Music for the New Year

I was never a fan of the B52s but this song makes you think you are at the beach bodysurfing a wave.

It makes the bass guitar the centre of the music and it works!!

Seems appropriate for New Year's day in Sydney.

The original lead guitarist dies of aids I think and had only 4 cords on his guitar. Strange but apparently it worked

Last Post for the Year

The following are interesting articles from various blogs around the place just in time for holiday reading.

• Firstly from the Land of Oz Ken Parish looks at the political year and all the mud slinging. Lengthy but worthy of a read
• Paul Krugman looks at structural deficits and sees some cyclical issues. This is becoming an issue in its own right. sometimes structural deficits/surpluses are affected by cyclical events. (econspeak on this as well.) This is about how some people never learn. It happens here as well! ( Brad De Long on fire on this.)
• Noah Smith here and here looks at whether Japan can reflate. If the BOJ cannot hit a 1% CPI target how in the hell will it get near 2%!!
• Menzies Chin looks back at 2012 and has a bit of fun.
• The inimitable Mark Thoma provides great food for thought. the two Davids examine the Taylor rule and NGDP targeting and find problems.
• Brad De Long  on showing why economic history is one of his strong points
• Simon Wren-Lewis looks at the state of academic economics. hmm
• Lastly Carbon taxes making Ireland greener. Begorrah

Possibly the first Around the Traps

Okay it is Christmas day but the boys are watching Batman Begins so I have a bit of time on my hands.

If you enjoy economics here are some articles for you.

• Mark Thoma naturally has all the Krugman/Mankiw debate
• David Glasner has a short piece on whether History matters
• Menzies Chin looks at the Anti-Keynesian rants
• Nick Gruen looks at generosity and political preferences
• Simon Wren-Lewis looks at the state of macro debate
• Jonathon Portes marks his views to market
• Philip Lane  looks at the British economy
• Kruggers on the Fed and interest rates

Interesting but not so wonkish

• Tim Lambert on the the Australian's recurring war on science. ( just for something different.)
• Angry Bear here and here on guns
• Calculated Risk on the 10 economic questions for 2013

Some good holiday reading

Merry Christmas

Christmas is about the coming and birth of Jesus Christ.

The birth and life of Jesus Christ is incontrovertible.

Humanity is incorrigible  with respect to Jesus.We just do not want him to be Lord of our life and live his way.
He is inconvenient. We try to ignore him. We remember at Christmas or Easter.We take the holidays and the fun but not the truth.

It is incredible not inconvenient at all!!

This Church has the full version but alas not in electronic form!!

More classical music

The internet is fantastic.

Whilst I was trying to get versions of Songs my mother taught me I came across this lady.

not only a good voice but has great looks as well.Enjoy

Classical touch

Songs my mother taught me is one of my favourite songs.

 Choose your version

Two comments.

Only a prat would try and  outstage our Joan.

The better version is Lizzy's. A lilting voice simply made for the song.

Why Handel was a genius

Although this song  is really about Easter it is my favourite 'christian  'song and shows what a genius Handel was.

Yes I know it is ironic heretics sing this so beautifully when they clearly cannot believe the words!

Try this as well

Enjoy and enjoy Christmas. God gave us his son for a reason!

Know your subject

Okay I know I said I wouldn't be writing but someone has annoyed me/



Sam Wylie at Core Economics ( sorry no link as the article is that bad!) makes a number of rather silly remarks about the fiscal position of the Australian government.

In no particular order.

• He thinks it is real GDP that is important to the budget position. It isn't it is nominal GDP
• He doesn't understand the government doesn't want to obviate the automatic stabilisers as the economy is slowing
• He thinks that cutting spending by 1% of GDP is no big deal. It has no impact on revenues for example
• He then cannot nominate by how much he wants the public sector to detract from Growth
• His policy would lead to either a slowdown or a recession and just remember we are slowing down at present
• He is not aware of advice from both the OECD and IMF on fiscal policy
• Finally he has a very thin skin as he deletes  comments he cannot or will not answer.

Postscript

Samuel J at Catallaxy has also written something on the budget so breath-taking ignorant on simple fiscal policy I wonder how it ever got to air so to speak.

I will simply say no matter who was in government they couldn't possibly post a surplus ( because of slowing nominal GDP growth) and you would slow the economy even more if you tried.



Have family coming over so I might do something tomorrow.

all the best

Forrest Gump

If you treat people as idiots then it could possibly mean they are idiots.

Sinclair Davidson attempts to argue black is white in true Goebellian fashion.

In true SA fashion the commenters except for a noble few, agree that black is white.

Please note the commenter Pedro. Although sympathetic to the view usually promulgated at this blog he cannot believe what he is reading!

I believe we can call this the Forrest Gump column!!

Christmas is coming so few posts are likely until after the third test!

Fiscal Policy again

Well at last Wayne Swan has bowed to reality.
As I have mentioned almost ad finitum given we have had below trend nominal GDP growth for some time and it is nominal GDP that is all important to the budget bottom line we were never going to get a balanced budget ( for that is what you have if the bottom line is less than 1% of GDP.)

In no particular order the reasons why we should not have a balanced budget are:

• It isn't possible. If you try to cut spending to overcome automatic stabilisers you will increase the deficit not reduce it as we see in Europe
• Fiscal policy is not an end it is a means. It is there to boost GDP growth and reduce unemployment not the opposite
• Austerity works in good times as Keynes pointed out in 1936 not in times when the economy is slowing
• Fiscal policy is quite potent but monetary policy is not is some circumstances. This means lower interest rates may not offset tighter fiscal policy even if the RBA is not behind the curve.
• It may lead to the $A depreciating and going to levels reflecting its fundamentals
• Even the OECD and IMF have said so

Wayne Swan has shown again he takes a long time to change his mind. After browbeating by the Treasury Secretary and RBA Governor he eventually agreed to use fiscal stimulus to overcome the GFC, thank the Lord.
Now he has been eventually convinced he couldn't get a surplus. Why did it take so long?
Why is he such a hopeless politician. On this see Mumble ( second last on the sidebar.)

I should add AGAIN that when anyone claims the budget should be in substantial surplus then you know they are fiscal incompetents.

Compare the last three years of the last government with the last three years of this government in terms of budgets. One thing stands out like a saw thumb.

