Outlook for macroeconomy

I hate to say this but all my forecasts over recent months seem to be proving right.

First, we have over-done monetary policy (see my contributions in Club Troppo, January 29 and February 4th 2010).

Second, our expansionary fiscal policy was on the right scale (although mismanaged at times) e.g. see my Club Troppo piece of February 25).

Third, the world is now entering the “early stages of a third depression”, due to a general fetish about public debt (e.g. see Krugman piece of June 28th).

Finally, any future macro-policy change (to the extent it is needed in this country) must rely more on additional spending (on health, education and infrastructure) and less on labour market deregulation and reductions in taxes (see for example my CT piece of March 18, 2010). The people who are most vulnerable (the medium to long-term unemployed and under-employed) are the real victims of the global financial crisis.

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j
j
11 years ago

and less on labour market deregulation and reductions in taxes

Fred, you wouldn’t cut payroll tax and you’d prefer paying someone to stay home out of the Treasury coffers rather than see them get a job in a less regulated labor market.

Okay

Lastly if there’s a deflationary vortex how exactly does fiscal spending ameliorate the problem, especially when I think you would also agree that deflation is foremost a monetary problem (it sounds like someone trying to cure stomach cancer by using a laxative).

Rafe
11 years ago

Fred I appreciate that it may be hard to for an old Keynesian dog to learn new tricks, but how do you think the US can spend their way out of the hole they have dug by big spending?

http://catallaxyfiles.com/2010/06/26/thank-you-maynard-and-friends/

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

Because Rafe they haven’t indulged in big spending.

Catallaxians aren’t known for their mathematical skills.
also bear in mind hours worked is rising and productivity has also been high.

On the other hand countries such as Ireland. Latvia. Lithuania have gone backwards big time on YOUR policies

Rafe
11 years ago

The US has not had big spending?

Jack Strocchi
11 years ago

Dr Argy boasted:

I hate to say this but all my forecasts over recent months seem to be proving right.

First, we have over-done monetary policy…

Second, our expansionary fiscal policy was on the right scale (although mismanaged at times)…

Third, the world is now entering the “early stages of a third depression”…

Finally, any future macro-policy change (to the extent it is needed in this country) must rely more on additional spending…

Dear Dr Argy,

I don’t wish to sound disrespectful but could you please:

– provide links, and preferably supporting quotes, to your various predictions
– indicate how these theoretical predictions correctly anticipated later empirical observations

Its a bit late to claim credit for predicting that AUS’s economic policy settings are not too bad. On OCT 2008 on this blog, I predicted that our buoyant factoral* flows, expansionary fiscal policy and easing financial policy would make AUS “odds-off” for a recession:

At the moment an [AUS] recession appears to be odds-off. Although a slow down in Asian growth and a rise in global interest rates might cause property market capitulation.

Even then the govt and populace will throw everything at the property market to keep a high floor on prices. More home grants, tax breaks, bail-outs, raids on super, infrastrucure splurges – you name it.

The Great Australian Dream will not go down without a fight. Neighbours Home and Away last stand.

My mildly bullish prediction was confirmed. An important point, more than 2/3 of the credit for which should go to Howard-Costello, not Rudd-Swan. The RBA has been a rock through out the whole episode, being at least six-to-12 months ahead of the curve on tightening and easing interest rates.

Also, where did you predict a double-dip recession for EU or US?

FWIW I agree with you that we need to invest more in human capital, largely health and education. But of course this is justifiable on micro-economic grounds, irrespective of the macro-economy.

regards

Jack Strocchi

* Mainly massive inflows of high-IQ students propping up the residential investment property market and therefore the banks loan portfolios. AUS never had a credit crisis, our banks credit ratings went up during the GFC.

Jack Strocchi
11 years ago

Note, I qualfied the OCT 2008 prediction by cautioning on the rate of “Asian economic growth:. A few months later on I predicted that the PRC’s economy would not “slow down”, thanks to the massive fiscal stimulus being administered by the CCP and its general ability to run a tight ship. On 04 FEB 09 I predicted that the PRC would shift from an external-export driven to a more internal-development driven economic strategy:

I also predict that the PRC will engineer a relatively soft-landing for its largely-export driven economy. Unemployment in export related industries will rise but the largely state-run economy will turn to internal development, largely in the peasant hinterlands. This will have the added benefit of politically pacifying unrest in the hinterland.

The confirmation of my bullish prediction on the PRC eliminated the cautious qualifier on my bullish prediction for AUS. That PRC’s quarter trillion dollar stimulus package saved everybody’s bacon. And for their governance pains the CCP received no credit. Situation normal, jeeze liberals are an ungrateful bunch.

All that was required was for KRudd to act as Santa Claus and cut every one a $900.00 cheque for Christmas.

On a personal note I am bitter and twisted about not receiving ANY credit whatsoever from the blogosphere for making what were, in retrospect, pretty good calls. Apart from the occasional bout in moderation purgatory for putting some politically correct nose out of joint. Jeeze bloggers are an ungrateful bunch.

