July 29, 2012
We Can Emulate the UK (GDP-wise)!
Or, still no expansionary fiscal contraction in the UK (surprise!)
Figure 1: Real GDP growth SAAR (blue line, left scale), and log real GDP, rescaled to 2010Q2=0 (red line, right scale). Dashed line at advent of coalition government. Source: ONS 2012Q2 preliminary release.
Free Exchange has additional discussion. But I think the IMF has a grip on how counterproductive the current path of contractionary policies, as hinted (diplomatically) in the PIN for the latest Article IV review:
Directors considered that deeper budget-neutral reallocations could also support recovery, including greater investment spending funded by property tax reform or spending cuts on items with low multipliers. They emphasized that automatic stabilizers should continue to operate freely, and underscored the need for shielding the poorest from the impact of consolidation.
Looking ahead, Directors commended the authorities for their strong commitment to achieve fiscal sustainability over the medium term. Many Directors supported the authorities’ prudent approach toward further fiscal easing, emphasizing the importance of not undermining fiscal sustainability and hard-won credibility, and noting the potential negative feedback loops between public finances and the financial sector. Many Directors also noted the difficulty of setting a specific timetable for potential future fiscal policy actions in the current uncertain environment. However, a number of other Directors considered that fiscal consolidation should not be accelerated as planned if growth does not build momentum even after further monetary and credit easing measures, noting that persistent weak growth that hinders achievement of fiscal targets might also pose risks to credibility. These Directors noted that any adjustment to the path of consolidation should be in the context of a multi-year plan and ideally accompanied by deeper long-run entitlement reform to help preserve credibility.
In other words, don't implement rapid short term fiscal consolidation (think "fiscal cliff"  ) which will be self-defeating. Rather think about maintaining stimulus while building in a multi-year fiscal consolidation (In the US that requires tackling the real problems of low tax revenue as well as entitlement spending.)
The entire Article IV report is here; the staff appraisal starts at page 45. Paragraphs 66 and 69-70 are of particular note.
(Buried in there is a plea for use of a balanced budget multiplier -- discussion by Simon Wren-Lewis here).
For those needing a good laugh in grim times, re-read this gem.
Posted by Menzie Chinn at July 29, 2012 11:21 AMdigg this | reddit
The real story, which Wren-Lewis mentions in his postscript, is buried in the charts. So on p.48, we see that government consumption is up, a point some have been using to say "Where's the austerity?" Further down the table, we see that public investment spending is well down. That reflects the safety net spending eating up more of total spending even as spending on stuff goes down.
It's really a shame the government - any government - can't or won't produce a simple statement of the points so often discussed. You have to tear apart documents and download vast pdf's full of blather.
Re the US: I have been watching the commercials about the need to reduce the debt. I have no problem with reducing the debt. But what is the alternative to what Obama has proposed, meaning a smallish tax increase now? Mitt wants to increase defense spending and the total non-defense discretionary budget isn't enough to make up for the cost of the tax cuts he proposes (together with some nonsense about closing loopholes he refuses to identify). I'd love to see a plan that isn't bullcrap. If the point is "rein in entitlement spending," then do they actually intend to turn Medicare - and maybe the VA - into a voucher system? Would be the shortest reign in US history.
Posted by: jonathan at July 29, 2012 01:17 PM
Although I generally agree with your assessment of the UK policy mix, I think it is somewhat unfair to evaluate the results of the "experiment" when at the same time the Euro Area (to where the UK sends 50% of its exports) is in deep trouble.
There are no degrees of freedom!
Posted by: Juan A-D at July 30, 2012 12:12 AM
Do you live in reality? Do you work for a government entity that slashed payrolls? And woke up the next day to find services were delivered with out public complaint? Do you stare out the window at the stream of people heading to the welfare building next door, some of whom bump into you in new cars talking on free government cell phones while you're headed in? Are you watching the California high speed train being built? Or the Presidential helicopter? Did Bob Evans lose when it dumped busboys upon increases in the minimum wage? Is is better just to send people to waste money in a big government building, or just let them stay home and send a check? Is it good to borrow $100, flush it down the toilet, and be on the hook for $99 a few years later? Is China really a success, like the great Beijing Olympics areas flooding with sewage (now we know why they spread chemicals to stop rain during 2008). If not, why would it work here (No. - Krugman socialist talking point 1983467 they're "Kleptocracy;" I'm a saint and can direct government stimulus to the people like free cell phones). You know that interest rates are low despite massive government deficits. So what.
Posted by: Barney at July 30, 2012 05:07 AM
Menzie is right to mention the fiscal cliff. Our brilliant politicians have manipulated us into a position that will make the UK debacle look like child's play.
What happened in the UK is that the government cut spending without any consideratin for how the services that will be ended will be replaced. All they did was create pain for the British people.
This problem could have been dealt with very easily. All the British had to do is remove the wedges that pervent the private sector from providing those services profitably and at lower cost. Instead the British government increased taxes.
The British people not only faced a loss of public services they faced a significant increase in almost everything that they purchase when the VAT tax was increased from 17.5% to 20%.
The British government had the British people in a vise of lost government services and increased taxes and they are tightening the screws.
But the US experience crafting taxamagedon shows us that the British politicians are not unique in their stupidity. Look at what the US is facing January 1, 2013. Massive budget cuts primarily in defense with legislated increases in social spending and in addition we have the sunset provision of significant tax cuts that will essentially hit every taxpayer in the country with a massive tax increase.
If we can learn anything from the Brits it is what not to do. But then who says US politicians are smart enough to learn anything?
Posted by: Ricardo at July 30, 2012 08:38 AM
We can emulate Greece (debt-to-GDP-wise)!
Posted by: W.C. Varones at July 30, 2012 08:46 AM
Let's just adopt more of Obama's policies....he is, after all, a Keynesian genius...($20 billion and 1,700 jobs later...)
But, hey, it's all Paul Ryan's fault.
Posted by: Robert at July 30, 2012 09:25 AM
Barney aka Hairy aka Qin aka Jose: Yes. Yes. No. No. Yes. Yes. Who is Bob Evans? Wrong question. Wrong question. Yes. Nobody is recommending Chinese policies for the US (and this question demonstrates your complete cluelessness about (i) Chinese macroeconomic policy and (ii) macroeconomics generally). Yes. So, if as in the neoclassical model the optimum is to equate the marginal productivity of capital to the real interest rate to the ratio of the marginal utility of consumption in two adjacent periods, then the real interest rate matters.
Posted by: Menzie Chinn at July 30, 2012 09:47 AM
Juan A-D: Good point. I agree that fiscal policy is not the only thing going on. So too are external developments, as well as monetary policy.
If you embark upon a policy, you should think about what is likely to happen, in terms of making a conditional forecast. Maybe I was unnaturally pessimistic, but I think I could've foreseen some pretty bad stuff happening in the euro area, and would've wanted to condition on that possible downside (but then, I'm an open-economy macro, as opposed to closed economy macro, guy -- so maybe I had additional insight).
In any case, exports are down, but safe haven flows presumably help keep UK interest rates low, which is a plus going the other direction.
Anyway, my impression is a majority of UK macroeconomists foresaw the coalition policy path would make the UK skirt recession, even in the absence of eurozone implosion. The package was merely the latest in triumph of hope over knowledge.
Posted by: Menzie Chinn at July 30, 2012 03:31 PM
So what you're saying is that a country that is levered overall greater than 5 times GDP is going to fail no matter what they do? Agreed for once Menzie!!
Menzie's solution, LEVER UP MORE!!
Posted by: Anonymous at August 2, 2012 10:28 AM