Niall Ferguson, MA, D.Phil., is the Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor at Harvard Business School.
Niall F’s website doesn’t just tell uswhat a dashing fellow he is. It shows us. There he is – hair pinned back by the onrush of the future he is building as he expounds our past.
And then it shows us that he collects job titles pretty much with every breath.
He is a resident faculty member of the Minda de Gunzburg Center for European Studies. He is also a Senior Research Fellow of Jesus College, Oxford University, and a Senior Fellow of the Hoover Institution, Stanford University.
Anyway, I was amazed to read this spray which dates back to September last year. (It’s mysteriously almost impossible to read on his website with the background nearly as dark as the text – perhaps it’s my browser – but if I were him I would have made the background darker still – and somehow prevented highlighting which turns the text an easy to read white on blue background – but I digress).
It argues that Australia’s fiscal stimulus didn’t save jobs and save Australia from a (technical) recession. (I’ve occasionally seen Ferguson wade into economics proper and it’s seemed to me that he’d kept his claims calculatedly vague to try to stay out of the way of those who might deconstruct his claims in the blogosphere. In any event he has run into flak from Krugman and others who pulled his arguments apart.
Here what’s telling is Ferguson’s reciting partisan talking points. Viz.
Spare us the fable that it was better designed. After the home insulation fiasco and the now-proven waste on new school halls, that can’t withstand serious scrutiny.
Well if you read the reports the school halls exercise seems reasonably well managed – only it attracted lots of headlines – not hard with 20,000 odd projects and a rushed timetable. Indeed it’s not even clear that the insulation was such a fiasco, but we’ll leave that to one side. But the thing wrong with Ferguson’s claim is that from a macro-economic perspective which is all that’s relevant to the argument the stimulus was well designed. In other words even if the projects were a micro-economic fiasco, they had the same short run macro-economic characteristics as brilliantly executed projects. And their macro-economic impact was as you’d expect and as measured – strongly supportive of the economy.
Then there’s the net exports story.
Net exports surged from 2.4 per cent of GDP in the firstquarter of 2009 — the nadir of the GFC — to 5.4 per cent in the first quarter of this year.
Problem is that that’s nowhere near enough to hold up GDP growth against expected plunges elsewhere. And surging mining exports won’t save many jobs – as seemed to be saved. If you look at the national accounts you find that consumers spent their cash splash in late 2008 and early 2009 so that retailing jobs were retained and that construction boomed. That’s what saved the jobs. Funny that.
Ferguson’s article seems almost certainly done on the fly. He argues that the RBA raising rates shows that the stimulus was overdone. But the RBA gradually put rates up to around a neutral level as it became clear that the economy was doing OK – looks like evidence of getting the economy back to normal ASAP to me. Wasn’t that what we wanted? Perhaps there’s an argument here, but Ferguson leaves us none the wiser as to what it is. Then he says this “As economist Christopher Joye has shown, small business, residential mortgage, personal and credit-card interest rates have all been materially higher under the Rudd-Gillard government than under Howard.” And, through the very different economic times and periods of the cycle – and the increased margins after the GFC – and this is supposed to show what exactly?
The thing that took the cake for me was Ferguson falling for the right’s talking point that the mining tax showed a kind of Hugo Chavez kind of instinctive punishment of success. It was a fine piece of micro-economics which would have lowered more distorting taxes (on companies – including low profit mining companies – and savings) which was the baby of Ken Henry, one of our finest econocrats, who’s a believer in free markets and lower taxes.
Finally, let’s raise our hats to Aussies who did the most to meet China’s booming demand: the diggers. Yes, theAustralian mining industry, which accounts for nearly 10 per cent of GDP and circa 40 per cent of total exports,moved heaven and earth — well, certainly earth — to satisfy China’s needs. We see the fruits of this effort everyday, most recently in the record $3.6 billion trade surplus in June, the biggest in history.Unfortunately, the government is doing the very reverse of tipping its hat. On the contrary: it’s dipping its handinto the mining companies’ pockets.
