Wednesday 21 March 2012

The Eternal Sunshine of the Wattless Mind?


The Eternal Sunshine of the Wattless Mind?

In a forbearing profile of the British Chancellor of the Exchequer, the Sunday Telegraph (18 March 2012) records,

‘George Osborne is probably the first chancellor in modern history to take a two-day holiday a week before the budget. His decision to do so speaks eloquently about his approach to the job … his predecessors are amazed at his ability to spend so little time on the job’.

Osborne returned from holiday to appear on the BBC in order to promise a ‘crackdown’ on foreigners not paying enough stamp duty on the real estate they buy in London; stamp duty on purchases over £5m will be raised from 5 to 7 percent.  Big deal. My back of the envelope calculation suggests this will raise at best £40m over 12 months, compared to forecast revenues last year of £589B. This is a made-for-television policy.

The Telegraph unwittingly put their finger on it when it concluded  ‘… we can see the outlines of Osbornism. It is not an economic doctrine: it is the absence of economic doctrine’. That captures it: the Chancellor’s mind is perfectly unsullied by any economic principle.

Of course, we get the politicians that we deserve. And their minds, too. In 1936 Keynes, in the last paragraph of General Theory, judged that his contemporary public was ‘impatient … for fundamental diagnosis’. (The completely unheralded success of the launch of Penguin books that year is one corroboration Keynes’ contention).  Did not that ‘impatience’ exert an influence on the character of the body politic? In that year a future a Chancellor of the Exchequer, Hugh Gaitskell, was head of the Department of Economics at University College, London, spending a good part of his energies mastering Hayekian trade cycle theory, and arguing against quasi-Keynesian remedies that appealed to his Labour colleagues. We cannot imagine any politician today taking difficult economic thought so seriously. But, correspondingly, we cannot imagine the public having any hunger for ‘fundamental diagnosis’. In the midst of our listing economic system, we have suddenly burgeoning not Penguin books, but Twitter.

Tuesday 20 March 2012

In the Long Run ‘We’ are all … Irrelevant


In the Long Run ‘We’ are all … Irrelevant

Perhaps Keynes’ most quotable and frustrating remark is, ‘In the long run we are all dead’. To dispose of it I am tempted to brandish the riposte of Ludwig von Mises;

‘I do not question the truth of this statement: I even consider it as the only correct declaration of the 
Neo British Cambridge School’.  (Economic Planning, 1945)

But this sally is to evade Keynes’ point. Which is, as far as I can see,  that ‘the rate of discount’ is not zero;  and (to illustrate his thrust) assuring the patient that their agony will ultimately vanish hardly by itself constitutes sufficient grounds for inactivity. It would hardly constitute grounds (for example) to decline to purchase morphine.

Keynes’ remark, thus interpreted, is both irresistible and weak. It may with equal justice be retorted that time preference is not infinite. And it is not infinite; not even for that futurity when ‘we’ are dead, and gone, and wholly untouchable by events on earth. Was not Keynes himself concerned with the ‘economic possibilities of our grandchildren’?

While on the matter of mortality ….  the Australian Bureau of Statistics' just released Causes of Death gives a striking measurement of  how quickly our ‘journey’s end’ is changing. In 2001 ‘Ischaemic heart disease’ (which, of course, felled Keynes) killed 26, 234 people.  In 2010 it killed 21708 people; a decline of 4526. In 2001 3740 died of Alzheimer’s and dementia. But by 2010 9003 did.

(see: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/E39670183DE1B0D9CA2579C6000F7A4E/$File/33030_2010.pdf)


Thursday 15 March 2012

The 'More is Less' Fantasy of Today's Public Finance


Richard Howard, the global strategist of the hedge fund Hayman Capital, has recently articulated thus one the popular delusions regarding current 'austerity' programs:  

‘At the moment, the peripheral countries are cutting their budgets quickly and aggressively, which is having a negative impact on their economies and making it even harder for them to reach a balanced budget.’(Business Spectator)

There you have it: to cut government spending is to make it harder to balance the budget. And conversely, to increase spending is to reduce the deficit. The might be called the More is Less fantasy. More government spending, less of a deficit.

Let me give this fancy its due: increasing government spending by $1 probably will increase GDP in many contexts; and so will increase government revenue. But will a dollar of spending increase revenue by more than a dollar? Not even the most crude, skewed and one-eyed Keynesian models will allow this conclusion.