Revenue is a lot weaker this time round than last. Check out Mark the Graph

POSTSCRIPT

If it was easy to balance the budget then Hockey would promise to do that. He hasn't.!

Compare and contrast:
John Quiggin
Nick Gruen
Sinclair Davidson


Okay I think Nick's is easily the best around the traps

The Budget and all that

Ross Gittins writes about the budget and the economy and he makes a lot of sense.

I only support putting the budget into the black if they do it via smoke and mirrors. After-all fiscal policy is if anything too contractionary. Only a very silly person would make it even more contractionary particularly when cash rates are at 3%!

When nominal GDP is below trend as it has been for some time then the budget will not be balanced.

Without smoke and mirrors fiscal policy can only become more contractionary by attempting to balance the budget. This means weakening the economy and wella the budget blows out. We see this happening in Europe.
(The Irish economy is still below what it was before the GFC!)
Such measures if anything would lead to $A appreciation which is contractionary as well.

Monetary policy just wouldn't offset this just as it isn't at present.

Update

Wayne Swan at a press conference has bowed to reality. He will not try and obviate automatic stabilisers.

He was quite good at the press conference as well.

Around the Traps

The following is sorry are some interesting articles from blogs I have read.

• Simon Wren Lewis has an excellent article on looking at whether it takes a lot of Harberger triangles to fill an Okun gap. Read it and find out.
• Jonathon Portes has an excellent guest contribution from Adam Posen on the UK economy
• Mark the ballot has some interesting stuff on the polls. as I said on Friday read the blogs on his sidebar. The ALP can still win the next election IF history repeats itself!
• The thin-skinned Ken Parish has a fantastic article on the 'Slipper ruling and the rest'
• Lord Keynes looks at who the main critics of Hayekian business cycle theory were
• Stephen King looks at two school attacks. One in the USA and the other in China. One person had guns and the other a knife. In one attack a lot of people were murdered and in the other none were!
• Mark Thoma shows how todays is vastly different to the 1970s and son worries of stagflation are overdone
• Bill Mitchell in an old article which I have only just read shows why I lost faith in Milton Friedman. ( I read about this at Uni.)

If I find more as I go reading today I will post more.

Enjoy

Book Review and possible Christmas present

I wrote quite recently about Kaiser Fong and his analysis of the Lance Armstrong Affair.

Well here he is reviewing Nate Silver's book.

I really enjoyed it. I must buy the book.

(As an aside the last Neilsen poll is being done this weekend so on Monday when it is released I will via Mark the poll show the latest figures.

Just remember to read most of the blogs on his side-bar. They are fantastic.)

Musical interlude

East west is one of the all time great music tracks.

Solos from Mike Bloomfield and Elvin Bishop on guitar and Paul Butterfield on Mouth harp.

It is mouthwatering stuff and made in 1965!!! Well I reckon it was 1965 but you tube says differently.

I first heard this on Chris Winter's Room to move on 2BL Monday nights. That is pre-FM radio  folks.

I give you both the studio version and the live version.

I have hyper-linked them instead of using you tube for reasons you will see when you open the link

Europe

Europe has been a disaster for those supporters of classical economics.

for some enlightened reading  try Kevin O'Rourke and of course Kruggers.

Read the links as well. The Netherlands is now affected!!

I really should add Jonathon Portes as well.

CRA again.

Mike Konzal  demolishes the case that CRA lead to risky lending.

I do wish people who try to portray CRA as the villain behind the GFC would try and show how papers from the Fed and each Regional Fed on this issue were wrong.

They never do. They simply ignore them. This is usually proof they have no case.

Whoopsy I forgot Noah Smith has also written on this.

Okay read this Fed research paper on the topic!

The Curious case of the $A

It used to be easy to know the direction of the $A. It merely followed the direction of the terms of trade ( in other words commodity prices).

However in recent times commodity prices have fallen BUT the $A has remained at high levels. why?

It appears sovereign wealth funds find the yields on our government bonds with its AAA rating from all three rating agencies (The only time thus far this has occured) irresistible.

The $A being at high levels is contractionary for the economy. This combined with fiscal policy is outweighing the stimulatory effects of lower interest rates.

Indeed it appears to be the major reason why nominal GDP levels has been lower than trend for sometime and why disinflation has made real GDP higher then nominal GDP.

Can this continue?

Ricardian Ambivalence believes it can.( see the comment on the jobs article). He thinks it can as long as the terms of trade keep falling. You then get a European situation of net exports only rising through very low wage growth.
In other words very tepid growth which means rising unemployment.

How does a policy maker change this?

Well a loosening of fiscal policy would achieve this. You would then get expansion through both fiscal policy and a lower $A. However as the economy expands and then you get a tighter fiscal policy you then get back to a stronger $A than the fundamentals would lead you to.

The problem at present is that old fashioned fundamentals has taken a back seat. It seems to me it will continue to do so whilst the European crisis continues.

An old fashioned Keynesian would find himself in a bind. At present the government is following Keynesian policies. A reliance on monetary policy with fiscal policy going from neutral to contractionary.

What to do?

Lance Armstrong

Do you enjoy statistics?


I admit so.  That is why I loved reading Nate Silver , Simon Jackman etal on the US election.

In this hugely enjoyable article Kaiser Fong goes through the stats with regard to Lance Armstrong.

Good blog as well.

Goebbels Award

I am going to start the Goebbels award.
Each time I see something written which is soooo inaccurate that Joesph Goebbels would be proud of it then it will be awarded..

The inaugural winner is  Sinclair Davidson who attempts to say part of the rise in GDP is because of Government spending.

Now go to the National Accounts and they say the public sector actually detracted 0.5 percentage points from GDP growth.

Wow. He is asserting, in a kind of indirect way the exact opposite of what has actually occurred!

This shows how well the Goebbels technique is employed. He isn't spouting some falsehood from the rooftops alah Alan Jones. He is simply quietly slipping in the lie and then everyone accepts it.

Global Warming

Do you think or believe the official forecasts on climate change are overblown and always over the top?

Well you are WRONG

Know your Subject

Yikes this is too good to be true.

A person using the amazingly accurate epithet of 'Poor old Rafe' writes about part-time employment and strikes and productivity.

Only one problem he is wrong on both counts.
The ABS released their labour force statistics yesterday. Now yes over the month he is right but ( remember there is a lot of noise in monthly figures)  why over the year to November has part-time employment fallen but full-time employment risen?