For shame . . .
Postscript: From last years Budget Paper No. 1, here is the Treasury’s breakdown of GDP growth in 2009-10 – the dark blue lines. It’s easy to see the fiscal stimulus in consumption, dwelling investment and public expenditure. It’s not so easy to see some of the factors that Ferguson mentions, like net exports for instance, though obviously they played some role. 
Nicholas
I agree. There is less to Professor Ferguson than meets the eye. I’ve read 3 or 4 of his books, and what’s striking is that they are very plausible/convincing until the last chapter or two. For example, the “Pity of War” concludes that World War I was not worth fighting, because Germany ended up top nation anyway (courtesy of the EU). Ahistorical or what?
As an income distribution pedant, I was also struck by bits of “the Ascent of Money”, where it was clear that he he is a not a gifted amateur (even) – but then Hobsbawm also makes a few striking errors in this field. (i.e. neither of them are accurate). On the whole, it is an interesting book, but these bits of it are simply ignorant.
However, I think he more recently went over from being a provocateur to just saying stupid stuff presumably for political reasons when he had an article in a Canadian newspaper arguing that the UK was in a worse financial position than Greece. He based this on an EBRD paper projecting future budget positions. The EBRD baseline was that the 2009 budget position was the default and would continue over the next 40 years. So the UK deficit on 2009 was about 10% of GDP, and if you continue this for 40 years you end up with a very large and nasty number.
Now 40 years of a deficit of 10% of GDP means that you have probably had the world’s longest depression – which fails the basic credibility test. So either he doesn’t understand what he is saying, or he is happy to mislead.
Thx Peter,
I’ve only read one of his books, one on the rise of money, but I didn’t get far. It obviously had teams of research assistants working on it, but it was dull and I didn’t read far. It seemed like reading one of those worthy volumes put out by some institution you know ‘the Oxford history of this century’ or the Cambridge companion to that century’.
Anyway, perhaps I didn’t persevere enough.
Ferguson is one of those guys that doesn’t seem to be able to bear being out of the spotlight, even if it means talking about things he knows little about. He had an article before the financial crisis about what he called Chimerica. The part about the nexus between the U.S. and Chinese economies had a factual basis but then he went on to say how the relative current account positions were not really an imbalance and thus fairly benign. Of course, he went on to revise that view after the crisis.
That said, I’ve made this point elswhere but the issue with the stimulus is less about the first stage of the stimulus, which was important in holding activity up in the early stages of the crisis, but whether, once it became very clear that growth in Australia’s emerging market trading partners had held up better than expected and that our terms of trade were recovering quickly, the second stage of the stimulus was well calibrated and should have been unwound more quickly. RBA policy has had to get back to neutral fairly quickly in part because fiscal consolidation has been relatively slow.
Think of it this way – if the output gap in Australia has been eliminated (more or less) and the terms of trade have hit another localised peak, shouldn’t government savings be higher? Criticism of the BER and insulation schemes was overblown, but it is pretty hard to argue that they were the type of infrastructure projects that would make the greatest contribution to the country’s productivity performance.
My concern going back to the Howard years is that the proceeds of the mining boom have been pissed up against the proverbial wall. Collectively, we have behaved as though the increase in commodity prices is a permanent one and thus undertaken relatively little consumption smoothing (private and public). I think the Chilean/Norwegian approach is superior.
One last quibble. It is true that the mining sector accounts for only a small direct share of output and employment. But when commodity prices are rising strongly, it is the income effects and contributions that is most relevant for broader economic conditions. You have to follow the chain all the way to the end.
I don’t know if the RSPT was such a neat bit of micro-reform. Ken Henry seems to have not read the constitution. Do you think even Anna Bligh would have signed up to effectively nationalise Qld resources?
A profit share arrangement would be a sensible part of any royalty scheme, but surely surely you are not claiming that the RSPT package was an optimum design even wishing away the constitutional realities?
