Would it be rude to mention monetary offset?
Royal Baby to Boost British Economy by $400 Million
Festivities-related expenses will lead the way with an estimated $131 million (£87 million) in additional business thanks to the royal baby, according to the research. That includes increased spending on alcohol ($94 million, or £62 million), with the group predicting three million bottles of champagne and sparkling wine will be opened across the country, mostly in informal celebrations, to celebrate the baby.
Let’s hope Mark Carney doesn’t spoil all the fun by making the Brits pay for their celebration with less consumption in other areas. No need to take away the punch bowl when there are unemployed Brits capable of producing more punch.
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15. July 2013 at 16:41
“Let’s hope Mark Carney doesn’t spoil all the fun by making the Brits pay for their celebration with less consumption in other areas.”
This comment reveals just how misled one can get from extreme nominal thinking.
The correct economic way of thinking through this is to first understand the fact that economic resources are scarce. Every good can only be disposed of in one and only one way. It is why economic goods carry a money price, and why money carries a real goods price.
The next thing to understand is that if 3 million bottles of wine and champagne are going to be consumed for the purposes of this royal baby celebration, then that ipso facto implies those 3 million bottles are not going to be consumed for other purposes.
The final thing to understand is that central banks issuing more paper notes is not the same thing as increasing the supply of capital goods, such as those associated with wine making, e.g. land, tractors, distilleries, casks, tools, equipment, energy, etc.
Brits are going to have to settle with 3 million fewer bottles of wine and champagne for purposes other than the baby celebration, precisely because of consuming the 3 million bottles of wine and champagne for the purposes of the baby celebration!
Even Mark Carney is not able to eliminate the law of scarcity, and the law of opportunity costs. But what he can do is either set about additional malinvestment by bringing about inflation now, which will inevitably correct in the future with recession in the future, or he can reveal past malinvestments by bringing about deflation now, which will expedite these types of corrections with recession now.
What he can’t do is the Jesus move of turning water instantly into wine.
15. July 2013 at 17:38
Geoff: the EU already produces too much wine than can be consumed. More wine bought will just mean a bit less wine poured into our wine lakes (i think some might get recycled somehow but its not a very valuable use). So drinking a bit more could be genuine economic boost. The wine is already being made for crazy subsidy purposes. It might as well be drunk!
15. July 2013 at 18:06
I don’t think I’ve ever seen a punch bowl other than on TV.
I’m not sure which exact statute proscribes dishonouring a royal birth as treason towards the Crown and thereby subject to the death penalty, but I’m sure we have it somewhere. It may be a by-law of York-
https://www.whatdotheyknow.com/request/in_york_it_is_perfectly_legal_to
“After an extensive search of our records I can confirm that there are no records of any Scotsmen being legally shot with a bow and arrow in the last ten years.
There is however a vague recollection of an alleged occurrence several centuries ago which involved a group of men from the Nottingham area, dressed in green, who were enjoying a stag night in York.”
I’m glad we have a Freedom of Information Act in this country to get trained government bureaucrats onto finding out about things like this, rather than their day job of causing trouble.
15. July 2013 at 18:18
Nick:
“the EU already produces too much wine than can be consumed. More wine bought will just mean a bit less wine poured into our wine lakes (i think some might get recycled somehow but its not a very valuable use). So drinking a bit more could be genuine economic boost. The wine is already being made for crazy subsidy purposes. It might as well be drunk!”
Given that there is a relative abundance of wine, then capital and labor can be redirected into producing other goods instead.
Drinking wine in particular, and consumption of wealth in general, gives zero “boost” to economic growth. ZERO. ZILCH.
The only activity that “boosts” the economy is saving and investment.
15. July 2013 at 19:34
I can forgive the Hollywood Reporter for not understanding the concept of aggregate demand, and that more spending on this event is only less spending on other items, if AD is head steady.
But when “major” newspapers engage in such folly…or “economic thinkers”….
15. July 2013 at 22:24
Geoff, you say “drinking wine in particular, and consumption of wealth in general, gives zero “boost” to economic growth. ZERO. ZILCH”. I can see that wine consumption may have negative side effects to the economy due to hangovers and such. But the rest of your statement seems wrong to me. What if a country’s or individual’s wealth consists of iron ore, or farm land, or labor skills? These are more likely sources of wealth. If they are consumed or utilized they would tend to give a boost to an economy. If they just sit idle, they do nothing. In fact, labor and farmland are necessary inputs to have a stock of wine in the first place. So if an increased consumption of the stock of “wine wealth” leads to an increase in utilization of idle resources to replenish that supply of wine, that should boost an economy.