On Industrial disputes and Productivity I will outsource this to Grog's Gamut again.

Notice the difference between the evidence and the assertion.

The link is in the national accounts. He asserts something and has no idea of the primary source. wow!

This person is living in a parallel universe

Almost the start of Around the Traps

National Accounts

Yesterday the National Accounts were released.

please see Ricardian ambivalance and Mark the Graph ( please note for all political junkies he has another blog as well now Mark the Ballot)  on the sidebars
See also Grog's Gamut.

Nice graphs and analysis if you read them all.

What to me is important.

Real GDP is > than Nominal GDP because of DEFLATION. Yes folks deflation.

Remember it is nominal GDP that is important for the budget bottom line.

Unit labour costs are falling sorry rising much more slowly and productivity is still increasing.

Mr Hockey

Times are tough for Mr Hockey. Cash rates and budget deficits/public debt are inexorably linked.
However he just cannot explain how interest rates are lower now than under Mr Howard.

He wants greater public spending cuts BUT the public sector actually detracted 0.5  percentage points from GDP growth.

Just how much of this does he want and how does he think it will affect the budget bottom line?

Interesting stuff

Catch up with Noah Smith on the sidebar on a debate about multipliers, Simon Wren Lewis about how much inflation should a Central Bank allow and Jonathon Portes on self defeating fiscal policies.

Yes another lesson if one was needed that classical economics is a disaster for policy makers to follow as Europe well knows now.

Polls and the Next Election

Just before I start writing read Mumble's thoughts with which I heartedly concur and also let us assume the parties are at 52:48 ( Liberal/Labor).

Now let us take a bit of history.

• Governments, usually and most particularly 2nd term Governments, usually get a swing to them during the campaign) in the Election. ( think 2004, 2007 elections

• Opposition leaders usually do very well in their first election but decline after that IF still Opposition Leader.

That means the government could still win the next election.

Surprised? I was to some extent. I was always confident a scare against the ETS would be devastating BEFORE implementation but a yawn after it came in ( just like the GST).

I will be interested if the Government can exploit Abbott's many bouts of hyperbole after all he has a long history in this area.

We will see.

Will the ALP dare to say interest rates will always be lower under them than the Liberals!!

Postscript.

This article is a great read about recent political developments



Later Postscript.

Polls have gone back to around 54-46ish which makes the above academic. The result would be a win for the coalition but the win would be thinner given a swing towards to the Government.

Spend Money on Roads

The Federal Reserve of San Francisco has looked at spending on roads and likes it.

And it has large multipliers.

People who are of the same age as me will remember John cox saying similar things for Australia.

I remember being poo-pooed for saying the stimulus should have spend money ensuring a dual carriage way from Melbourne to Brisbane.

The Greatest moment in Australian sport

It was in 1973 when Australia eventually made the World cup.

I saw all the home matches  and watched the away matches on TV

Go to the end and watch Jimmy McKay's magnificent goal.

I was cheering on the streets when we had won.

( This took some finding.)

Second best moment  this....

The main reason to be optimistic on the US

Why should anyone be optimistic on the US economy.

One word. Housing.

The main reason is that the distressing gap will narrow.

Now if Republicans can just regain some sanity!

( yes I agree there is no sanity clause)

Catherine Bell V Stana Katic

I prefer Catherine but my youngest son prefers Stana.

In the end it doesn't matter.  they are both beautiful.

Please note neither are blondes. both have wonderful skin texture. Bell because of her persian origins and Katic because of her eastern european origins.

Know your Subject

A person called Samuel J writes about why the budget should be in surplus here.

Unfortunately neither he nor anyone at that blog have any idea of the subject they are attempting to talk about.

He in essence makes four points.

1. There is strong employment growth,
2. There is record Terms of trade
3. There is strong economic growth and
4.  he also asserts NAIRU has increased by 0.5 percentage points.

• Firstly employment growth is not strong. If it was strong unemployment would be falling and the employment to population ratio would be rising.
• The Terms of trade are not at record levels. Even when they were high taxation never got to levels we saw under the previous government as we has seen before. Obviously Samuel has never looked at a budget or MYEFO paper. As we saw last time tax revenues are at levels we have seen since the early 90s.
• As we have seen previously it is NOMINAL economic growth that it important to budget numbers not real economic growth. at present real GDP is running above trend but nominal GDP is running below trend.
• Treasury has not made any statement anywhere that NAIRU has risen.If it had the RBA would not have cash rates where they are.

One might say the writer is the Tahir of blogging on this record but I couldn't possibly comment.

Blogs on my sidebar

Why do I have the blogs on my sidebar?

Let us go through them in no particular order.

Noah Smith's Noahopinion ( get it?) and David Glasner's Uneasy Money are fantastic for pure intellectual stimulation into areas of economics one sometimes mightn't venture to.

Brad De Long and Paul Krugman are simply too good to miss from a Keynesian perspective.

Mark Thoma's Economist view is also too good to miss. He picks up any interesting article written anywhere. Indeed read this blog first.

I have been following Calculated Risk since the credit crunch. It is a must read if you want to know about US housing.

Econbrowser features Jim Hamilton and Menzies Chin. some good econometric work is always around.

Simon Wren-Lewis writes the Mainly Macro blog and it is good for the UK and Europe.

Macroblog is the blog of the Federal Reserve of Atlanta with Dave Altig  and always proves interesting.

John Quiggin's blog provides commentary mainly on Australia.

Examining Australia then one should read both the Kouk's Market Economics ( sadly too few articles as his wife is suffering from cancer) and Ricardian Equivalence. ( the commenters are of high quality as well.)

Peter Martin is an old mate and a great economic journalist and has a great blog.

Harry Clarke is good for examining environmental economics.

Mumble is a great blog for politics. Simon Jackman is useful for looking at politics from here and afar.

The Pollbludger is great for Australian politics.

Finally Mark the Graph will graph anything he can straight away.

Fast bowlers

Now this bloke was a fast bowler and I do mean Fast bowler.

By comparison Pattinson or Morkel are medium pacers

Public debt

I am astounded by Andrew Robb's latest  proposal.

I will make a number of points in no particular order.

First of all  it appears He has no idea of our obligations under Basel 111 as the Kouk outlines. ( go to his links of previous articles as well.)