LO, re your point on the usefulness of projects like the BER and HIP. The problem is a simple one – most useful projects have a lead time of five to ten years in terms of the planning, design, and approvals stages before ‘shovel-readiness’.
Thus, if an expenditure program is needed in a hurry, and if there are no projects in the back pocket ready to go, it almost ensures that less than optimal projects get the go-ahead.
Given that we know that economic activity comes in cycles, why is it that governments do not have such projects planned, designed, approved and ready to go? What seems even more obvious is that if projects were planned, designed etc sufficiently in advance, then one could advance or delay them for a year or two to take into account much less traumatic cycles than the GFC. If that were to be done, then both Government and private sectors could obtain better tender prices throughout the business cycle because these sectors would be competing less for scarce resources. Moreover, such anticipation of project needs and planning would also breed a culture of provision of better planning and fast initiation of construction when private sector activity turned down.
At a certain level of academic fame, the temptation to give up serious work and turn to well-paid polemics seems very strong (Krugman and Stiglitz being examples from the other tribe).
LO,
Even the cash splashes needed to be planned over some months. Remember how the government was lambasted for the cash splashes – what a frivolous response to a serious crisis. Couldn’t they be more – well serious. Couldn’t they build something? Like maybe infrastructure and stuff. Well that would have definitely been poorly timed – as Paul Keating’s macho One Nation was. So we went with light building projects. So they had to be put in place. Not so easy to simply knock on the head. Shouldn’t savings be higher – yes, but like your comment in your last line – in the medium term. You can’t do everything immediately.
Pedro, I thought it was optimal design – with one quibble which was that if the Govt had wanted a Brown tax it should have had a Brown tax, not one in which it borrowed the up front costs of the JVs it was forming from the partner with the higher cost of capital – the private sector partner.
Andrew, I’m not that enamoured of Stiglitz’s writing, but Krugman is different. Partisan yes, but extremely well informed a lot of the time, and where he makes mistakes he usually acknowledges them.
[…] Nick Gruen It was a fine piece of micro-economics which would have lowered more distorting taxes (on companies – including low profit mining companies – and savings) which was the baby of Ken Henry, one of our finest econocrats, who’s a believer in free markets and lower taxes. […]
Mmyeah. What Norto said.
Shorter Gruen: my preferred polemicist’s take is preferred to the dashing polemicist I envy.
Krugman didn’t pull Ferguson’s argument apart, and neither does this post. I’m shocken’ awed by the collective disregard for the elephant in the room amidst the discussion of Teh Stimulus Wot Saved Orstraya, namely the RBA’s massive cut in interest rates over 2008-2009. That was hugely stimulatory, and this point is routinely ignored by the admirers of Rudd’s fiscal fellatio, as Ferguson rightly points out.
As for the abortion known as the RSPT, RIP.
[…] is Nick Gruen Well if you read the reports the school halls exercise seems reasonably well managed – only it […]
I have read a few of Ferguson’s histories (including the Ascent of Money and Empire) and I quite enjoyed them. His op-ed was essentially to debunk the Rudd/Swan claim at the time that they alone saved us from the GFC.
Ferguson nails 5 of the reasons why Australia avoided the worst of the GFC. However, it is disingenuous to include the Howard government’s surpluses and not the Rudd government’s stimuli. Add that, and possibly two more:
– the healthy profits that meant our banks didn’t have to add risk to their portfolios
– a lack of reliance on short term funding by Australian companies. Sure some got caught up, some failed, but not too many.
Has he gone this far, his argument would have been comprehensive. But his politics compromised his analysis.
Rudd has to also bear some of the blame for calling up the GFC as the sum of all fears. He had no idea of the role of expectations, particularly when he was unaware of the transmission mechanism of the crisis. But he resolved this with the stimulus. Drain confidence, fill private coffers, restore confidence…
Where analysis is needed is on the transmission of the crisis to Australia. It seems it threatened most as a financial crisis, and less as an economic crisis. In this sense, financial sector reforms and guarantees are much more potent tools than stimulus and are problaly the undersyung heroes of the Rudd response (although I think they left a lot to be desired in their design and implementation of the response).
