Paul Krugman at the LSE
This is a reprise of a blog posted last summer following Krugman’s talk at the LSE. So much of what he talked about remains relevant today especially the challenges facing macro-economic policy-makers when deflationary and debt dangers continue to lurk.
”“The central problem of depression-prevention has been solved, for all practical purposes.” Robert Lucas, 2003
In a world of depression economics many of the standard rules of economics no longer apply. The global economy remains in the grip of a sustained downturn, the duration of which might make Japan’s “lost decade” look favourable in comparison. And macro policy-makers are grappling with an infection that has proved highly resistant to the usual doses of anti-biotic. Despite a remarkable attempt at stimulating demand – through the acceptance of large fiscal deficits and the dual attack of conventional and unconventional monetary policy – things seems to getting worse albeit more slowly.
This seemed to me to be gist of the core message from the first of the Lionel Robbins lectures delivered by the 2008 Nobel Prize Winner for Economics, Professor Paul Krugman of Princeton speaking at the LSE this evening.
read more...»A selection of revision notes on exchange rates
The gyrations of currency values in international markets can have far-reaching consequences for short term growth, inflation, employment and living standards. Exchange rates figures in both the AS and A2 macroeconomic syllabus and we have blogged about them extensively over the last year. this blog brings together a selection of articles and presentations that we hope students will find useful in their exam preparation for June 2010.
read more...»Are we on the cusp of a second banking crisis?
Paul Mason reports here on fears of a second banking crisis - closely tied to the sovereign debt crisis. “Across the European banking system there is too much unfinished business” - there is much to be done to cleanse the system of bad assets and recapitalize the banks? Given the scale of public sector debt and the lack of room for further bail outs - are some banks too big to save? Will banks have to agree a hair-cut on their existing loans? Is a bank tax needed to create a new bail out fund?
This radio 4 Today programme discussion between George Magnus and Robert Peston is also worth a listen: Eurozone crisis ‘has ensnared’ governments
Finding new opportunities among the economic wreckage
I am reprising this blog entry from a year ago partly because Robert Frank is one of my teaching heroes. But also because his idea of a steeply progressive consumption tax continues to have such resonance today as we seek to find ways of re-balancing our economic systems away from excessive and often wasteful consumption towards saving and productive investment. Read on and you will find out about positional goods, status races and the case for taxing consumption more and saving less.
read more...»A selection of revision notes on fiscal policy
The handling of fiscal policy is one of the big macroeconomic issues of the year and one that is likely to dominate many AS and A2 macro essays in the exams this summer. Here is a selection of our recent blogs on aspects of fiscal policy during the last twelve months together with some brief revision notes on fiscal policy and its impact on the real economy.
read more...»Euro Land and Optimal Currency Areas - A Valentine’s Day Massacre
In A2 macro when we teach the economics of a single currency, it is not long before the idea of an optimal currency area makes an appearance. The crisis facing Greece and a number of other Euro Zone countries has laid bare the structural flaws in the monetary union project. Euroland is a long way from being an optimal currency zone.
read more...»Warnings of hysteresis for the EU economy
This is an updated blog post on the topic of hysteresis in the EU economy. The recession and financial crisis may lead to a permanent loss in potential economic output and a slower trend rate of growth in the future according to a study by the European Commission. The fall in potential GDP will be an example of hysteresis effects across the European economy and the cyclical downturn in output and jobs creates long term damage.
read more...»Sterling and Exports - The Importance of Time Lags
Roger Bootle has an excellent article on the lagged effects of a competitive exchange rate in today’s Telegraph. One of his arguments is that the default behaviour of many UK exporters is to take higher profit margins from their overseas sales rather than cutting their prices to boost export volumes. Crucially the impact of a lower currency takes time to show through in the international trade data and this is partly because switching production to countries where the exchange rate is favourable cannot happen overnight .... read this paragraph:
“Where export prices are not cut, this does not necessarily mean that the weaker currency will do no good. It is rather that the benefit will take longer to come through. In response to higher profit margins, firms will have more incentive to sell abroad. In the economic textbooks, selling abroad, or switching from European to Asia markets, is simply a matter of pressing a button. In reality it isn’t like this; sales networks have to be established, modifications to the products or services made; foreign relationships built up. These things do not happen overnight.”