He obviously has no idea of the history of this. Peter Costello had the 'brilliant' idea of reducing government bonds. The market very quickly told him they wanted government bonds. It is much better price corporate bonds off government bonds than swaps which is what happened when government bonds became too scarce to do this.

It is impossible to say crowding out is occurring when spreads have narrowed to what they have today.
It is also pertinent to add here that the corporate sector has been reducing debt as quickly as possible since the GFC.

This brings us to the macro-economic problem. if you are attempting to reduce net debt as much as possible then you are saying you will be detracting a lot from GDP. This means nominal GDP will be hit hard and it has been below trend for some time ( unlike real GDP).


This means you are expecting the RBA to take up the slack. It means taking up a lot of slack given the $A propensity to stay well above levels you might expect given where commodity prices are (which is contractionary ).

All in all Andrew Robb hasn't really thought through his thought bubble at all. Also remember he was one of the main men responsible for the irresponsible costings

Gambling

Australia has a problem with gambling.
The Productivity commission has examined this issue.

I have a personal issue here. My parents lost about $500k due to someone gambling it away on poker machines.

It seems to me that the industry is being contradictory.  if problem gamblers are only a small proportion of people who gamble then revenues will not be affected. if they are a large proportion ,as the PC says they are , then they will affect revenues.

The Industry say that they are a small proportion but also they will affect revenues quite a lot!

Thus I have little sympathy for clubs who say they might be strongly affected by curbs on how much a person can gamble.

This is exacerbated when they claim most of their revenues go to community projects.

This claim will only hold up when this revenue only comes from people who gamble responsibly.

Test Cricket and football

The Second test starts today at Adelaide.
Let's hope we do not hope another road for a wicket like we saw in Brisbane.

We need a contest between bat and ball.

Socceroos looked good against South Korea in a friendly recently.

New young players for the most part looked good. We have too many old players in the team and it shows up in the defence.

Musical Interlude

I saw this as part of a Creedence Clearwater Revival special a long time ago.

A great band which have lost two of their key players. Their drummer and bass guitarist.

Both the Steve Cropper and Donald 'duck' Dunn were part of the Blues Brothers.

Industrial Relations

Every so often you want to write about a subject but then find out someone has beat you to it.

Grog's Gamut has a good article about the fallacies behind the whining on the labour market.

He also has a good article on why the is no wage breakout as all.

Wages are doing little, Industrial disputes have done little and of course NAIRU hasn't thus changed.

Like most of the time the critics of the labour market have no evidence to back up their claims only slogans,

Fiscal Policy

Let us examine fiscal policy again.

Just to be helpful this is what CBA research has come up with.

                                                              12/13  13/14   14/15
                                                                 $b       $b        $b

Budget balance at May budget          1.5      2.0        5.3
changed economic parameters            -1.9    -5.0      -3.9
implied starting point                            -0.4    -3.0       1.4
policy decisions                                      1.4     5.1       1.9
budget balance                                        1.1     2.2       3.3  


So the major problem has been economic parameters changing for the worse. In this we know what it is. Taxation revenues being much lower than one would expect. The government has made policy decisions which have meant the budget would be balanced.
This means fiscal policy has been contractionary for some time now. In other words it is detracting from GDP growth.
The public sector is making way for the private sector as Keynes said they should at this stage.
Moreover it is not detracting too much from economic activity as to produce a slowdown.

It is highly noticeable that most critics of fiscal policy never address this potential problem. Implied in their criticism is that fiscal policy should be much tighter. In some cases very much tighter.

It is not in the nation's interest to create either a slowdown or a recession.

At present cash rates are 3.25% and it appears the RBA is wary of letting them go below 3%. The $A has not fallen to levels one should expect given where commodity prices are.

The world economy is a different place to one would normally expect so tighter fiscal policy other than what has been announced does not seem appropriate at present.

pot pouri

here are a couple of posts which are interesting

Dave Altig from the Atlanta Fed makes some interesting points about the 'fiscal cliff.

Noah Smith  writes about Macro-economics and freshwater 'thought'

Jonathan Portes writes about bond yields , budget deficits and public debt.

Calculated risk has the latest USA inflation CPI readings

Gregory Peck

Gregory Peck starred in three of the best movies I have seen.

To kill a Mocking Bird was a movie based on the law and the court room. It still stands up well today.

Twelve O'Clock high was a thinking man's war movie. Peck changes a US squadron of bombers based in England . He eventually goes nuts though.

A Big Country is the thinking man's western. I couldn't do the movie justice so just watch it and enjoy it.
no gunfights though. Great cast!

Favourite TV Programs

I have four programs I just love and I came to all of them by accident.

They are:
The Virginian,
The Mentalist,
Castle and
Jag

If you are curious about any of them then just look up wikipedia.

The Virginian is a Western but a sensible one. The title comes from the foreman of the ranch that the series delves on. We never get to know his name. Other characters in it was Trampas, Steve Hill, Randy Benton, Emmet Ryker ( only character not be to be on the ranch and my favourite).
One thing they had in common was that they were all fast  guns.

The Mentalist is about Patrick Jane a former 'psychic' who assists the CBI by being able to read people and situations. The head of the team is Teresa Lisbon. A gal with a terrific body but a plain face.
The series is all about Patrick Jane (our own Simon Baker). There is no 'love interest at all.

Castle is about a a best selling author ( Richard Castle) helping out the NYPD. The head cop he works with is Kate Beckett. If you do not believe hairstyles can be the difference between a woman being attractive and a babe then check out Stana Katic's hairstyle. Once she has long hair she is absolutely gorgeous.
Naturally Castle and Beckett like each other and eventually fall for each other.

JAG is about lawyers in the US Navy. Sarah McKenzie is front and centre played by Catherine Bell. without doubt she is the most beautiful woman I have seen. She plays a woman who is both tough and vulnerable. The Series ended with her and Harm getting married.

(Catherine Bell is the only female I have seen who looks much better with short hair. Stana Katic is the typical female who looks much better with long hair. They are both beautiful women.)

The Virginian had a bad last season. Called the men of Shiloh it completely changed the emphasis of the series and it wasn't hard to understand why it stopped.

JAG on the other hand had a terrible first series. Once love not sex became the main ingredient for its characters and we saw both investigations and courtroom scenes it got better and so did the scripts.

Not much to say on the other two but they appear to be both near the end.