Also, Norton is right with the Krugman call. He is a political outsider, but an economic insider, so why does he spend so much time discussing politics his knows little about and not focussing on bringing advances in economics to our attention?
He also remains unaware of much of the evolution of economic thought and remains stuck in the saltwater vs freshwater debate, ignoring the fact that the current generation of academic economists has a lot of time for bounded rationality, heterogenous agents and behavioural economics. Considering he is co-located with Stephen Morris, Hyun Song Shin, Markus Brunnermeier, Nobuhiro Kiyotaki and others, this is just obtuse. He just keeps cranking the data through the obsolete machinery in his head and thinks that because he hasn’t advanced, then no-one else has. Oh, and he hates Robert Lucas. I mean, really hates Robert Lucas. For the record, I rate Robert Lucas (would have won two or three Nobels if allowed)
I would take Brad DeLong as the liberal voice of dissent over Krugman any day.
Krugman’s criticism of macro and how it failed the world was one of the most disingenuous pieces of analysis I have ever read. Macroeconomics, like other sciences, is in a constant state of development. It is necessarily backward looking, as economists model the past and present policy prescriptions. But the economy is complex and dynamic and ever evolving. Despite regulation, it’s agents find new ways to creep forward. The business cycle keeps cycling. It always will…
For all those saying that the RBA interest rate cut is what saved Australia? Did the interest rate cut generate enough jobs?
If you answer no, then you have to admit the stimulus is what forestalled a technical (as defined by the media) recession in Australia.
As for the mining rent tax, that is good economics no matter what school of thought you come from.
I am concerned that this current government is attempting to net export its way to a surplus with the oncoming commodity bubble (essentially a financial activity) instead of creating productivity through job creation. This would be a more effective means of returning to surplus but perhaps more difficult to implement.
I suppose the real issue for the stimulus is whether the benefit gained outweighed the cost. I believe many people think more money was spent than needed.
Nicholas, that is a little more than a quibble. You ignored the constitutional problem that they are still struggling with.
Nicholas, I think this is one your lamentably worst posts. You are determined to prove something too much.
With regards to Krugman and stimulus. I have read Krugman, every day, for more than a decade and he is a shadow of what he was? Perhaps you suffer the same malaise yourself?
Can you give me an example of where Krugman has not justified large Keynesian fiscal stimulus without reference to the zero bound on interest rates? Somewhere we never were?
This actually correlates with some of the approach by Ferguson? Oh, it actually also correlates with Labor Outsider here? Did the stimulus work? Likely! However, not as much as thought and for some of us, as in Cairns, the Federal macro approach has crucified us with boosted interest rates and currency? I think Warick McKibbon (subsequently removed from RBA ) would agree?
On the mining tax I fully agree with Furguson that it only makes sense if in the context of a sovereign wealth fund. I support a mining tax in that context although many still want to perpetuate the lie that resources are owned by all Australians (even this week by Paul Bloxham) when they are very clearly legally held by the respective states?
Are you aware that only five years ago a prominent Australian academic actuary was publishing papers that the absence of returns on mining investment refuted the entire Black / Scholes capex theory on risk and return?
If I answer “maybe” do I still get a prize? Maybe an interlocutor who understands the limitations of counterfactual hypotheses?
Why?
Yairs, “perhaps more difficult”. This is an oft-encountered problem with hand-waving solutions.
This is truly awful reading…
But the worst think you have claimed is this:
So are you saying that stimulus projects don’t have to add any productive value to the economy or be value for money? Who do we have any unemployment then if this find of approach is good macro policy. Why not get the 5.1% who are still unemployed to simply dig holes and fill them up…according to your logic it doesn’t matter ‘in a macro sense’ because jobs are created.
What total rubbish!
