Both Jim Hamilton and Menzies Chin examine the advance estimate of the December quarter GDP figures in the USA. ( I have always found it useless to look at the advance estimate as some of the more important items are forecasts!)
Simon Wren-Lewis looks at when formal monetary targets are useful.
Kevin Bonham looks at JWS research and the marginal seats. ( BOOKMARK THIS BLOG GIVEN THE ELECTION IS ON SEPTEMBER 14).
Harry Clarke refers to some commentators as the ratbag right. These people use a number of faux facts to support their positions.
I thought I might go through some of them given I have just examined one.
The Government is spending like crazy. I examined some of this a few days ago so I won't repeat myself here. This is easy to spot. They will never mention the reason for the large fiscal stimulus was the GFC ( where we successfully avoided recession). They will join GFC spending with post GFC spending to make it look larger than it actually is. They imply a deficit is always expansionary. They will ignore where the Federal Government detracted from growth as well.
The Stimulus didn't work. People usually assert one of three reasons why we avoided recession. Tony Makin thinks it is because net exports rose. However he didn't realise that the contribution to growth came about because exports simply fell less sharply than imports! Then there is China recovering and so boosting commodity prices. ( Please note the contradiction between China somehow having a successful fiscal stimulus but we do not). Only one problem China recovered AFTER we did. Lastly people assert it was all monetary policy. A few problems with this argument. Firstly they always avoid telling people when monetary policy changed from being contractionary to neutral to expansionary. Secondly they assume away any lags. ( I did my post-graduate study on monetary policy and I can tell you the lags are long, something people at the RBA confirm is still occurring these days.) The transmission mechanism. How come it was only the first home buyers that reacted to lower interest rates. This was very unusual in a typical Australian recovery. Banks even with a government guarantee couldn't get funding overseas for a long time. You cannot lend if you cannot borrow. Lastly credit figures simply do not bear out monetary policy working as usual.
Austerity worked in Australia during the great Depression. I wrote about that here. This is always easy to spot. They will use a graph that has a long time frame so you miss the fall in GDP in 1932. They will always talk about the fall in unemployment but never mention it only gets to 4% or less after WW2 occurs.
Austerity economics is expansionary. This is always about Alesina and Ardagna paper. I wrote a little about it here.. ( here is a bonus by former co-author with Alesina ). Please note when any person talks on this they will allege it was Austerity that reaped the rewards. For example they will talk about one of the Irish episodes of austerity, the successful one, but leave out the two unsuccessful ones.They will neither explore any reasons for the unsuccessful ones nor explore why the only successful one succeeded. ( It was because the Irish devalued their currency quite a bit, interest rates fell quite a bit and their major trading partner was in the midst of the 'Lawson' boom).
Obama increased the budget deficit 2,3.4 ( pick your figure) fold. They criticise Obama for vastly increasing the deficit but the CBO estimated the budget deficit on January 2008 at $1.2t. People overcome this by merely showing the deficits for the year.
Lastly there is no AGW. The latest attempt at this is to say there has been no increase in temperature since 1998.John Quiggin shows the whole hog here. Why was 1998 chosen?
There is a piece over at Catallaxy by Henry Ergas with supporting points by Sinclair Davidson which purports to show the main reason for the Government being unable to attain getting the budget into the black is Government spending.
Let us unpack the reasoning and see if it stacks up.
Firstly we read 'In 2008-09 and 2009-10, Labor massively increased government spending, taking it to a higher share of GDP than at any time since 1993-94. That surge was meant to be wound back once the economy recovered; but though growth was well above trend by 2011-12, the increase was never reversed, with new spending programs being ramped up as stimulus measures were phased out.'
No mention of the reason for the increase in spending ( where did that GFC go?) No mention that a ratio rises because of two reasons. No mention of how he determines trend.
Also note he implies the growth to combat the GFC continued..
Next we get this. 'As a result, since Labor was elected, per capita government expenditure has increased by 3 per cent a year in real terms, more than double the rate at which it grew under John Howard.'