16. July 2013 at 01:24
Scott: probs need to reply to this: http://noahpinionblog.blogspot.co.uk/2013/07/japans-stagnation-demand-side-or-supply.html
16. July 2013 at 03:15
Saturos, Yes, that has some good and bad points. I’ll respond when I have more time.
16. July 2013 at 05:43
Okay, I’m rude; Broken Window Fallacy.
16. July 2013 at 08:41
Jerry Brown,
At a most basic level, we measure Gross Domestic Production we don’t measure gross consumption. Drinking more wine does not create more wine.
Then the economists say that income must equal output, and consumption must equal production. Of course consumption never does exactly equal consumption, so we put a plug in the consumption numbers (inventories) and consider everything waiting to be consumed as consumed.
Wine in the cellar has already been drunk from and economic accounting point of view.
But, when we really get down to it, gluts do not exist — or the do not exist outside of the short term. There is a price at which all wine produced will be consumed. It just might take some time to find that price.
16. July 2013 at 08:41
Geoff,
Here are various ways to analyze this
(1) Nominal: Does the royal baby lead to more wine *purchases* than would otherwise be made? The article says yes. Given an AS-AD framework, more spending is more AD, which means more NGDP, which means more RGDP unless we are at the production frontier.
(2) Real: Would people prefer to live in a world with a royal baby and wine consumption, or no baby and saved wine? I think most people prefer the former, although this is an empirical question. This means that royal babies are welfare-improving.
(3) In micro terms, we can think of the royal baby as a complementary good to the wine, increasing the wine’s consumption value. The royal couple are “baby entrepreneurs,” whose cool new app (the baby) has increased the value of smartphones (the wine).
16. July 2013 at 10:52
Prof. Sumner,
Check it out: Paul Krugman is gearing up to launch a big attack on your views!
http://krugman.blogs.nytimes.com/2013/07/16/the-paradox-of-flexibility
“One place Bartlett goes a bit wrong, I’d argue, is in continuing to preach the Friedman line that all this could have been avoided if only the Fed had done its job; that’s a view that, I’d argue,has taken a real beating from recent events.But that’s going to have to wait for a later post.”
16. July 2013 at 11:34
Too bad the Royal Family does not celebrate the Royal birth with a potlatch.
Nukimatt ( Creator God) is angry.
16. July 2013 at 13:14
http://www.bbc.co.uk/news/business-23328472
“”It’s comforting to see some stabilisation in core services prices,” said Laura Rosner, economist at BNP Paribas in New York, adding that “we expect personal consumption to remain weak.”
However, while low inflation might be good for consumers, it can hurt corporate profits. Rising prices help raise revenue figures which can boost companies’ top lines.”
If this is how well economic correspondents grasp inflation, then how can one expect the general public to understand it? “People understand inflation” is the single more egregious false belief of economists today.
16. July 2013 at 13:21
TravisV,
Did I read that correctly or did Krugman reject sticky wages as a cause of short-run non-neutrality of money in that article?
“One implication of all this is what Gauti Eggerstsson and I (pdf) call the paradox of flexibility: making it easier for wages to fall, as Hazlitt demanded then and his modern acolytes demand now, doesn’t just redistribute income away from workers to the wealthy (funny how that happens); it actually worsens the economy as a whole.”
So has New Keynesianism lost one of its most notable advocates? Do “sticky wage” explanations of recessions no longer work in practice, as well as not in theory, in Krugman’s world?
It’s as if Friedman endorsed the real bills doctrine in his old age or Keynes lived to become a Marxist.
16. July 2013 at 16:34
The Fed updated the household financial obligation ratio for 2013Q1. For the first time since the recession, it increased (although it is still at a very low level).
This is huge news. Households are releveraging. It’s certainly an offsetting factor insulating AD from the sequester. QE3 played no small role in this.
16. July 2013 at 18:18
Obviously the solution is to clone royal babies — with only 6,000 babies a year, they can double the British economy. If they also prepare for an alien invasion at the same time… my God!
16. July 2013 at 18:31
Jerry Brown:
“I can see that wine consumption may have negative side effects to the economy due to hangovers and such. But the rest of your statement seems wrong to me.”
It’s more fundamental than wine drinking in particular. It’s acts of consumption in general. All consumption. Every act of consumption takes wealth out of the economy, without putting any wealth in. That’s the definition of consumption. Consuming resources after which there is nothing.
Saving and investment on the other hand bring new resources into being. That is what grows the economy.