A stimulus package that does not provide value for money or significant productivity improvements is akin to pouring petrol on a fire and claiming the strong flame that flares up momentarily shows we will be warm forever.
You have once and truly showed me that Keynesians like you and Krugman are out of answers and offer nothing to the current economic debate.
Ferguson was sponsored for a visit to Oz by the CIS. All his Australian economic commentary is just parroting Greg Lindsay, who arranged the junket. It shows.
I’d say that as an economist Ferguson makes a good historian – except that his history of the British Empire makes me doubt he’s a good historian either. Just what is it with historians and Hegel? Ferguson seems to argue that the Empire was a Jolly Good Thing for the natives by advancing history towards some final apotheosis.
Stavros,
“So are you saying that stimulus projects don’t have to add any productive value to the economy or be value for money?” It depends on the situation but it’s always better to add as much value as you can.
“Who do we have any unemployment then if this find of approach is good macro policy. Why not get the 5.1% who are still unemployed to simply dig holes and fill them up…according to your logic it doesn’t matter ‘in a macro sense’ because jobs are created.
What total rubbish!” Agreed, the proposition you’ve mooted is total rubbish. I’ll leave to you the exercise of trying to figure out the difference between what I said and the propositions you have rehearsed above. We are both agreed are total rubbish.
Andrew Norton’s equivalence between Ferguson and Krugman/Stiglitz is false and uncharacteristically lazy. Krugman and Stiglitz are trained economists, and use models and data to make policy predictions. I might add that they also happen to have been right about a lot of things in the past several years. They aren’t perfect, but they are a lot closer to e.g. Taylor and Mankiw on the right of politics. Ferguson is just a blowhard on economic issues–as Krugman said, a “poseur”.
Ferguson’s economic history is interesting. He writes lively, informative histories and I enjoy reading them. I have enjoyed some of his academic writing on Keynes and the German hyperinflation, for example. Economic history is his thing. It’s his area of expertise. But I have never seen any evidence that he has anything more than an undergraduate level understanding of macroeconomics. He has a track-record of making false predictions and overblown arguments about e.g. the behaviour of the bond markets that are way outside his expertise.
If you think he and Krugman and Stiglitz (both of whom are distinguished macro-economists–just ask the Riksbank) are on the same page, you probably need to reexamine your own prejudices.
Google [“Niall Ferguson” “Paul Ryan”] and it becomes apparent that you can only take Ferguson seriously if you can take Ryan seriously. Good luck with that!
Very nice, Alphonse: that says it all. Nicholas and Rob at #19 have got Ferguson exactly right: a narcissist and, when it comes to macroeconomics, a dilettante.
As for the specious contention that Paul Krugman has undergone some kind of tragic decline over the pat decade from scholar to propagandist, it doesn’t wash. His NYT blog is much the same in flavour and basic analysis as his early Slate columns. Meanwhile he still produces academic papers employing essentially ortohodox tools.
And unless by ‘elephant in the room’ Fyodor means ‘frequently discussed proposition’, I think he’s mistaken in claiming that supporters of the stimulus measures ignore the possibility that monetary policy contributed to the recovery. But we can’t disentangle the effects of the interest rate cut and government handouts on household consumption; we will never know what would have happened to private investement absent the interest rate cut; and, whatever the answers to those questions, it remains true that government spending was the main contributor to GDP growth in 2008-09.
Rob – I have to take issue with your assertion that you “have never seen any evidence that he has anything more than an undergraduate level understanding of macroeconomics” since that implies that you have seen evidence of a undergraduate understanding. There is basically nothing in the current macro debates that is not comprehensible with even a second year macro course under your belt. Astoundingly almost everything we have seen makes sense under the macroeconomics of the 1950s. Apart from adding a bit of Mundell Fleming, anything since then is not relevant to the current dynamics (such as the inflation work from the 60s and 70s) or a complete waste of time (most of the past 30 years, elaborate mathematical models where recessions don’t exist, or efforts to reconcile the effective but inelegant new keynesian models with the elegant but useless RET etc.).