I only saw the Virginian on early morning on 7 mate before hurrying to work. I taped it after that. I haven't seen all the episodes.

I watched JAG because my wife like it. I like it as well. I have seen all the episodes. Last episode was a bummer.
I caught the Mentalist only by seeing an add for it on TV and since I liked Simon Baker from the Guardian I watched it. My two boys love it.

I caught Castle late one Sunday night and have been taping it ever since. I have to catch up on earlier episodes.

Budgets the cyclical and Structural parts

The budget has two basic parts to it.

The cyclical and structural parts. Both are estimates.

the largest is the cyclical. In good times there is more taxation , less social security etc.

The smallest but most significant is the structural part of the budget. It is this part that plainly either boosts the economy or takes away from it.

Treasury has naturally written on this.

The key part to remember is that changes in the structural part of the budget will effect the cyclical part of the budget.
Done the right way it combines with it. As the economy gets stronger and stronger you need to boost the structural surplus. This means the cyclical surplus will also be large.

What they have done in Europe is the complete opposite.

One little point is the effect of the structural part of the budget will be determined by whether it was deliberate or not.

If, as in Europe or even here, the structural deficit increased because tax  revenues have changed and are considerably less then the effect on GDP will be negligible or even nought. If a Government spends money on infrastructure for example then the impact will be considerable.
The best way to see what way fiscal policy is going is to look whether it is adding or detracting from GDP.
If the structural deficit has increased but the budget is detracting from GDP then you know the structural deficit isn't worth looking at.

Greece is a good example to look at when looking at these two parts of a budget.

I said earlier they are only estimates. Ireland is the best example of what can happen with estimates. Before the GFC hit them Ireland's budget was in surplus and the structural deficit was around 0.5%. In essence it was balanced. (It should have been in surplus.)

After the GFC hit the country that small deficit suddenly rose substantially to  around 6% of GDP.
This was all due to tax revenues or lack thereof.
Yet fiscal policy was detracting from GDP!

Polls

Who are the best people to look at when examining polls here in Australia.

I think possum is possibly the best however another good one is  here.

Either way with around one year to go until the next election we do not know with any confidence who will win.

We do know from 'qualitative polling' ( better known as using focus groups) that the hyperbole Tony Abbott used when criticising the ETS is now working against him as he turns out to be quite wrong.

Gillard is getting a bit of a lift but not enough as yet.

Test Cricket

I love test cricket.

This blog is the best blog about cricket.

Budgets, costings etc

A lot of people say why is there a budget deficit when there is/was a commodity price boom.

These people have never examined budget papers. the latest MYEFO has this for Taxation as a % of GDP

2002-03	192,131	24.0
2003-04	206,091	24.0
2004-05	223,314	24.2
2005-06	241,215	24.2
2006-07	257,392	23.8
2007-08	278,376	23.7
2008-09	272,627	21.8
2009-10	260,973	20.2
2010-11	280,839	20.1
2011-12	309,943	21.1
2012-13(e)	339,209	22.2

Being very conservative compare the yellow episodes with the blue ones.

If Swan had Costello revenue figures he would have few deficits at all. Costello would have few surpluses if he had Swan's revenues.

What is most important in examining future budget figures is nominal GDP. This has been lower than trend in recent times. Whereas real GDP has been higher than trend.

So the change from deficit to balanced budget has come from expenditure.

Joe Hockey has a bad memory regarding budget costing leaks .

There is nothing wrong with the government getting Treasury to look at Opposition policies.


The Opposition can now use the PBO to cost their policies.There is now no excuse for their costings debacle from the last election.

Nate Silver and The US Election

I think Robert Waldeman writes about how we should be quite impressed with Nate Silver the best.

Quite clearly people who do not understand basic statistics and desperately wanted Romney to win, like the crowd at Catallaxy, were shown to be complete imbeciles.

So too the pundits. Just take a peek at Brad De Long on the sidebar.

Republicans now have to decide who is more important. Those that can count or those that cannot!

Update.

this is interesting

nuther one.

Grog's Gamut puts an Aussie perspective on the election.

yikes I forgot our own Simon Jackman doing the same stuff Nate Silver did for the New York times with the same accuracy for the Huffington Post

Last comment but this is a must read if you are a wonk on this.

US elections

With regard to economic policy.I agree with Noah Smith.

Four years ago I agreed with Paul Krugman that Obama was being naive in believing he could get Republicans to do anything on a bipartisan basis.
That turned out to be true. I find it amusing to hear Republicans criticising Obama for 'not reaching out' to them.

Obama's mistake was being far too conservative with regard to the economic stimulus he asked for.

One really doesn't know what Romney would do. Would he indulge in 'expansionary austerity' or simply boost the deficit as both Reagan and Bush did in good times. I think probably the latter.

Roy Buchanan - Hey Joe

I now know how to do this!!  more to come

Who will be the next US Prez?

I cannot be original so I will outsource my thoughts to Paul Krugman.

In essence if the polls are accurate it is another four years for Obama.

A comparison of Blogs

I will say nothing.

Simply compare this article  by John Quiggin and its responses to this article by Steve Kates and its responses. Please note Peter Whiteford's contributions in both.

Actually I will hint at my thoughts.

Here is Steve Kates writing complete nonsense about polling in the USA.

Compare to say Ezra Klein.

Steve Kates works at RMIT? how does this man have a job?

Keynesian and Classical economics,the expurgated version

What is the dispute between Keynesian economics and Classical economics.
Quite a lot really.

Most people think Keynesianism means using fiscal stimulus when the economy slows down.
WRONG!!
Don't believe me then read the General Theory  yourself.

Keynesianism is using fiscal policy when there is a liquidity trap. What you ask is a liquidity trap?

It is circumstances when monetary policy doesn't work. In the 1930s it was deflation. now it is zero bound interest rates. I would also add when monetary policy is impotent such as in Australia's case during the GFC. the RBA eased rates BUT banks found it hard to get any funding, even with a Government guarantee, to lend money out.

The big trick is to ensure as the temporary stimulus runs out that fiscal policy doesn't become too strict and ruin any recovery such as the US in 1937 or Japan in the 90s.

In 'normal' times' monetary policy is the preferred policy instrument. Fiscal policy is only used to the extent automatic stabilisers kick in.( i.e. no large deficits).
Thus we see it is counter-cyclical.