“What if a country’s or individual’s wealth consists of iron ore, or farm land, or labor skills? These are more likely sources of wealth.”
Wealth is its own concept. I define wealth as material goods. Consumer and capital goods are all examples of wealth.
I treat money, to the extent it is a free market money, where the ultimate value of it is its final value, and I treat stocks and bonds, more as claims to wealth, than wealth itself.
“If they are consumed or utilized they would tend to give a boost to an economy.”
No, consumption does not give any “boost” to any economy. Consuming a resource leaves nothing left. You eat a hamburger, and it’s gone. You have nothing to show for it afterwords. Taking wealth out of existence is not a positive activity with regards to economic growth. It’s a positive activity with regards to the individual consumer’s standard of living.
“If they just sit idle, they do nothing.”
If they sit idle, or if they are consumed, there is no “boost” to the economy either way.
“In fact, labor and farmland are necessary inputs to have a stock of wine in the first place.”
We’re talking about consumption.
If you want to talk about labor and land, those are their own concepts as well.
“So if an increased consumption of the stock of “wine wealth” leads to an increase in utilization of idle resources to replenish that supply of wine, that should boost an economy.”
Consuming wine does not “replenish wine.” Consumption is one activity. Saving and investing is another activity. Saving and investing in the production of wine is what replenishes wine. Consuming wine decreases the supply of wine.
If the act of consuming wine attracts capital to the production of wine, that means that capital cannot be allocated elsewhere. While the production of wine may be increased, the production of other goods has to go without the capital being devoted to wine production.
If everyone consumed wine, and nobody saved and invested in wine production, there would soon be no more wine left.
16. July 2013 at 18:35
marris:
“(1) Nominal: Does the royal baby lead to more wine *purchases* than would otherwise be made? The article says yes. Given an AS-AD framework, more spending is more AD, which means more NGDP, which means more RGDP unless we are at the production frontier.”
Consuming resources leaves fewer resources for further production. There is no such thing as a production frontier apart from actual production. It’s a fudge factor, made up to justify all sorts of horrible actions.
“(2) Real: Would people prefer to live in a world with a royal baby and wine consumption, or no baby and saved wine? I think most people prefer the former, although this is an empirical question. This means that royal babies are welfare-improving.”
You’re ignoring what could have been done and what could have been produced had the wine not been produced and consumed, but something else instead.
It isn’t an empirical question, it’s a logical question, because you can’t empirically observe what could have occurred had people used resources differently than they actually did.
“(3) In micro terms, we can think of the royal baby as a complementary good to the wine, increasing the wine’s consumption value. The royal couple are “baby entrepreneurs,” whose cool new app (the baby) has increased the value of smartphones (the wine).”
You can view these events through such analogies if you want, but nevertheless, other goods besides wine could not get produced because the scarce labor and capital were devoted to wine production and consumption.
16. July 2013 at 19:07
Off-topic but may be of interest:
ECB Monetary Policy in the Recession: A New Keynesian (Old Monetarist) Critique (Robert L. Hetzel) July 2013
http://www.richmondfed.org/publications/research/working_papers/2013/wp_13-07.cfm
16. July 2013 at 19:34
Geoff:
“If the act of consuming wine attracts capital to the production of wine, that means that capital cannot be allocated elsewhere.
While the production of wine may be increased, the production of other goods has to go without the capital being devoted to wine production.”
Here’s a question for you:
Suppose that vineyards cannot be used to produce other crops (which is not a bad approximation, because of high switching costs).
Suppose, as well, that there are no marginal capital costs to produce wine, but that there are significant marginal labour costs (which is not a bad approximation).
Finally, suppose that there is significant slack in the labour market (i.e. mass unemployment).
If consumption of wine increases, what happens to economic growth?
PS: Please answer within the parameters of the question. Pointing out that some of the approximations are unrealistic is beside the point.
16. July 2013 at 19:44
I think it is not rude to mention monetary offset, because it doesn’t exist. If there is an output gap more spending closes it and does not produce inflation. So nothing to offset. The CB won’t even notice that the gap narrowed slightly. After 3 years of inanities of austerity which gave UK a double dip recession and record unemployment despite having its own currency some extra spending will only help.
17. July 2013 at 00:26
OhMy,
“If there is an output gap more spending closes it and does not produce inflation.”
The SRAS curve is not flat even at very high levels of unemployment, let along unemployment of about 7.8% in a country with a developed welfare state. Inflation isn’t an off/on switch that manifests only at full employment.