To see this, let's travel into a Keynesian universe as far as an unhinged reason will permit.

We may begin  - in the spirit of extreme Keynesianism - by throwing out any suggestion that the economic system has a self-equilibrating tendency, and assuming the most simplistic Keynesian model of the elementary textbooks (often referred to as the 45 degree model). Such a model assumes away the possibility that in response to an increase in government spending, the interest rate might rise (and so reduce investment); or that the exchange rate might appreciate (and so reduce exports); or that the price of output might rise (and so reduce real money balances, with further negative implications for the interest rate and the exchange rate); or that consumers will perceive that any extra government debt spells future interest charges and future taxes to match; or that consumers will save almost all of any temporary increase in income that might be generated by a temporary increase in government spending.

In other words, we give everything we can to the Keynesian model. And we now give more. We suppose that there is zero 'leakage' arising from savings: that is, 100% of any extra income is consumed by households. And we assume zero leakage arising from imports: that is, 0% of any extra income is spent by households on overseas sourced goods and services.

This is the model of the ultimate 'multiplier'. In such a model if the government spends another dollar (financed by debt) then that will generate 1/t dollars of extra GDP, where t = the fraction of an extra $ of GDP that will flow to the government in higher taxes.

So what is the extra revenue from this extra GDP? Some simple algebra gives us the answer:

t * 1/t  

And  t * 1/t  equals 1.

Thus in this ultimate multiplier model one extra dollar in government spending will generate one extra dollar in revenue, exactly.

The consequence is that the slightest movement away from the 'ultra' assumptions made above implies that one extra dollar in government spending will generate less than one extra dollar in revenue

So if we allow households to save even just a few cents of extra $ of income then the multiplier will be smaller than 1/t, and so one extra dollar in government spending will generate less than one extra dollar in revenues.

And if we allow households to spend even a few cents of extra income on imports, then the multiplier will be smaller than 1/t, and so one extra dollar in government spending will generate less than one extra dollar in revenues.

Conclusion: even in this extreme Keynesian universe, More is, alas, More. And Less is Less: less government spending, less deficit.

Wednesday 14 March 2012

The 'In Fifth Year of Recession' Myth
The media are full of the claim that Greece is now in its fifth year of recession. Started by various Greek finance officials, this canard has been picked up and credulously repeated by BusinessWeek and Reuters, and many others. In truth Greece has been in recession, as customarily measured, for 12 quaters, or three neat years.

Greek real GDP  (seasonally adjusted) grew until the fourth quarter of 2008. It fell again in the first quarter of 2009. Two succesively quarterly falls is usually deemed to constitute a recession. Thus Greece could be said to be in recession from the beginning of 2009.

That is 3 years.

(Data is sourced from http://stats.oecd.org/Index.aspx)
 

Tuesday 13 March 2012

The New York Times Misreports 'the World's Largest Economies'.

The March 12 2012 issue of the International Herald Tribune (a digest of the New York Times) carried a table of 'key figures of the world's largest economies'. (See the article entitled "World looks to U.S. consumers for rescue"). 

But the table does not report 'the world's largest economies'; not by conventional reckoning, or by its own choice of metric. 

The table includes Mexico and South Korea; with their $US GDPs for 2010 correctly recorded (at 1034B and 1014B, respectively).

But Spain hard a larger $US GDP than both these countries in 2010 (
1410B).

So did Australia (
1237B).

And neither Spain or Australia make their table.

There is, plausibly, a commercial benefit to the NYT in ensuring Mexico gets 'air time' in its newspapers.It may also be that their business page readers  have more  interest in Korea than Australia; after all, US trade with South Korea in 2011 was $US44,505m, compared with only $US27,515m for Australia.


But the Times did not state it was reporting 'key figures of the world's economies of most interest to our readers (and advertisers)'. What it did state was incorrect, at least by its own criterion of 'largeness'. 


For the record, the economies with the 15 largest GDPs in 2010, at current exchange rates and in $US B, are as follows:


Australia 1,237.36
Brazil 2,090.31
Canada 1,577.04
China 5,878.26
France 2,562.74
Germany 3,286.45
India 1,631.97
Italy 2,055.11
Japan 5,458.80
Korea 1,014.48
Mexico 1,034.31
Russia 1,479.83
Spain 1,409.95
United Kingdom 2,250.21
United States 14,526.55








(All data is drawn from http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/weoselgr.aspx)