Which is what I always find interesting about Krugman. In his period of partisan commentary (starting around 1999) he never cites any authority from his stature, or his prizes, or his own work or even his doctorate. He’s only ever portrayed himself as an heir other people’s work, and someone who accepts the work of the economics profession. The greatest offense he sees in his opponents is they have neglected to learn or understand this body or easily accessible work in favour of being disingenuous or posturing as very serious or simply recycling long dead fallacies that should have been put to sleep in a 1st year class.
I remember reading Ferguson’s Ascent of Money once and being hihgly bemused that his case study for the welfare state was Japan. Not the birthplace in Germany, nor even the British experience which he (as a storyteller at heart) could play as a epic arc of rise, decline and fall. The aenemic Japanese system, paltry compared even to the United States and even still distantly relegated behind corporatist and family based support. If he had tried to tie it to Japanese stagnation I’d be able to see a motive for being disingenuous, but instead I’m just confused.
As for Ferguson’s appeal as a commentator, well, he does provide a nice bit of Received Pronunciation for anyone who would find Ray Hadley or Bill O’Reilly too declasse.
Are many of the commentators here economists?
I’m clearly not but do have to give you all a big shout of congratulations at displaying so much professional courtesy and regards for the work of other economists.
Over at Catallaxy watching/reading hc and Steve Kates exchange professional courtesies is a marvel to behold.
Do these guys then get together at conferences and have a good laugh over their exchanges or are they more likely to do the belly barge a la Carlton/ Akermann at 10 drunken paces?
Anyway it all makes for jolly entertainment and what is a blog for if not that.
Gotta agree with Rob. Krugman and Stiglitz are to the left what Mankiw and Taylor are to the right.
But I gotta disagree with James Farrell. Krugman has opted out of academia. His academic output has diminished considerably over the course of the last ten years. His focus now is his commentary, his blog and the conference circuit. That is OK. He has done his bit and an exceptional bit it was.
The point with Krugman and Ferguson is that they each perhaps should each focus on their comparative advantage. For Ferguson, this is history. Any foray into macro will be invariably be met with scorn from trained economists (note the dilletante, poseur, blowhard accusations above) even when he nails 5 out of 8 factors for Australia avoiding the worst of the GFC.
The case for Krugman is the same. He should steer clear of politics, unless it intersects with macro (in this sense, I have no problem with him taking on Ryan). But his political meanderings most likely burn up poli scientists as much as Fergusons macro stuff burns up economists.
And Richard Tsukamasa Green, I agree that early macro was very good. But again, you’ve missed the point. Just as Krugman misses the point. Early macro gave us very good but imprecise insight, but advancing any field by necessity takes some wrong turns. You can’t skip steps. You can’t just go to the answer.
Rational expectations may not be perfect. But it serves as a benchmark for those seeking to improve the state of the field to work against. The same goes for other aspects of economics (EMH, perfectly competitive markets). They are just first approximations that others can work from. They are massive achievements precisely because they let us get to insights about behavioural finance and asymetric information. The precursors are a necessary condition for insight that follows.
By all means, smash as worthless some paper with 1 or 2 citations. But any paper or theory that chalks the thoughts of others in support or opposition is a meaningful contribution.
There are a few problems with the it wuz orl interest rates that saved us.
The lag is quite short.
One would normally expect most interest rate sensitive sectors to react but they didn’t as they have in the past. One really did. First home buyers.
Banks found funding really hard to get even with a government guarantee. Remember post Lehman Bros anyone.
For anyone to claim the RBA saved us when they cut rates after realising the post Lehman Bros disaster is truly astonishing.
Next thing we will have commodity prices helping us conquer the GFC.
We have an excellent example right here in this post, James. Nicholas referred directly to Ferguson’s piece and said not one thing about the cut in interest rates to which Ferguson refers explicitly in his critique.
You can’t have it both ways. Either you can disentangle the effect and make that attribution or you can’t.