Classical economics, on the other hand, emphasises always having a balanced budget no matter what the business cycle. As the budget begins to get into deficit because unemployment rises and tax receipts fall The Government cuts spending and/or raises taxes to attempt to maintain a balanced budget.
Thus it is pro-cyclical. In bad times it exacerbates a slowdown and creates a recession. you can even promote a depression like Ireland or Estonia.

In good times Keynesianism means much stricter fiscal policy that classical economics. See here for example.  This means a larger budget surplus the stronger the economy.
Classical economics on the other hand means greater stimulation to the economy. This is because the government will either spend more money or cut taxes as more revenue comes in because of the stronger economy.

Now you ask what should be happening right now?


I think Jonathon Portes and Richard Koo both have a good take on that.

This means Australia has done an extremely good job since we got hit with the GFC. The stimulus was large enough to avert a recession and as the stimulus has finished the detraction from GDP has not been too large to offset the recovery.

Music interlude part 2

I can do it now so enjoy. more later

MYEFO & the MRRT

MYEFO was released on Monday.

The Government has foolishly locked itself into producing a budget surplus. ( Economists would regard a surplus of less than 1% of GDP as a balanced budget.)

Having said this I am glad it has used accounting tricks, smokes and mirrors etc both in the budget and in MYEFO. You really do not need to detract more than just over 3/4 of a percentage point from GDP at present.

Think for a moment if the Government produced a fearful budget that detracted say 2 pecentage points from annual growth. the RBA for one would be nervous having to reduce interest rates to well below 3% to compensate.

At present our bonds are being bought up big time by overseas buyers , particularly central banks, because we have a sound economy and our rates are, naturally, higher than elsewhere. This is outweighing the fall in commodity prices thus the exchange rate hasn't fallen like it has in the past. This has a contractionary effect on our economy.

It  appears the MRRT brought in no money in the first quarter it started. Given the fall in commodity prices this is not surprising. Afterall it is a tax on super-profits. No super-profits then no revenue.

Will it produce revenue? It will if the Chinese economy starts growing at its normal levels again.  It appears to have bottomed at present so this may eventuate.

Postscript.

I forgot about one of the major if not the major point for the budget. Whereas real GDP growth is above trend. Nominal GDP growth is below trend at present. Hence the low tax as a % of GDP levels we have seen post GFC. They have been  21.8% , 20.3%, 20.1% and 21.1%.

You have to go back to the first two years of the previous government to see such low levels. If only Wayne Swan had the tax levels of Peter Costello he would be rolling in surpluses.


In regards to the MRRT it appears most State governments think all mining companies wil have to pay the MRRT and so have the royalties claimed against liabilities however only a very small number will.

wow.

Knowing your subject again

Oh dear Simon Cowan is at it again. ( see previous article).

He conflates headline deficits with structural deficits. ( Hint if the public sector is detracting from growth you can be pretty sure the structural deficit is not deteriorating. This current budget is detracting a bit more than 3/4 of a percentage point from GDP growth. On the other hand quite a few of Costello's budget surpluses added to GDP growth!)

Please read this and then this.
Now remember as Austerity was imposed the headline deficit figure increased as a % of GDP.

Why you ask? 

The IMF  ( Oliver Blanchard and Daniel Leigh actually) recently examined public debt and paying it off etc.

Look in particular at the UK in the 1920s. This quote tells you a lot.

"the United Kingdom (1918) had the worst growth performance, with negative growth and a considerable increase in its debt burden." 

It had a substantial primary surplus over the period which inhibited economic growth.However public debt rose BECAUSE growth was so low!

Let me outsource to John Quiggin the maths behind debt rising or falling.

"This is pretty much arithmetic, since public debt (at end of) this year is the sum of public debt (at end of)last year and (an appropriate measure of) this year’s deficit.

If public debt is growing faster than nominal GDP, then public debt/GDP ratio will rise. Note that, since debt is a stock and GDP is a flow, it isn’t strictly correct to refer to debt as a “share” of GDP."

I hope Simon understands now.

The US economy and such

The US economy has not recovered quickly or strongly since the GFC.

A number of Keynesian critics say this shows that fiscal stimuli doesn't work.

However the net fiscal stimulus was not large. ( Their NBER paper is a must read as this is the expurgated version.)

Herein lies the irony. Private sector employment has been quite good. It is public sector employment that has held the recovery back. It is extremely ironic that if public sector employment grew at levels we saw when George Bush Jr was in power then unemployment would be falling to 7%. If public sector employment was similar to that when Ronald Reagan was in power then unemployment would be falling to 6%.

In either case the Fed would be increasing rates not indulging in QE!

We see here that simply allowing the private sector to grow is not good enough. Libertarians must be tearing their hair out seeing their ideological cubby hole being demolished.

One of the major inhibitors this time round has been the housing sector. It was in a bubble and thus not able to be a prime mover to boost economic growth.The distressing gap has been large for some time.

I will leave it to you to guess what would happen to that gap if unemployment was approaching 6% rather that only just getting under 8%.

In the Presidential election we see a current President who in reality has been much more austere than any Republican and of course unsuccessful.

We have a challenger whose economic plan doesn't add up and seems to have ignored why both Reagan and Bush blew their budgets. Indeed the Romney team have supported the totally discredited  theory of austerity policies promoting economic growth. ( gosh it is working well in Europe.)

Then we have the possiblity of a fiscal cliff which would lope a cool 5% of GDP. This would bring on another recession.

I am glad I live in Australia where economic policy has been quite good and successful.

CRA and the GFC

There are people out there who believe the CRA caused the GFC reading the Sub-prime crisis.

Randall Kroszner , (a person thought too conservative to be a Fed governor by silly Democrat Senators) gives both a good description of what the CRA is/was and looks at one of the many studies into by either the Fed or each of the Regional Feds.

This paper blows that CRA caused the GFC argument apart.

I now quote Richard Green who is far more knowledgeable than I.
" If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.

These are originations for 2-28 subprime loans.  Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income.  If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically).  They find the same result when looking at pricing and default.  "

Finally  The RBA's Luci Ellis looks at the causes of the GFC in part of this speech.

All in all people who support the theory the CRA caused the GFC have no evidence and like old time communists are letting their  ideology overule the facts of the situation.

Know your subject continued

At Catallaxy Sinclair Davidson here  and here makes a fool of himself.

