Around the traps 1/2/13

For anyone knew I regularly ,every Friday, look at the more interesting posts around the blog.

I mightn't agree with them but they do make you think!

• Chris Dillow finds support for Maslow's hierarchy of needs. Okay he doesn't say that but it sure looks like it.
• Matthew Yglesias finds with negative real interest rates it makes sense to issue debt  not to tax
• Noah Smith looks at jobless recoveries and irrational expectations. ( Mate get a new picture!)
• Can I remind everyone of the excellent article on Statistics Noah wrote with Andrew Gelman also around which I wrote about a few days ago.
• Ricardianambivalence believes the RBA should cuts rates (so do I) BUT tips they won't
•  john Taylor provides fodder for both the always interesting David Glasner  ( David tells us of an -ebook by two commenters of his on Market Monetarism) and of course Kruggers
• 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).
• Sinclair Davidson and Simon Breheny show they do not understand the difference between an exposure draft and a drafted bill.
• Andrew Elder tries to find the Real Tony
• Frances Woolley looks at poor whites in South Africa re Apartheid
• jazzbumpa examines US spending and revenues and find out the Republicans are not telling the truth
• Barkely Rosser on Juan Cole on 10 Benghazi myths
• niamh(?) on European austerity. Can you believe it? Steve Kates is badly wrong again!

Enjoy

Faux Facts

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?

If you enjoy statistics

This is heaven if you are into statistics.

First read Noah Smith and all the links.

Then read Andrew Gelman.

How to mislead

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

Around the Traps 25/1/13

Here we go,

• 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.
• Jonathon Portes debates debt ratios
• Mark Thoma finds US fiscal policy is not in crisis.
• econbrowser's links. Calculated Risk ( Bill McBride) worth a read. He has the best unusual graphs as well. 
• Peter Dorman  looks at mitigation vs adaption in climate change

(apologies for some small problems.I had to get my wife from the airport today so time was precious.)

• ricardianambivalence  looks at how people are viewing RBA actions
• Lord Keynes finds another country other than Germany that recovered from the great depression

Should have added these two as well!

Eddie and the Cruisers

This was a pretty good movie ( with Michael Pare' and Tom Berenger) with an equally good soundtrack.

This is the best song

It sends shivers up your spine!

If you do not understand Keynesianism do not write about it!

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.