Some Krugman's food for thought
November 30, 2011, 10:24 am
Bleeding Britain
These days, ambulance-chaser economists like yours truly have an embarrassment of riches: so much is going wrong, in so many places, that one hardly knows where to start.
But let’s spare a moment for a disaster that’s being overshadowed by the euro crisis: Britain’s experiment in austerity.
When the Cameron government came in, it was fully invested in the doctrine of expansionary austerity. Officials told everyone to read the Alesina/Ardagna paper (which is succinctly criticized by Christy Romer (pdf)), cited Ireland as a success story, and in general assured everyone that they could call the confidence fairy from the vasty deep.
Now it turns out that contractionary policy is contractionary after all. As a result, despite all the austerity, deficits remain high. So what is to be done? More austerity!
Underlying the drive for even more austerity is the belief that the underlying economic potential of the British economy has fallen sharply, and will grow only slowly from now on. But why? There’s a discussion in the Office for Budget Responsibility report, p. 54, that basically throws up its hands — hey, these things happen after financial crises, it says, and cites an IMF report (pdf).
So I wonder: did they read the abstract of that report? Because here’s what it says:
Short-run fiscal and monetary stimulus is associated with smaller medium-run deviations of output and growth from the precrisis trend.
That is, history says that a financial crisis reduces long-run growth potential if policymakers don’t limit the short-run damage it does.
And yet what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …
It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.
And the truly awful thing is that Cameron and Osborne are so deeply identified with the austerity doctrine that they can’t change course without effectively destroying themselves politically.
As the Brits would say, brilliant. Just brilliant.
.56 Comments E-mailPrintShare
Close
Facebook
Tumblr
Digg
Linkedin
Reddit
Permalink
..
--------------------------------------------------------------------------------
November 30, 2011, 8:49 am
Questions Of Confidence
Some readers have asked why, given my scornful discussions of the “confidence fairy” story about fiscal austerity (will that be my lasting contribution to economic discourse?), I’m willing to take seriously the idea that ECB rate hikes had a huge impact via expectations.
That’s a good question, but I do have answers.
First of all, the ECB story is about the bond market; the expansionary austerity story isn’t. Instead, to believe that fiscal contraction will lead to higher consumption and investment spending you have to believe that consumers and firms will make major changes in their current behavior based on perceptions about taxes and spending years in the future. And that’s just a lot less plausible. The likes of Pimco are out there trying to figure out the implications of ECB behavior, and investing accordingly; how many families do you know deciding on holiday purchases based on expectations of tax policy in 2014?
Second, the monetary story is a lot more concrete. The ECB’s readiness to raise rates despite low core inflation and high unemployment tells you a lot about the likelihood that it would choke off the modest rise in inflation needed to make the eurozone adjustment feasible. Do Cameron’s budget cuts convey any comparable information about future UK taxes and/or solvency? I don’t think so.
Finally, the whole euro situation is fraught with multiple equilibria and the risk of self-fulfilling panics — which means that there can sometimes be disproportionate responses in a way that doesn’t make sense when we’re talking about budget cuts.
So yes, expectations can matter; but some expectational arguments are more equal than others.
.
Bleeding Britain
These days, ambulance-chaser economists like yours truly have an embarrassment of riches: so much is going wrong, in so many places, that one hardly knows where to start.
But let’s spare a moment for a disaster that’s being overshadowed by the euro crisis: Britain’s experiment in austerity.
When the Cameron government came in, it was fully invested in the doctrine of expansionary austerity. Officials told everyone to read the Alesina/Ardagna paper (which is succinctly criticized by Christy Romer (pdf)), cited Ireland as a success story, and in general assured everyone that they could call the confidence fairy from the vasty deep.
Now it turns out that contractionary policy is contractionary after all. As a result, despite all the austerity, deficits remain high. So what is to be done? More austerity!
Underlying the drive for even more austerity is the belief that the underlying economic potential of the British economy has fallen sharply, and will grow only slowly from now on. But why? There’s a discussion in the Office for Budget Responsibility report, p. 54, that basically throws up its hands — hey, these things happen after financial crises, it says, and cites an IMF report (pdf).
So I wonder: did they read the abstract of that report? Because here’s what it says:
Short-run fiscal and monetary stimulus is associated with smaller medium-run deviations of output and growth from the precrisis trend.
That is, history says that a financial crisis reduces long-run growth potential if policymakers don’t limit the short-run damage it does.
And yet what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …
It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.
And the truly awful thing is that Cameron and Osborne are so deeply identified with the austerity doctrine that they can’t change course without effectively destroying themselves politically.
As the Brits would say, brilliant. Just brilliant.
.56 Comments E-mailPrintShare
Close
Tumblr
Digg
Permalink
..
--------------------------------------------------------------------------------
November 30, 2011, 8:49 am
Questions Of Confidence
Some readers have asked why, given my scornful discussions of the “confidence fairy” story about fiscal austerity (will that be my lasting contribution to economic discourse?), I’m willing to take seriously the idea that ECB rate hikes had a huge impact via expectations.
That’s a good question, but I do have answers.
First of all, the ECB story is about the bond market; the expansionary austerity story isn’t. Instead, to believe that fiscal contraction will lead to higher consumption and investment spending you have to believe that consumers and firms will make major changes in their current behavior based on perceptions about taxes and spending years in the future. And that’s just a lot less plausible. The likes of Pimco are out there trying to figure out the implications of ECB behavior, and investing accordingly; how many families do you know deciding on holiday purchases based on expectations of tax policy in 2014?
Second, the monetary story is a lot more concrete. The ECB’s readiness to raise rates despite low core inflation and high unemployment tells you a lot about the likelihood that it would choke off the modest rise in inflation needed to make the eurozone adjustment feasible. Do Cameron’s budget cuts convey any comparable information about future UK taxes and/or solvency? I don’t think so.
Finally, the whole euro situation is fraught with multiple equilibria and the risk of self-fulfilling panics — which means that there can sometimes be disproportionate responses in a way that doesn’t make sense when we’re talking about budget cuts.
So yes, expectations can matter; but some expectational arguments are more equal than others.
.
No hay comentarios:
Publicar un comentario