In this he is being very sneaky and tricky. He keeps the large increase in the first year of the stimulus in the figures to imply the overall increase is still quite large. A look at MYEFO shows that over the years since the stimulus including the latest budget the real increase in spending is 3.9% over 5 years but falls to 1.1% over 4 years and is in fact nil over the last three years.
Given that tax revenues as a % of GDP are the lowest we have seen since Keating was PM then it follows the improvement in the budget position must be in expenditure.
Look at it another way if the government was spending as Ergas is alluding then it would have been adding to GDP but it has in fact been detracting from GDP!
We then get this after a very short paragraph. 'That forecast surge was never plausible: it involved tax collections increasing more rapidly than at any time since 1986-87, when an overheating economy and raging inflation produced a 13 per cent increase in revenues.'
Why would Treasury look at a period of strong economic growth ( so strong inflation rose to quite high levels) to forecast revenues? When one looks at periods when the economy was recovering after tax revenues had taken a strong hit we see rises of 12 and 18%. Wow that changes the story doesn't it.
Just another couple of things to consider.
Spending in this current budget will be 23.8% ( down from the peak of 26%). This is below the average of the last Government!
The difference in tax revenues as a % of GDP between this government and the last government is 2.3% of GDP. That's around a cool $35b!
Wow it is amazing how a story changes when one introduces pertinent facts!
I should add Jonathon Portes has a great take down of those who advocate austerity all the time like Ergas and Davidson do. It is about the UK but it is easy to see how it would translate to Australia
NGDP targeting is on the agenda.David Altig is still a sceptic ( as I am) however David Glasner looks at it with open eyes after Charles Goodhardt passed sceptical comment.
He also looks at the social cost of finance. Read Noah Smith's linked piece as well.
John Quiggin examines trouble in paradise. (ease up on Jim Rose John!) Naturally Sinclair Davidson disagrees. He is also sneaky with Depression facts but I will pass that to the keeper!
Noah Smith has an interesting piece (tautology?) on macroeconomics. Simon Wren-Lewis takes it differently.
Brad De Long reads Oulton and Sebastian-Barriel and finds more evidence to use fiscal policy when Keynes said so and not to use it when he said not to use it. ( My words not his).
Kruggers find a lack of spending in the USA here and here.
Sinclair Davidson has a column on Arnold Kling writing about Keynesian-economic-policy except he doesn't!
Let us examine it in detail.
1. Firstly he says the historical record shows Keynesian economic policy doesn't work. He then quotes Robert Murphy who he claims shows this but he doesn't. Actually every example of 'expansionary austerity' he cites supports Keynes contention you only do it in good times. ( Remember the IMF study on this?)
Robert Murphy is not a good 'scholar to cite
2. The macro-economic models trotted out to support Keynesian policies are highly suspect. Arnold Kling cites err Arnold Kling. wow! Only problem is that the policies are not Keynesian. Wait for it!
3. He claims that if the Keynesian rationale for deficits in recession is correct then then must be times for balanced budgets or even surpluses but most of the time there have been deficits. This doesn't make sense.
Yes any Keynesian would argue in good times you would not have a deficit. Why do they gert the blame when deficits happen when Keynesians claim otherwise!
4.He claims no Keynesian economist is coming forward to say perpetual deficits are appropriate. huh! Has this bloke ever read say Paul Krugman, Brad De Long, Larry Summers Simon Wren-Johnson, Jonathon Portes.......
5. He says the recession ended on June 2009 so therefore so should deficits. Yikes this has tonnes (get it) of errors.
Firstly if you end deficits too early you go back to recessions. See USA 1937 or Japan 1997.
Deficits can still occur because it takes time for the cyclical part of the budget to adjust to the economy.
I am going to stop there.
Plenty of holes. How ironic that Sinclair Davidson, a person who criticises anyone who gets Hayek minutely wrong , give Arnold Kling full exposure when he isn't even criticising Keynesian policy.
