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July 03, 2011

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Keith

very well put.

Andrew

I agree, very nice post.

Perhaps Osborne doesn't really believe there will be much medium term expansion, but wishes instead to prevent the perceived disaster of a "loss of market confidence", Greek style. It may be easier to sell a "take the pain now" policy as an expansionary fiscal contraction.

Tim Worstall

"Osborne’s policy is not based upon general equilibrium thinking. He wouldn’t know a DSGE model if it were to hit him in the face"

It's worse than that. DSGE, the "dynamic" bit is different from "general equilibrium".

GE is Walras, neo-classical. DSGE is more often New Keynesian etc. Neither of which we'd really describe as "neo-liberal".

But then n-l in Ritchie world means some combination of what he doesn't like/doesn't understand.

Charles Wheeler

"For me, economics is not about big ideas such as "neoliberal" economics. Instead, it’s about data and mechanisms; mathematical models are useful insofar as they draw attention to mechanisms and their likely importance."

That's where you're going wrong. You're fixated on the minutiae, this model, that model ...

Meanwhile the idealogues and popularisers carry on with the dissemination of their neoliberal meta-theories through lobbyists and think-tanks, pushing Randian fantasies about 'free' markets and individualism, even as we head for the abyss of accelerating inequality, widescale destitution, collapsing financial markets and exploding debt bubbles. The movers and shakers keep plundering the shrinking riches sure in the knowledge that it can't last http://goo.gl/5xeCF). Meanwhile, technocratic economists keep fiddling with their models while Rome burns.

I suppose there's a funny (as in absurd) side to it.

Charles Wheeler

p.s. Economic theories are simply used to justify a particular ideology – it doesn’t matter that the Efficient Market Hypothesis is flawed or Ricardian equivalence unproven – they justify the idea that government action at best has no effect, at worst reduces the efficiency of markets. We know, empirically, that this is nonsense, but as they confirm the dominant ideology which preserves the self-interest of the wealthiest, they will prevail whatever their shortcomings.

George Osborne’s primary objective is slashing back the public sector for ideological, not economic, reasons so any theory that justifies deficit reduction is grist to the mill. It makes no difference whether it is ‘true’ (or economically credible to trained economists) or not.

Jackart

Another way of putting "Instead, that basis is the empirical fact that sometimes (pdf) - and only sometimes (pdf) countries have tightened fiscal policy and experienced surprisingly good growth." would be that the fiscal multiplier is close to one, and therefore growth is unrelated to fiscal contraction or otherwise... Some other factor is dominant.

Cahal

'Perhaps Osborne doesn't really believe there will be much medium term expansion, but wishes instead to prevent the perceived disaster of a "loss of market confidence", Greek style. It may be easier to sell a "take the pain now" policy as an expansionary fiscal contraction.'

Unfortunately, although this appeals to ordinary people's 'tighten your belt' mentality it is not economically pertinent.

For a start, it's not like the markets are going to wake up one day and send UK bonds skyrocketing to 10%. It would be gradual; if the government weren't doing enough, they might see a small tick upwards and could adjust accordingly.

Secondly, cutting spending =/= cutting the deficit. The fastest way to reduce the deficit probably doesn't coincide with the fastest cuts possible to spending. Hence why the Coalition's borrowing has been revised upwards (and will continue to be).

vimothy

Tim, I'm confused by your comment. In what sense is a DSGE not a GE model? The second part of your comment is also confusing. An NK model is basically just an RBC model with added monopolistic competition and sticky prices, right? What is it about NK models that makes them inherently un-neo-liberal or otherwise?

Andrew

@Cahal - I was not suggesting that "taking the pain now" appeals to the public - quite the opposite - that it was being sold as an expansionary move.

"For a start, it's not like the markets are going to wake up one day and send UK bonds skyrocketing to 10%. It would be gradual; if the government weren't doing enough, they might see a small tick upwards and could adjust accordingly."

This is not necessarily true. If the bond market believes a debt-deflation trap has been entered then it would be too late for adjustments. I believe Greece is making a few adjustments currently...

"Secondly, cutting spending =/= cutting the deficit. The fastest way to reduce the deficit probably doesn't coincide with the fastest cuts possible to spending." - The world is complicated and that may be true. In fact it is certainly true in a completely useless way: if Government appropriated all economic activity and made just the right decisions with it, then that would be the fasted way to reduce the deficit! I was merely speculating on what Osborne might believe.

cityeyrie

"Expansionary fiscal contraction" seems to me one of those policies where the glaring clue to its incompetence is the oxymoron. It is not so much ideological as simply lying, like new Labour's wheeze combining competition and cooperation (or vice-versa) in the same group of government over-seers.