Chris – My point isn’t about the direction and worth of macro, just that the phenomena we’re faced with is very elementary and easy to understand. By analogy it’s as if we were faced with a problem about where cannonballs will land. A physicist would need no nobel prize or awards to point out an answer with only recourse to undergraduate (actually high school) understanding that comes from Newton – this doesn’t dismiss Einstein or quantumn mechanics or the (as yet) fruitless adventures in string theory. Anyone who came to the table repeating fallacies about heavier cannonballs falling faster would be treating things with contempt. The problem isn’t that they’re not experts, they’re not even motivated dilletantes.
In this context though, Lucas is like an expert in string theory who doesn’t know Newton, which is scary.
This is Delong describing his surprise at just how well the simplest and most vulgar models have performed.
And because it’s amusing here’s Ferguson Vs Ferguson
Thanks Richard,
I recommend Ferguson v Ferguson to all. Note how hedged almost all the comments are. As in the article I quoted, this guy never gets down to clarify the issues, indicate what evidence supports his case – other than via grand themes (ie the national accounts provide evidence that most of his claims about the stimulus not saving jobs are nonsense).
Just like this extract of Ferguson talking to our very own CIS (ignore the crazed introduction to the video). Note how he says when it comes to prediction ‘Krugman could be right’ or words to that effect. And try to ignore the tittering in the audience – whether from the left or right or anywhere else, I really hate organised complacency like that. Still I guess there have to be some guilty pleasures in running a think tank.
I take your point and I apologise if I misrepresented your position.
I don’t accept your Lucas/string theory/Newton analogy though. Because the simple models worked well this time, does not mean they have always worked well nor that they will always work well. We have mixed theoretical and empirical results. Nothing has been resolved definitively. Just this crisis has seen the momentum go back Keynes’ way.
To suggest the Keynesian idea of burying bottles of money or whatever it was is as incontrovertible a truth as falling cannonballs is a gross misrepresentation.
As a result, your criticism of Lucas doesn’t follow.
Perhaps Lucas is too dogmatic. But then the same can be said about all the economists discussed in this string (including Stiglitz, Krugman, DeLong, Mankiw, Taylor etc ad infinitum).
Insurance markets work pretty well. Not perfectly, but nowhere near the way Stiglitz represents them in his work. It doesn’t make him dumb. He is just searching for a sharper tool. To further bound the error.
Lucas reacted to Keynesians and what he suspected were cosniderable political economy issues by finding another bound. And now we have moved further inside that to, as I said before, hetereogeneous agent models, behavioural finance, bounded rationality, learning etc.
Does DeLong’s endorsement of simple models compel him to pack up his tools and go home? No, depending on the circumstances he finds himself in re-appraises the data and the context of his work and seeks to stand on the shoulders of giants, take what we know and get closer to an explanation.
“Nicholas referred directly to Ferguson’s piece and said not one thing about the cut in interest rates to which Ferguson refers explicitly in his critique.”
Well it’s pretty obvious that a 4% cut in rates had a substantial effect – though it would have occurred over time and in a way that was much more difficult to predict than fiscal pump priming.
Is the game I’m supposed to be playing that I think all the good bits came from the fiscal stimulus and my opponents think that it all came from somewhere else? Then we all yell at each other?
It was obvious enough to Ferguson, but you chose to ignore that part of his argument, focusing solely upon the subsequent increase in interest rates.
Why do you think the substantial effect “would have occurred over time” and “was more difficult to predict”? Most mortages in Australia are variable rate, pegged to the OCR. Even after allowing for the increase in credit spreads what do you think a 400bps cut in the OCR did to the monthly disposable income of the average home loan borrower?
At the start of Sep-08 the OCR was 7.25%. By early Feb-09 it was 3.25%. The first part of the free cash element of the fiscal stimulus only hit bank accounts in Dec-08, with the bulk in Feb-09, by which time the key demographic segment for consumption – i.e. the mortgage belt – had already seen large falls in the cost of servicing its debt. The insulation and school building projects took effect much later. In terms of expected incentive effects what was delayed or uncertain about the obvious impact of a massive cut in interest rates?