The article reminds us that a more competitive exchange rate helps to re-balance the economy at a time of domestic weakness. But that the benefits of a weaker pound have been diluted by
(i) Supply-side weakness in UK industries (e.g. a lack of some aspects of non-price competitiveness)
(ii) Low demand in key export markets - not least the European Union
(iii) Longer than expected time lags between a fall in the currency and a pick up in export sales
Many exporters have also been held back by problems in accessing trade credit - few importers pay in advance for goods and services sold overseas!
More of the Roger Bootle article can be found here: The competitive pound is one of the few things we have got going for us
10 Macro Charts for A2 Economics Revision
We keep teaching our A2 students until Tuesday! (What happened to half term?) So finding alternative approaches to revision can be time consuming especially after students have become saturated with timed essay and data response work. Today I used a set of ten macro charts for my A2 groups - each one was selected because I felt it reflected an important aspect of international or domestic macroeconomics - ranging from the diverging trade performance of Norway and the UK, to volatility in the world prices and output of steel. And some domestic charts focusing on UK inflation in goods and services and some evidence to what has happened to business profits in Britain during the recession.
I use data charts extensively in my A2 teaching - partly because it makes students more comfortable in interpreting the numbers and because the charts themselves are revealing in showing changing macroeconomic relationships.
Charts
(please select cancel when asked to update charts!)
Ten_Key_Macro_Charts.pptx
EU Quality of life
Since 1998, the European Union Regional Policy unit has been collecting data on the happiness or otherwise of its citizens in 75 cities. It reported in 2004, 2007 and now 2010 with its ‘Survey on perception of quality of life in 75 European cities’. Who would have thought that our Newcastle is the third most satisfied city in Europe with its provision of healthcare?
EU Economics: Eurozone crisis in graphics
An excellent graphic resource on the BBC web site - available here
Greek’s shadow economy and institutions
Economic institutions matter! From the credibility of central banks to the roles played by legal systems in upholding property rights and the need for a functioning system of government in collecting tax revenues and making sure that each dollar or euro or pound of state spending is money fairly well spent. I enjoyed reading Tyler Cowen’s piece in the New York Times today - among many others he senses that an eventual default and departure from the Euro is probably the best approach that greek can take.
The budget crisis facing Greece boils down to excessively high levels of government spending and a failure to collect sufficient tax income. This comes as no surprise when we discover the size of Greece’s shadow economy.
“Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.”
Brazilian aviation reaches new heights
This BBC News Asia report provides a terrific example of how the Brazilian aviation industry is enjoying fast growth on the back of greater competition and rising per capita incomes. (Air travel has a high income elasticity of demand). Domestic demand for short haul and long haul flights is rising quickly and the emergence of Brazil as the world’s third largest manufacturer of commercial airlines is testimony to the increasing diversity of the Brazilian economy away from dependence on exporting commodities.
Blanchflower scathing on cuts
Blanchflower here criticises Osborne’s contractionary fiscal policy at a time when growth is still anaemic, emphasising the collapse of multiplier effects from government spending, but also the negative impact on employment, both in the public and private sector, at a time when the private sector is still recovering slowly from the recession. Whilst cutting in a recession is clearly against the Keynesian ethos, Blanchflower accuses the Conservatives of also only following ideology rather than common sense, at a time when the government is one of the few entities to still be able to spend right now. He says this, and while there are reasons why the fiscal outlook for the UK is different to Greece’s, it is the financial markets that will dictate whether the government is allowed to spend right now…
Britain at risk of Japan-style deflation
So warns MPC member Adam Posen - whose remarks at a speech at the LSE are reported in the Telegraph. It is worth flagging up three of the specific difficulties facing the UK according to the Posen view
1/ The heavy reliance on foreign investors as a source of funding for the UK fiscal deficit
2/ Britain’s small manufacturing sector - currently rebounding quite well - but not of a sufficient size to make a really big difference to prospects of a recovery
3/ Continued weakness and fragility in the UK banking system - where deeply risk averse behaviour and continued de-leveraging is “undermining companies’ abilities to raise funds” prompting many businesses to hoard cash rather than invest.