Anyway, even if it was flat in the UK right now, the reason that the Bank of England is tolerating above-target (and rising) inflation is because the output gap is there. As the output gap narrows, the Bank of England would come under even more pressure to bring inflation back to target. If it’s a small change to the output gap, then of course it’s a small change to the pressure, but that doesn’t mean that the monetary offset “doesn’t exist”.
“After 3 years of inanities of austerity which gave UK a double dip recession and record unemployment”
(1) A double-dip recession, as usually now defined, would involve a second period of declines in RGDP for two consecutive quarters. Under current figures, that never occured-
http://www.tradingeconomics.com/united-kingdom/gdp-growth
– though that doesn’t mean that demand in the UK wasn’t too low in the past 3 years, as that chart suggests.
(2) “Record unemployment figures”? Even in absolute terms, the unemployment rate never reached the heights of the early 1990s recession, let alone the early 1980s depression:
http://www.bbc.co.uk/news/10604117
17. July 2013 at 00:29
To be fair, if you define “record unemployment” in terms of low levels of the total number in employment, then there was a fall in the level of employment in 2011-
http://uneconomical.files.wordpress.com/2013/07/uk-lms-emp-2013m03.png?w=595
– but not to record lows, to put it mildly!
http://uneconomical.wordpress.com/
17. July 2013 at 01:55
W. Peden – that stuff from Krugman is conditional on the idea that the CB can’t control the price level at the ZLB. Somebody should really pin the UK CPI data to his door.
17. July 2013 at 02:04
Britmouse,
On the basis of the last few years, you’d think that the Bank of England can’t control the price level: it can’t bring inflation back within the target range!
17. July 2013 at 12:34
W Peden
The BoE hasn’t been trying to bring inflation back into target range. It’s been targeting NGDP growth, but secretly and in a way they sincerely hope no-one notices.
It is stupid, we know, a bit like driving to a destination on the most roundabout route possible. No wonder it will take us some time to arrive!
17. July 2013 at 12:42
James in London,
I’d say that, judging by the minutes, they’re pulling in different directions. However, I think the reason why there hasn’t been more stimulus over the past three years is to try and engineer a gradual fall in inflation, at least to a level where they aren’t getting too much flak.
17. July 2013 at 12:42
But I agree that the Bank can bring down inflation and indeed has done so compared to 2011.
17. July 2013 at 15:38
Ciceron:
“Suppose that vineyards cannot be used to produce other crops (which is not a bad approximation, because of high switching costs).”
“Suppose, as well, that there are no marginal capital costs to produce wine, but that there are significant marginal labour costs (which is not a bad approximation).”
“Finally, suppose that there is significant slack in the labour market (i.e. mass unemployment).”
“If consumption of wine increases, what happens to economic growth?”
It decreases, ceteris paribus, because consuming resources does not grow the economy. This is a universal truth. There are no assumptions that can overturn it.
“PS: Please answer within the parameters of the question. Pointing out that some of the approximations are unrealistic is beside the point.”
I always try to respond to and inquire into thought experiments given that the assumptions are true, because that is the proper approach. I only question the assumptions when they are internally inconsistent. Given that all of your assumptions are possible, I think it is proper for me to answer given those assumptions.
Having said that, please be advised that it is one thing to deduce from a relatively restricted set of assumptions, it is quite another to be saying something accurate about the gigantically huge and complex real world economy.
I think it is important for you, and everyone else here, to really have it sink in that consumption does not grow economies. Ever. No exceptions. The ONLY thing that grows economies is saving and investment, for that is the only activity that brings new economic goods into fruition, which is the very meaning of economic growth.
Consumers do not grow economies. Producers grow economies. However, since in a division of labor all consumers are producers, it is more accurate to say that consumption activity does not grow economies, whereas productive activity does.
You add nothing to economic growth by spending money on wine or cheese for your own consumption. You help the economy grow by what you do to earn money.
Earning money is how money and spending are connected to economic growth. Spending money on goods requires those goods to be produced first. Without that prior production, which required saving and investment, you can’t buy anything with your money.
This is something that is challenging to grasp, because most people who use money, use money for consumption. When you live your life earning money and spending it all on consumption, it is easy to come to the conclusion that the primary source of economic growth comes from consumption spending.
The supposed sophisticated explanations that purport to prove consumption spending “boosts” the economy, are all really nothing but ex post rationalizations of this very crude and basic stab at economic thinking.
The most healthy economy is one where consumption spending is the barest minimum, and investment spending (which requires saving) is maximized. Any deviation way from this towards consumptions will always and everywhere shrink the economy from what it otherwise could have been.