Jack Strocchi
11 years ago

Note, I qualfied the OCT 2008 prediction by cautioning on the uncertain question possibility of a”slow down in Asian growth”. A few months later on I predicted that the PRC’s economy would not “slow down”, thanks to the massive fiscal stimulus being administered by the CCP and its general ability to run a tight ship. On 04 FEB 09 I predicted that the PRC would shift from an external-export driven to a more internal-development driven economic strategy:

I also predict that the PRC will engineer a relatively soft-landing for its largely-export driven economy. Unemployment in export related industries will rise but the largely state-run economy will turn to internal development, largely in the peasant hinterlands. This will have the added benefit of politically pacifying unrest in the hinterland.

The confirmation of my bullish prediction on the PRC eliminated the cautious qualifier on my bullish prediction for AUS. That PRC’s quarter trillion dollar stimulus package saved everybody’s bacon. And for their governance pains the CCP received no credit. Situation normal, jeeze liberals are an ungrateful bunch.

All that was required was for KRudd to act as Santa Claus and cut every one a $900.00 cheque for Christmas.

On a personal note I am bitter and twisted about not receiving ANY credit whatsoever from the blogosphere for making what were, in retrospect, pretty good calls. Apart from the occasional bout in moderation purgatory for putting some politically correct nose out of joint. Jeeze bloggers are an ungrateful bunch.

Fred Argy
Fred Argy
11 years ago

Rafe, I happen to agree with butterfield.

I am prepared to accept that countries like Greece had no choice: they had to step up deficit reduction (including some temporary wage deregulation).

But why are other countries like Germany, UK, France also looking for ways of accelerating deficit reduction? In the USA, for example, the Senate (under Republican influence) has rejected any additional government spending e.g. on providing aid to state governments or extending unemployment insurance for the 10% of jobless people (near 20%, if you add on the under-employed). These are the real victims of the global financial crisis: the large finance companies have done very well so far.

Why do you think share markets are so ratty about the expected Republican-led universal debt reduction over the next three years? You would think markets would rejoice – unless they saw big problems ahead for profits.

Jack Strocchi
11 years ago

Fred Argy @ #8 said:

Why do you think share markets are so ratty about the expected Republican-led universal debt reduction over the next three years? You would think markets would rejoice – unless they saw big problems ahead for profits.

Since inflation is next to impossible in the current environment, are you predicting a massive US devaluation in order to clear the decks of foreign debt? In which case you should be going very short on USD.

Alphonse
Alphonse
11 years ago

This chart shows that moving up to 10% unemployment is a great way to enlarge a deficit. Beyond the Bush legacy, the major problem for the US has been not too much pump priming but too little.

Rafe
11 years ago

Fred, how much more evidence do you need to accept that the spending policy of the UA has failed?

http://catallaxyfiles.com/2010/06/26/thank-you-maynard-and-friends/

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

actually Rafe Steve doesn’t produce any evidence and when someone actually provides the correct figures he goes away and cries.

In the US you have had a much steeper recession than most envisaged.

The States for almost the first time have cut their spending.

The stimulus was quite modest. you have to take out of the structural deficit the Bush programs and then the effect of the economy as well which enlarges it.

The one person who has called this correct is Krugman

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

I should have added why does Rafe and other Catallaxians ignore countries such as Ireland, Latvia, Lithuania.

They all adopted their policies yet the economy went backwards Unemployment is in double digits and their deficits and debt are higher

Senexx
11 years ago

Butterfield, Bloomfiled & Bishop @13

I would love to see a counterargument from that group on your assertion. I suspect it will not be forthcoming.

Rafe
11 years ago

The counter-argument is that the bust in Ireland was not due to austerity.

I don’t have link, this is copied off an email discussion.

Thanks to a deadly cocktail of a world-beating property boom, combined with unrestrained government spending, the boom veered out of control. The price of an average house soared by more than 350% between 1997 and 2006. The price of an acre of un-zoned land rose from 5,000 to 35,000 euros in rural Ireland in seven years. Between 2004 and 2008, banks in Ireland issued $50 billion in mortgages — the equivalent of banks in a country the size of the United States issuing mortgages of $2.8 trillion.

Flush with cash, the government went on a spending binge. From 1997 to 2008, investment in Ireland’s health service went up five-fold. Public-sector employment soared, even as pay doubled. Infrastructure projects were started across the country, but invariably completed spectacularly over budget.

The Irish economy unraveled with remarkable swiftness. Soaring labor costs forced Dell to pull up stakes and move 1,900 jobs to Poland. The collapse of the iconic Waterford Crystal brand quickly followed. Anglo Irish, the most aggressive lender of the past 20 years, was nationalized as property values halved. Tax revenues in 2008 were the worst on record as the economy collapsed. The government’s budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3% of its GDP last year — worse than Greece.