All the standard models and mechanisms put forward to try to solve this situation treat money as some kind of often-capricious trade wind. Money is not a natural thing, force or ectoplasm. Money is entirely a human concept and in all forms represents a bond of trust between people, dependant on all agreeing to accept that bond. Economic (ie any human) activity, while mostly directed by those who define and create the money, is independent of money itself. Most models say little about this process, and treat money as itself a commodity, so everything else is mysterious.

I'm really at the point of thinking, enough already with the tinkering. Albeit some measures should be happening already, under existing laws, like vigorously prosecuting corporate/bank fraud, and direct payment for public projects and services by the state; and others should be simple enough to institute given that magic 'political will', like regulation of the recent crop of exotic financial instruments and taxation of financial transactions - these all somehow miss the point.

All this debt, and attendant instruments, is so much paper and googlebytes we humans all happen to agree can be exchanged for goods, services, taxes and overwhelmingly pitched into the speculation kitty. All this debt actually does is licence some people to collect rent off everyone else who actually works for a living, often working without getting 'money' for it. The Greeks seem to better understand this as simply a license to steal.

I do try to look at things practically most of the time and restrict my thinking to what seems possible to do now, or at least in the near future - and what won't get me arrested. On the other hand, while I watch the cuts starting to bite, with attendant needless suffering and upheaval in my own and many people's lives around me, with the most ridiculous justifications made for them by all parties/press - I want to start smashing windows down Picadilly myself. (Begging the question of whether it's safer to smash windows than sit down in F&M...)

My brick will have Universal Debt Cancellation written on it. Would the world really end if we decided that all current debt is no longer owed? Could this not help 'balance' the world economy, at the expense of the rentiers?

Who in the real economy looses if we stop all this playing with derivatives, CDOs, SIVs, government bonds, etc and kick the private banks out of the business of creating what we use as 'money'? Why can't a democratic government spend its own money into the economy and restrict private banks to tending that moeny?

I'd like to get beyond all the smoke and mirrors of the present financial system. I want to see an end to evidence- and logic-defying, oxymoronic nonsense masquerading as serious policy. I want to see an end to this financial system which relies on corruption, exploitation, addiction and war to keep the shell-game going. I want a system which rewards co-operation, healthy competition, long-term thinking and positive contributions to human and ecological well-being. Why don't we have more models for that?

Do I, a tenuously middle-class professional, need to actually start throwing bricks myself before this happens? Probably. Will throwing bricks at windows of the elites itself be counter-productive? Possibly, but it would sure feel good!

In all, though, I'd rather not have to.

Cahal

'This is not necessarily true. If the bond market believes a debt-deflation trap has been entered then it would be too late for adjustments. I believe Greece is making a few adjustments currently...'

Greece's bonds are 6 years maturity time whereas ours are 13.5, which makes a huge amount of difference to how fast the markets can react.

Also, don't forget that we can always print our own money if worse comes to worst.

Blissex

There is a possibility that the government's game is completely different from the one people think, and it is about pure and simple austerity to save the pound.

The single biggest economic fact in the UK is is in this graph:

http://mazamascience.com/OilExport/output_en/Exports_BP_2010_oil_bbl_GB_MZM_NONE_auto_M.png

The dates of major turning points in it coincide almost exactly with major political turning points (in particular Blair handed over the country to Brown at the exact point when the production fell below consumption).

The UK has become a net importer of oil, and the graph is starting to look like that in the dismal 60s and 70s. Therefore no automatic support of the pound from oil exports, and shrinking free money from oil royalties.

Oil imports have been increasing only slowly because oil consumption has been slowly decreasing because of the recession.

The overriding concern of the government seems to be to suppress consumption to reduce imports to avoid a collapse of the pound and a repeat of the collapse of Argentina in the 1990s. The priority of the government seems to protect pounds denominated asset prices; also because proprietors of those assets are its main constituency.

The overall political problem is that the "aspirational" middle classes have been been very important so far, and of
course it is practically impossible to satisfy their lifestyle aspirations in a situation of climbing oil imports. That's going to cause a lot of problems.

Nonymouse

What facts suggest fiscal contraction is not working, Chris?

If I was Osborne, I would just want to see nominal GDP growing, and the job numbers ticking up. I would not care much about the real GDP figures in the short term; so long as NGDP grows strongly, the private and public debt burden will ease.

So, then I'd look at the Q1 NGDP figures, and see a nice rise in NGDP, way above trend growth rate. I'd look at the nominal retail spending figures through the rest of the year, and see the same above-trend growth in nominal spending continue.

Add to that, the job numbers are not looking bad.

Some other people might look at the real GDP figures, and extrapolate that the depressingly high deflator means that the government isn't borrowing enough money. But, if I was Osborne, I would know those people are stupid.

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