More here from the Independent
The Realities and Relevance of Japan’s Great Recession - slides and transcripts are available here
Spain adds to the Euro’s woes…
As if having Greece going into meltdown was not enough for the euro currency to shoulder, Spain yesterday added to this burden… the Spanish government was forced to rescue one of its biggest regional banks: the central bank has taken operational control of Cajasur, which needs an urgent cash injection of €500m.
There has been a fresh bout of horizontal integrations announced in a bit to make their balance sheets more stable - Caja Mediterraneo, Grupo Cajastur, Caja Extremadura and Caja Cantabria want to form a bank with €135 billion in assets, to make it the country’s 5th largest lender.
This is all a time when the IMF has just delivered a bearish analysis on the Spanish economy:
“The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness,” the report said.
Do troubles for the euro know no end…?
The cutting begins…
The first round of government spending cuts were announced earlier today amounting to £6.2 billion. Whilst this is not “austerity” of the sort that Greece has been talking about recently, they are genuine cuts, albeit further measures are still required to tackle the huge black hole in the public purse.
read more...»A2 Economics Revision - Data Description Revision on Fiscal Deficits
Here is another example of some macro-economic data that you might be asked to interpret in an A2 AQA data response exam paper
“Using the extract, identify two significant features of the changes in the fiscal balance for the USA and the UK over the period shown by the data” (5 marks)
read more...»Revision Presentation - US Economy Chartroom
Here is a new revision presentation (and slide handout) highlighting key economic data and trends for the US economy. How strong is the early stage of recovery from the recession? In a related blog post I consider some of the ways in which economic events in the USA affect trade, investment and prices in the British economy.
View revision presentation on US Economy Chartroom
Download printable (pdf) handout
EU Economics: - Europe the weak link in the world economy.
A link to an excellent and thought-provoking article by Paul Mason from BBC Newsnight on the implications of the Greek/Euro Zone crisis. He argues that the ripping up of the Euro Zone fiscal rule book and the eventual bail out of the Greek economy shifts the risks to taxpayers in Northern Europe.
“In the 27 member states of the EU, it is France, Germany, Italy and the UK which bear the risk of southern European default. That is to say, the taxpayers of northern Europe. And, as members of the IMF, the industrialised countries of Europe are additionally exposed to the Fund’s €250bn loan.” Stage Three of the financial crisis - hallmarked by an age of austerity poses severe social and political risks across the continent.
In a related feature Professor Joe Stiglitz is interviewed here by BBC World and argues that imposing fiscal austerity by european governments risks plunging Europe into a second recession.
A2 Economics Revision - The US and the UK Economy
This revision note covers some of the macroeconomic connections between the UK and the USA economy.
read more...»New IPPR report on migration economics
The IPPR has issued a new report detailing research on the effects of labour migration for a number of developing countries. Here is the link to the press release and the report itself.
A2 Economics Revision - Data Description Revision on BoP
Just as with your AS exams from one year ago, AQA unit 4 macro papers contain data response questions and the first part involves drawing evidence from statistics either in table or chart format - a good example is the one above which tracks the current account balances for the UK and the USA from 1995 onwards. Note that 2010 and 2011 are labelled as forecasts - always something to pick up on when writing about the data in your answer.
read more...»EU Economics Common Terms and Acronyms
A selection of key terms and acronyms that students may find useful when studying the economics of the EU
read more...»Indian Economy Chartroom
Shubham Puri a visiting student from Mayo College India gave a super presentation on the Indian economy to one of my Year 12 economics classes this morning. It inspired me to call up a range of charts on the state of health of the Indian economy - one of the new key drivers of world demand and a vital component in the BRIC hypothesis!
It was interesting to hear from Shubham how much weight he attached to corruption as a factor holding back the underlying growth rate of the Indian economy. There are widespread doubts for example about the economic and social legacy of India’s hosting of the Commonwealth Games in Delhi later on this year.
Chronic unemployment in urban areas and much disguised unemployment across the country remain deep-rooted features of the Indian labour market despite impressive rates of growth and rising per capita incomes. Shubham confirmed that weak infrastructure is one of the aspects that contrasts India’s current situation with that of China.