First of all he really doesn't know how much of the CPI increase is due to the ETS.

Let us see what the CBA economics department say.

"The ABS has noted that it is not able to quantify the impact of carbon pricing.  But one back‑of‑the‑envelope calculation is to compare the contribution from higher utilities prices with the average or “normal” contribution.  Over the past two years higher utilities prices contributed an average 0.27ppts to QIII CPI growth.  The contribution in QIII 2012 was 0.48ppts.  The gap of 0.2ppts should represent the bulk of the carbon tax impact on consumer prices.  This outcome suggests that the price impact will fall short of earlier Treasury modelling work that put the CPI contribution in 2012/13 at 0.7ppts.

 QIII CPI growth.  The contribution in QIII 2012 was 0.48ppts.  The gap of 0.2ppts should represent the bulk of the carbon tax impact on consumer prices.  This outcome suggests that the price impact will fall short of earlier Treasury modelling work that put the CPI contribution in 2012/13 at 0.7ppts."

Well that is vastly different to what Davidson is alleging.

He then goers on to say this:

"15.3 percent increase in electricity prices? In one quarter? What did Treasury modelling say about that? Oh, yes:

The carbon price leads to an average increase in household electricity prices of 10 per cent over the first five years of the scheme."

Yikes.
 First of all he is comparing a Treasury forecast based on CONSTANT prices with the CPI which must be in current prices.
Secondly he is comparing the whole increase in electricity prices to Treasury's forecast which is based on the impact of the ETS.

Thus neither he nor any commenter has a clue of what they are talking about.

This man is an academic!

Somewhat on topic Ricardian Ambivalence has a great post on the CPI , measuring inflation and what the CPI means.

Know your Subject

If you write on a subject you would expect the writer to have some knowledge of the subject he is pontificating on.

Sometimes this doesn't happen. Take Simon Cowan's piece at the CIS blog.

There are a lot of unfortunate errors.
Keynesian policy involves boosting spending ONLY when monetary policy doesn't work or is impaired. ( It is commonly called a liquidity trap.) The spending is a one-off as well usually on infrastructure.

It also involves a balanced budget or surplus ( sometimes substantially so) in economic good times.

Running an alleged 45 deficits in 50 years since WW2 might be a lot of things but Keynesian economics it most certainly isn't.

A few other things but in no particular order.

He seems to think you must have a budget surplus to reduce debt. He should examine the UK between the wars as the IMF did. Its debt increased despite budget surpluses. Why you ask. Lack of growth!!


Japan's lost decade came about from premature austerity.see Adam Posen .

Europe's problem's were exacerbated by austerity as we have seen previously.

Both Spain and Ireland had either a superior fiscal policy or a similar fiscal policy to Australia coming into the GFC.
Italy had a primary surplus.

Not good Simon. Not what I would expect from the CIS.


Paul Fritjers on both Club Troppo and Core Economics wrote about China at some time overturning the USA as the world super-power.
He linked to a paper on the USA/USSR rivalry.

When asked why he didn't review when the USA superseded the UK as the World Super -power he said the war of independence wasn't a great look or words to that effect.

Only problem he was out by at least 180 years.
He didn't even understand about the line about both countries arguing about battleships.
Yipes most people have the Washington Treaty as when the changeover was confirmed.

And he is an academic. Moreover he stops comments when this is pointed out so he combines a thin skin with inaccuracy.

Back to basics

two great posts on basic economic topics.

Macroblog has a great article on employment surveys, the unemployment rate, the participation rate etc.

This article is fantastic in examining cyclically adjusted deficits and the problems of measuring them.

European blues

Europe  is currently in what the Yanks would say is a funk.

The problem is that monetary policy can't really get a lot lower and there is one exchange rate for all nations in the Euro area.

Therefore when European nations bring in contractionary fiscal policies then one can only expect the economies to contract and that is what has occurred. They have reduced their cyclical adjusted fiscal deficits quite significantly. See here .

As we saw yesterday the IMF has offered a mea culpa. They were wrong and the policies they advocated have made the situation worse.

To reduce debt you must have growth and classical economics in bad times makes economies worse not better and hence debt ratios worse not better.

We have known this since at least 2010

When will people learn?

Another stake in the heart of Classical economics

The OECD and the IMF have recently released some papers that give great pause for thought.

The OECD has looked at micro-economic reform whereas the IMF has looked at macroeconomic policies.

the OECD has come to the view the best thing to do is just to get on and do the reforms HOWEVER there is a big proviso.The state of the economy can affect the short run impact of such programs.
For instance if the economy is in the doldrums then large scale labour market reforms will reduce employment not increase it. Lowering benefits may well increase one's incentive to get a job but if no jobs are available then less money is spent
Reducing job protection will make it easier to get rid of excess staff but a bad economy will mean not many hires.

The best thing to do when the economy is in the doldrums, like Europe, is to start with is reforming the product markets. As the economy improves then one should get 'stuck' into the labour market.

The IMF  has found out that in times of a liquidity trap (my words not theirs but essentially when monetary policy doesn't work) the multiplier is larger, quite larger. See Paul Krugman  for a reasonably good exposition on why this is so.

Classical economics tells us one should always have a balanced budget no matter what the state of the business cycle. In other words it is pro-cyclical.
Keynesian economics , on the other hand, believes in counter cyclical economics when there is a liquidity crisis.

The IMF has again found empirical support for Keynes as it did when it examined whether fiscal consolidation was expansionary and again none for classical econmics indeed quite the opposite.

This simply continues the story we have seen around the world since the GFC. Any countries that adopted classical economic policies either endured a large scale recession or a depression. This didn't happen when a country attempted Keynesian policies.


In ending it is highly ironic that some but all countries now in trouble didn't attempt Keynesian policies in good times i.e. a budget surplus indeed a substantial surplus sometimes.

The Depression in Australia

Julie Novak today at Catallaxy ( sorry I do not link bad posts) tries to show having a balanced budget was what got Australia on the road to recovery.

Let us look at what actually happened.

Angus Maddison’s Estimates of Australian Real GDP from Butlin (millions of 1990 international Geary-Khamis dollars)
Year | GDP | Growth Rate
1927 | $34,716
1928 | $34,164 | -1.59%
1929 | $33,834 | -0.96%
1930 | $32,181 | -4.88%
1931 | $32,720 | 1.67%
1932 | $31,878 | -2.57%
1933 | $33,696 | 5.70%
1934 | $34,991 | 3.84%
1935 | $36,424 | 4.09%
1936 | $38,160 | 4.76%
1937 | $40,336 | 5.70%
1938 | $40,639 | 0.75%
Maddison 2006: 452).