The expurgated version of Keynesian policy.
You only use fiscal policy when monetary policy isn't working ,In other words when there is a liquidity trap.
This does not happen in usual recessions. It usually only occurs in Depressions but it did occur in the GFC.
Let us make it very simple. A government should rarely if ever use fiscal policy when the economy weakens.
It is more likely to use sorry it should use Keynesian policy in good times
Postscript
Samuel J writes appallingly on fiscal policy at the same blog. I cannot be bothered to go through his lack of understanding on why budgets are in deficits or surpluses ( as I have done this previously )but even a a simple minded fellow would realise if an economy is facing below trend NOMINAL GDP growth then things are not normal. Duh! Don't write about topics you clearly do not understand.
Further Postscript
Could those friends of mine ( who all put up their fees this year (attempted humour)) please use the comments section. It means much fewer additions to the original post and also helps me. It shows up mistakes and bad assumptions for one thing.
In normal times nominal GDP and Real GDP are closely related. however as a wise old sage once told me when I was newly arrived in financial markets. You should always use nominal GDP for examining budget outcomes because at some stage real GDP and nominal GDP will digress. In recent times we have had above trend real GDP BUT below trend nominal GDP. This discrepancy has been caused by amongst other things disinflation.
IF nominal GDP was above trend then the budget would be sailing very comfortably into surplus waters and the fiscal contraction by the public sector would be negligible.
In a rambling piece on the nanny state Sinclair Davidson has some bloke called Eric Crampton ( great guitalist..get it!) writing a joke about an economist, engineer and and an accountant. (They have mathematician not engineer however given I know some engineers of my vintage and they knew the joke at the same time I did we will go with engineer. It is funnier as well. Ask an engineer!)
BUT it is wrong.
I heard this back in the 70s.
It goes something like this.
a person asked an accountant, an engineer and an economist how much 2 plus 2 is.
There are three punchlines depending on whether your audience is economists, accountants or engineers.
We will take the audience of economists.
The engineer gets out his slide rule ( yes it is that old) and says the answer is 4.0000000000000
The accountant looks smugly and answers how much do you want it to be.
the economist says let us assume.....
get it!!
Catallaxy can't even get jokes accurate. Says it all really.
Update
A mate has just e-mailed me to say he remembers me repeating this joke only in an updated way after one of my lectures in my first year at business school. The class made up up mostly of engineers and some accountants, only one economist though.
This is interesting.
There is a disagreement out there. The Kouk thinks that the interest rate cutting cycle is over. ( You need to read his Business Spectator piece to get all his reasons.)
The main reason is that he believes the improvement in the world economy will improve the economy. There are others of course.
On the other hand Ricardian Ambivalence believes there could be more on the horizon. Although iron ore prices have improved other commodity prices haven't.
I am in the latter camp.
I will add a postscript following the CPI result. RA is expecting a 0.5% result on the underlying rate. CBA is expecting a 0.7% rise.
If he is correct a cut maybe on the cards. If CBA is right then there is no rate cut.
More later
Ricardian ambivalence 1 The Kouk 0
Will there be another cut.
I agree with ricardianambivalence naturally. He outlines everything I would say anyway.
The one thing I would say is with regard to the over-valued $A. Any sort of decent growth in Europe will see the much watched but vastly less understood deficit and debt ratios fall.
We might then see demand for our triple A rated bonds diminish somewhat.
My wife left to tour Vietnam with her mother. This meant I had the two boys at home.
We got the first three series of Castle out as well as the first series of the Mentalist.
Although the boys had seen the Mentalist I hadn't.
However none of us had seen the early series of Castle.
I am not going to get into a big description of Castle. That is much better done here.
When one views the three series one cannot but be impressed by a well written and well acted series. We were.
The dinner table was filled with conversations about different characters, how they developed, grew and changed.
