

    - It doesn’t seem to properly acknowledge the nature of the banking system (that banks create money out of thin air: http://www.positivemoney.org.uk/research/proof-that-banks-create-money/).

    - Consumer sovereignty.

    - Free trade in developing countries when almost every developed one sued protectionism to take off.

    - Demonisation of unions, but little attention paid to massive corporations (which are basically unions for shareholders).

  49. Gravatar of ssumner ssumner
    28. July 2011 at 06:05

    OK, I’ll give you the last word, except to clarify my tax comment. I said the top income tax rate was close to 50%. The US has two federal top rates (35% and 3.8%, for a combined 38.8%) plus state top rates. In places like NY and California those are close to 10%. So the top income tax rate in the US is close to 50% in many important states. Obama wants to raise it even higher.

  50. Gravatar of business blog business blog
    19. October 2011 at 22:52

    business blog…

    [...]TheMoneyIllusion » British AD soars at a 9% rate in 2011 Q1[...]…

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