(thanks Lord Keynes)


Now what was the Premier's plan

The key architect and publicist for the plan, Copland, transposed it into a conceptual framework. It consisted of

• a depreciation of the currency sufficient to restore real income in export industries to 90 per cent of its former level
• a reduction in real wages of 10 per cent
• a general reduction in real government salaries and wages expenditure of 10 per cent
• a super tax of 10 per cent on income from property
• an expansionist monetary policy based on the purchase of government securities by the Commonwealth Bank with a view to maintaining the general level of prices
• a proportionate reduction in rentier income derived from securities (Copland 1934:66–7).

(thanks Alex Millmow)

So after the austere budget of 1931 growth actually contracted ( as it did in the UK).

Why did growth start in 1933?

The large scale devaluation ( an academic by the name of Bernanke called it massive. He co-wrote a paper with a Martin Parkinson.)

As Ralph Hawtrey said a large devaluation would cause inflation.

This gave the authorities two advantages

1) The liquidity trap was no more and thus monetary policy now worked ( this was why he thought the General Theory not necessary unfortunately the UK experience proved him wrong.)

2) real wages fell quite a bit. This helped reduce unemployment

Let us remember the best the unemployment rate got to between 1933 and 1939 was 8%!

So the balanced budget had nought to do with any recovery tepid that it was.

As usual what is written on Catallaxy is entirely incorrect

The polls

Yesterday we had three polls out. See the pollbludger for all the details.

Two, Newspoll and Neilsen, had essentially the same result after you take into account the margin of error.
The other Essential was completely different.
John Stirton from Neilsen tells us this and more.

From these results it is reasonable to conclude that the Essential poll is the rogue. Indeed it seems to be rogueish recently.

Why has this change occurred. Again  John Stirton seems to be correct. Whilst people were scared to death about the ETS BEFORE it occurred. This has almost dissipated since July when it came in.

This would mean having an electoral strategy about getting rid of the ETS whilst brilliant before it occurred is quite another thing  once it is in and the forecasted disaster never eventuates. This of course happened with the GST.

If this changes attitudes in other areas will be interesting. One essential poll ( not rogueish) showed only 35% of people realised interest rates were lower now than when the ALP won government.
If this perception eventually meets reality the Government might actually be in a position to win the next election.

However this Government is not very good ( read very bad) at selling anything.

Muslims

Why is it that some Muslims wish to protest against the US Government against a film made by a private person.

It would be akin to Christians protesting against the Canadian Government ( I think) against the Last Temptation of Christ.

If the Government has nowt to do with the film then the protest is simply stupid. Involving children with signs calling on people involved with the film to be beheaded is simply bad parenting at its most euphemistic.

It reinforces stereotypes that Muslims are unthinking and violent people.

Ignore the film and deny it oxygen would have been the best strategy.

It still is.

Tony Abbott

Does it matter what happened when Tony Abbott was at University?

No not really.

He was 19-20 so what!

what is strange is his reaction.

He was given a load of time by David Marr to deny the allegation when Marr was backgrounding his essay with Abbott.
Abbott could have denied it after the essay was released but all he said was he didn't recall the incident.
Something highly implausible.

Unfortunately for Abbott his media friends 'beat up' the issue ( pun intended). Greg Sheridan was over the top in defence of his friend. Gerry Henderson was more sober but he too fanned the flames making the 'issue' larger than it should have ever been.

Both then looked incredibly foolish when various people came forward to say the incident did indeed take place.

Abbott then looked very 'nixonlike' in saying the incident never happened and this was in accord with him saying he could not recall it.

He also looked poor when claiming this was coming from an ALP 'dirt unit' and then had to admit it wasn't. He also looked quite shifty when he couldn't deny his own staff had 'offered dirt' on ALP Mhrs.

All in all I think the only interesting aspect to come out of this is how bad Abbott is in defensively responding to questions about him etc.

This has election repercussions as in the next campaign Abbott will not get the gentle ride he got on the 2010 election campaign. He will have to act quickly on on his feet.

If this issue shows anything Abbott will not shine at all.

Whether this will matter or not is another subject.

AFR 'quality'

In today's AFR  John Roskam has a somewhat rambling tome and  attempts to do a number of things.

He asserts Obama has had a policy of higher spending and higher taxes. Unfortunately for the reader he provides no evidence for his assertion.
(see here and here for a different line.)
He writes about the memo Romer and Bernstein wrote for the incoming president, indeed he quotes some of it. It is therefore somewhat surprising he doesn't say the final 'stimulus' package was made up of mainly tax cuts and fiscal relief to the States. Indeed 40% was made up of tax cuts.
He doesn't say the deficit that Obama inherited was $1.2t. Nor does he say the recommendation was for much larger stimulus.

At no stage does he say that public sector employment fell dramatically because state and local Governments cut their workforces. If only they had increased them like in the Reagan years unemployment could be falling to 6%!

Also at no stage does he state the economic contraction was greater than anyone had contemplated. The December quarter 2007 GDP statistics fell by about 9% in annualised terms whereas non-farm payrolls were contracting by around 900,000 when the President came to office.

He, of course, completely omits any reference to the IMF material that shows that austerity makes an economy worse if the economy is slowing.  ( here).( The time for austerity as Keynes said and the IMF proved, is in good times ).

He implies that the Romney team will cut spending, taxes and the deficit but again we do not know how. Given the Romney tean has not released enough detail to make such a suggestion we have no idea of how Roskam can be so certain of his implication.

Finally he compares the recovery under Obama with that under Reagan. He again doesn't tell anyone that the recession was the prescription Paul Volker used to bring down inflation. In other words high interest rates.
One would expect a recovery under these conditions to be faster than one where there was a financial crisis.
He also does not say interest rates did not get anywhere near the zero bound level under Reagan.
Finally he does not mention the deliberate deficit spending under Reagan which Roskam asserts does not work.

All in all we can conclude either Roskam does not understand his subject area which is highly likely given the IPA's history or he does and is being what somewhat euphemistically 'misleading.

Either way it isn't a good look.