Castle changes from an immature womaniser to a more responsible person. He is always a fun guy but can be relied on in difficult circumstances. My wife tells me he is attractive. ( Isn't it interesting how guys can never look at other guys and give comments on their looks but women can do it all the time about other women!).
Beckett is the smoking hot ( to quote my sons) Detective. She is clearly a workaholic and thus driven. We find out this is all to due with her mother's murder. It is interesting in the first series she has short hair and it looks frumpy. The hairstyle gradually changes through series two until she has it right in series three.
This means after she shows her abilities she is allowed to look 'hot'.
Her Mum's murder leads her to only dating guys she is never in love with.
One interesting thing is that once it is apparent to both Castle and Beckett they love each other they rarely have sex with the person they are 'dating'.
They both have trouble telling the other of their feelings We learn this happened once before with Beckett at University!
The other characters are all interesting as well.
Roy Montgomery who dies in the last episode of Series 3 is in charge.
The two detectives under Beckett are Esposito and Ryan. They are 'Bros' and both are interesting.
Perhaps the two characters that are the least interesting are Castle's mother and daughter.
Here is an example of Castle
I realise I have left three things out.
First David Dale at the SMH believes the Mentalist and Castle are very similar.
This is complete cobblers.
Patrick Jane in the Mentalist is a loner out for revenge. He figures out who murders the victim. He is humourless.
Whereas in Castle it is a 50/50 effort with both people assisting each other to catch the murderer.
Castle and Beckett realise they have feelings for each other there is no love interest in the Mentalist.
Second a number of plots in Castle are funny. Ghosts, People from outer space, Vampires, Zombies, Psychics etc. The Mentalist is not funny indeed in a number of plots it is quite dark.
Thirdly The only similarity, as I found out from my sons ,is that a number of actors have played the murderer in both the Mentalist and Castle. Hence they knew before me who the murderer was!
( Fourth as my boys say and I totally agree Beckett is smoking hot whilst Lisbon is not!)
I should I wanted to see more once I had seen all the episodes ( none were boring). It was like reading a book. you cannot put it down. in this case I simply had to watch the episodes.
Whoopsy. the best episode thus far. Perhaps the last episode in Series 3. It is where Roy Montgomery dies ( he was a favourite of mine.) Beckett and Castle at last confront their feelings, Beckett is shot. Drama at its best.
A totally enjoyable experience more so as I could do it with my sons.
I will say when the series ends I will be sad and feel like I am missing something. I felt like that when Hill St Blues finished.
what you never watched Hill St Blues? for shame for shame.
The greatest theme music ever.
Update
I am going to start a new tradition. I am going to watch Castle DVDs over the Christmas break.
I couldn't do it any other time. Too much work to make up!
And yes Stana Katic has now zoomed ahead of Catherine Bell in the most beautiful woman I have seen. It is all about the hairstyle!
the Who were the best group around Britain in the 60s.
This is the best song they ever did and it was written well after that. It just shows how good they were.
The studio version was used in a House episode.
Prior to this Christmas I would read the Hobbit, Lord of the Rings and the Dune series over the Christmas break.
This would be one of the few times I would actually read fiction. ( I love non-fiction mostly).
I didn't continue the tradition this year because I couldn't get into the Hobbit and I found the Dune prequels better than the actual series.
I went to watch the Hobbit yesterday with my two sons or I should say I was shanghaied by them to watch it.
We went to the 4.15 session at Top Ryde. (At best 10 people watched it.)
It is a very enjoyable film.
It is not however very accurate to the book. It is like Peter Jackson has taken a lot of the LOTR films and tried to incorporate it into the Hobbit.
In doing so he has made the Hobbit very much more interesting.
It is the first of three films about the hobbit. It finishes where the troop escape from the trees.
Possibly the most interesting acting came from the person portraying Thorin. He is actor who starred in the UK mini-series North South. The only problem is that he didn't look like a dwarf.
The other major acting performance comes from the person who stars as Doctor Watson in the current series Sherlock. He is Bilbo Baggins.