Earlier on this week I heard Nouriel Roubini say in a lecture at the LSE that infrastructure in China is way ahead of where China has any right to be! Over ninety per cent of growth in China last year came from a massive surge in capital spending (capex). Too much investment in China will leave the economy with a glut of unused capacity and a major deflation problem once the short-term overheating is resolved.
Here is a brief presentation highlighting some of the key macro trends for the Indian economy.
Indian Economy Chartroom - Streamed Presentation
Download printable slide handout
And here is a wonderful short video My India that Shubham included at the end of his presentation
Ireland’s GNP and the Debt Crisis
Despite well publicised attempts to tackle an alarmingly high fiscal deficit, Ireland still has a budget shortfall in excess of ten per cent of national income and a high accumulated national debt measured as a percentage of GDP. But the true situation may be much worse. Low corporate taxes encouraged sizeable inflows of FDI especially from North America, the result being that Ireland’s GDP is much larger than her GNP - a better measure of the national income generated by Irish-owned economic assets. Government borrowing measured against GNP is very large indeed. And Ireland along with countries such as Greece, Portugal and Spain is mired in the classic debt-growth trap - how can it achieve fiscal austerity when national output and real incomes are falling.
Simon Johnson is strong on this issue today - the dangers of sovereign debt
“Debt overhangs hurt growth for many reasons: business is nervous that taxes will go up in the near future, the cost of credit is high throughout society, and social turmoil looms because continued austere policies are needed to reduce the debt.”
Irish Deflation
Deflation has been an issue for the Irish economy over the past 18 months. Given its strong position as one of the European PIIGS, rising unemployment and weak financial system, deflation is just another economic problem among many!
read more...»EU Economics: Greek Tragedy foresees the demise of the Euro
Angela Merkel has warned that the euro is in turmoil and is desperately trying to ensure that the rescue package is passed by the German parliament in a vote tomorrow.
Stephanie Flanders suggests that she needs to make this a crisis about “who runs Europe - governments or the markets?” if the vote is to be won. Her Stephanomics blog focusses on the leading role that Germany intends to play in discussions about how to implement and co-ordinate the package.
Her view is that Euro Zone aggregate demand is going to grow even more slowly than previously predicted, which will hold back GDP growth for other economies that rely upon Euro Zone customers to buy their exports.
However Reuters’ finance blogger Felix Salmon gave an even more gloomy scenario in this series of mock news reports broadcast on the Today programme this morning.
He imagines the fate of Europe’s single currency and the unrest that might accompany its break-up. Could this really happen? It could make a nice discussion piece to break up the final stages of revision classes next week!
Japanese economy - exports up but debt squeeze tightens
Here are two useful update articles on some of the issues facing the Japanese economy.
First, the BBC reports on an IMF study that urges the Japanese to take immediate steps to cut their national debt which “at nearly 230% of GDP, is the highest of any industrialised nation.” The IMF believes that economic growth is sufficiently robust at present to take some of the tough fiscal consolidation measures needed. (In contrast to the situation in the UK?). Second, a report that finds that Japanese exports are providing a kick-start to hopes of a recovery in GDP as “emerging Asian markets such as China have been driving Japan’s economy.” Faster growth will be key to Japan breaking free from the latest bout of consumer price deflation.
The UK too is hoping for an export-led recovery in the second half of 2010 and well into 2011 but a dark cloud on the horizon are fears that financial turbulence in the Euro Zone will cause the Euro Zone economy to fall back into recession and the pound to appreciate against the Euro - both factors would hit British exporters looking to grow sales in a region that accounts for well over fifty per cent of our trade in goods and services.
Roubini at the LSE - governments run out of policy bullets
The LSE was packed tonight for a talk and discussion with Nouriel Roubini. It was an occasion to help launch his latest book “Crisis Economics” and Roubini started by arguing that financial crises are now more common than is supposed. Economics textbooks pay lip-service to crises and the conventional wisdom is that systemic crises in the markets are irregular and few and far between. Dr Doom takes a completely different stance believing that the sorts of crises that have dominated the headlines in recent years are best described as White Swans rather than the Black Swans beloved of Nicholas Taleb.
The Roubini lecture is now available on video using this link
read more...»