The Bitter Taste of Austerity Medicine

The Irish government’s response was both swift and harsh. Irish Premier Brian Cowen launched what many called the biggest assault ever seen on the public services of a modern Western state. The government raised taxes, even as it cut salaries in the public sector by up to 20%. But public finances are hardly flush. The government plans to reduce its deficit to less than 3% of GDP by the end of 2014. But for now, the OECD forecasts Ireland’s deficit at 11.7% of GDP in 2010 and 10.8% in 2011.

Ireland is a living, breathing test case of the austerity measures that are causing taxpayers and workers to take to the streets with pitchforks across the globe. Keynesian acolyte Paul Krugman argues that Ireland’s current woes offer a glimpse into the consequences of fiscal austerity in the United States. On its face, it’s a sad irony that rather than being rewarded for swallowing the bitter cod-liver oil medicine of austerity, Ireland is grouped right alongside the other PIGS — Portugal, Greece and Spain. The Irish government’s heroic efforts notwithstanding, Ireland still pays three percentage points more than Germany on its benchmark bonds.

Ireland’s downturn has been almost certainly sharper and its recovery has been delayed compared to what it would have been had its government gone on a U.S.-style spending spree. That said, Ireland’s economy already may have turned the corner. Ireland’s economy expanded for the first time in more than two years in the first quarter by 2.7%, and is expected to grow as much as 1.5% this year. This is an improvement over an earlier prediction of 0.5% and marks the first full-year expansion since 2007. Ireland’s unemployment rate today stands at 13.4%, the highest since September 1994. But this is substantially less than the 16% projected for 2010 last year. Overall, Ireland is quietly starting to outperform the most pessimistic projections.

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[…] Keynesians like to cite Ireland as a case study in the failure of economic rationalism and the austerity measures that have been […]

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

Rafe,

Ireland adopted measures you heartily approve of.

It had five successive quarters of negative growth.

It has a larger deficit and debt than that of the US which had only a moderate stimulus program.

It’s unemployment is larger as well.

By the way ever noticed there is a larger difference between GDP and GNP in Ireland than any other Western Country.

guess why?

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

In 2007 the Irish had a minimal structural budget deficit ( less than 1% of GDP) and a debt ratio of 25.1%.

It was expected to get to 28.7% in 2010.It actually got to 77.9%

If you think it could have got to that by stimulating the economy you have rocks in your head

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

I think a comparison with Poland is more appropriate.

Their only problem in getting the budget back to balance is tax cuts unwisely taken but that doesn’t matter does it Rafe!

Rafe
11 years ago

Of course Ireland got into deep trouble, in proportion to the boom. That is just textboook Austrian boom and bust theory.

“Flush with cash, the government went on a spending binge. From 1997 to 2008, investment in Ireland’s health service went up five-fold. Public-sector employment soared, even as pay doubled. Infrastructure projects were started across the country, but invariably completed spectacularly over budget.”

Does that sound familiar?

The point is their situation is improving on the back of improved policies. Let’s see if the US does as well.

There is more information at Catallaxy.

http://catallaxyfiles.com/2010/07/14/ireland-stagnation-boom-bust-and-recovery/

sdfc
sdfc
11 years ago

So Ireland had low taxes and rampant public and in particular health spending even while running balanced budgets? Which is what they were doing running into the GFC. That’s one hell of an effort.

Buuterfield, Bloomfeld & Bishop
Buuterfield, Bloomfeld & Bishop
11 years ago

Rafe,

you have to be joking. Ireland is getting better.
It couldn’t have got any worse!

Why are you comparing Ireland to the US. If Clinton had have had eight more years maybe but Bush left a deficit of over a trillion dollars.

This is a good reason why the stimulus was modest.

On the other hand Poland seems a much more reasonable comparison.

After all Ireland in the 8 years before 2008 had 7 budget surpluses.

It had the opportunity to offset the worst of the GFC.
It elected not to and we can see the results which are vastly different to what you and your lot said it should have been.

Buuterfield, Bloomfeld & Bishop
Buuterfield, Bloomfeld & Bishop
11 years ago

The comparison with the US is claptrap.

Ireland came into the GFC with budget surpluses in 7 of the 8 years prior to 2008.

They could have stimulated like Poland or cut like they did.
According to your mad ideology Ireland should now be booming.

It ain’t. On the other hand Poland should be experiencing a severe recession.
It ain’t.

We won’t mention the spectacular failure on Australia you had either.

The US is an unfair comparison.After all Obama inherited a trillion dollar deficit on assuming office.

It is no wonder their stimulus package was so modest

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

Rafe,

how is the Irish result good?

They had budget surpluses for 7 of the 8 years prior to 2008.

so they had the capacity to stimulate the economy.

They didn’t band introduced catallaxy policies.

so they have double digit unemployment and budget deficit rates ( as a % of GDP) and rampaging debt not to mention five quarters of negative growth.

compare that to Poland

Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

By the way Rafe did you realise that the CBO said the budget two weeks before inauguration was one Trillion dollars in the USA?
didn’t think so.

make your statement of large stimulus rather ridiculous doesn’t it.
gee when are you catallaxy types ever going to be able to read a budget statement properly?