I found it interesting that I was very picky about the film LOTR being accurate to the book but I was pleasantly surprised that the Hobbit wasn't. Can't work this out.
All in all I can thoroughly recommend going to see the film.
If you are going to write about a subject then it isn't advisable to criticise people or organisations for something you do a lot of the time.
Gerard Henderson, last Tuesday, had a dig at the ABC. He claimed they couldn't admit when they are wrong.
If one reads this and this then you might think Gerard has a problem as well.
He reviewed this paper by Joshua Gans and Andrew Leigh on media bias. He tried to be cute by being smart about some of Gans research except he got the wrong person.( read this for example) He never could admit that.
He didn't like the paper either. Too many numbers
Henry Ergas criticised Peter Martin's article in Fairfax about the IMF paper on Fiscal profligacy.
He rightly says it examines public debt but they also look at public spending as well which Peter Martin reported. He claims there were a number of wasteful areas of public expenditure during 2008 but provides no proof.
He then accurately says the IMF paper didn't look at the quality of spending. A strange thing to say after claiming wasteful spending occurred in 2008. In fact quite contradictory.
I do remember Ergas claiming NZ had a faster fiscal consolidation program than Australia even given the Christchurch disaster. I thought that strange so I looked at the IMF reports on both countries and then any updated fiscal positions from both Country's treasury departments.
Guess what? Australia had a much faster fiscal consolidation program than NZ.
We see in both cases the pot calling the kettle black!
We learnt again through both Europe and the UK that classical economics is a complete crock!
We found out that Japan in the 90s was a good example to examine.
As Adam Posen showed fiscal policy was quite potent there. When fiscal policy was expansionary the economy expanded and when it was contractionary it contracted.
The IMF have shown us the full horror story about Europe now.
When I have a bit more time I will write a little more about this.
Just remember if classical economics worked the world would not have heard of an Adolf Hitler!
POSTSCRIPT
I have a bit more time.
Firstly I mentioned Adam Posen and his thoughts on Japan. This speech is as good as any to get a feel for his analysis.
We can see when interest rates are at zero low bound monetary policy loses potency. QE doesn't do a lot.
Deflation is something central Banks do not know how to overcome. If you start contractionary fiscal policies too early your economy will remain stagnant.
However as was stated above fiscal policy certainly does work. Indeed we first get some idea the multiplier is larger in these sort of times.
In Europe where interest rates are at ZLB and there are no flexible exchange rates for each country then contractionary fiscal policies will lead to economic contraction.
In fact in all these cases Austerity policies have lead to continued deficits and higher debt.
You need strong economic growth to reduce both. As Keynes noted in 1936 Austerity is needed in good economic times not bad.
Okay we now know the US will not go over the fiscal cliff.
Jared Bernstein has a pretty good summary of everything you need to know.
A couple of points.
We now know the Republicans really do not believe in expansionary austerity. If they did They would have let the automatic spending and taxing elements alone. This would have led to a strong recovery not a recession.
Instead of a reduction of 3.5 percentage points in GDP ( which would had led to a recession) it is now only half that.Now that is just what you need when you have a sluggish recovery.
One thing we have learnt both from Japan in the 90s and Europe, The UK and the USA now is that fscal policy is more potent then monetary policy at present given the ZLB.
more on this later
It is the new Year and some people are writing in a particularly interesting way.
Jim Hamilton looks at the history of QEs. Highly recommended
Mathew Yglesias looks at mulipliers. This has the latest paper from Blanchard and Leigh as well.
So does Simon Wren-Lewis. I should add he also examines Ricardian equivalence and the Pigou effect. Really interesting
As does John Quiggin He is looking at a number of things in macro-economics. all good reading
The wonderful David Glasner looks back and forward (?) to the Lucas critique
A question.
In this exchange between Sinclair Davidson and Peter Whiteford. Is Davidson merely Goebbelsising , doesn't understand the topic or suffer from Aspergers?
Just to make it clear unless I link an article all other articles are on the blog site nearby the linked article.