No, Nicholas, the game is that if you assert that Krugman and others pulled Ferguson’s arguments apart, then have a go at it yourself, then you don’t ignore his arguments, one of the key ones being the effect of monetary stimulus.
It was obvious enough to Ferguson, but you chose to ignore that part of his argument, focusing solely upon the subsequent increase in interest rates.
I credited it to the intelligence of my readers that they’d take that as read.
I mean seriously Fyodor, if you think I don’t think that a four percent reduction in the cash rate more than halving it wouldn’t have an expansionary effect, and that I don’t think my readers know that and think that, then, why are we bothering.
I didn’t ignore his arguments. He was saying that the fiscal stimulus didn’t save jobs on account of his five other factors. It’s an absurd proposition, rendered idiotic by a quick look at the national accounts. Exports and monetary expansion played their role – obviously enough.
Can you fill me in on what you think this graph would have looked like, and GDP growth, without the fiscal stimulus and how we could have got to ~2% growth in 2009-10.
um the lag in monetary is much longer than that. Much much longer.
Monetary policy became stimulative exactly when? Throughout most of 2009 the economy would stil be affected by the tightetning of monetary policy not the loosening of it!
why would we have the shortest lag of montary poicy in the history of the planet exactly when Major Banks were having big problems funding their books?
Monetary policy merely helped the recovery.
Also around 80% of customers at both CBA and Westpac kept paying their mortgages at levels when the OCR was at 7.25%.
I’ve put the fiscal stimulus graph in the postscript to the post.
He said nothing of the sort. To quote the bloke:
Ferguson did not assert that the stimulus “didn’t save jobs”. His argument is that the ALP cannot claim sole credit for saving Australia when there are other plausible explanations.
There’s nothing absurd or idiotic about the proposition, and the national accounts you refer to tell us nothing about what consumption, investment and net exports would have been if:
1) the banking system had not been robust;
2) the previous government had not reduced government net debt, thereby facilitating fiscal stimulus;
3) there had been no monetary stimulus from falling interest rates;
4) the AUD had not been allowed to depreciate to absorb the trade shock; and
5) the Chinese government had not stimulated China’s demand for raw materials, many of which are Australia’s principal exports.
I don’t know, Nicholas, and neither do you. Can you tell me what the graph would have looked like without 1-5 above?
Fyodor,
Pls let me know if there’s anything wrong with my reasoning here.
1.NF says “The claim in question is that it was the fiscal stimulus injected by the Labor government that saved Australia from much more serious recession.”
2. NF disagrees with this claim.
3. Therefore NF is arguing that “The fiscal stimulus injected by the Labor Govt did not save Australian from a much more serious recession.”
Can I get confirmation that we agree so far?
Yep.
4. So it seems to me that if I am disagreeing with NF, I have to show that the fiscal stimulus made a substantial contribution to growth whereas he has to show that it didn’t.
5. This would explain both why I didn’t give much significance to the other things that contributed to growth (because I readily concede at least some of them had a significant effect) and conversely why he had to show not just that they had a substantial effect – which should be taken as read for at least some of the factors – but also that they account for almost all of Australia’s relatively good performance (or conversely that the stimulus didn’t have much effect).
Nope. If you disagree, you have to show that Australia’s not-quite-so-severe recesssion was attributable to the fiscal stimulus and not to other factors. As James Farrell pointed out, this is inherently difficult, both for Ferguson’s position and yours, and explains why you have not done so.
No, that doesn’t explain either. You gave significance to:
1. His disparaging of the insulation and schools programmes;
2. The inconsequentiality of mineral exports to jobs growth [N.B. not the point];
3. RBA rate increases – but NOT the preceding decline; and
4. Defending the dog’s breakfast known as the RSPT.
As these points have little to do with the point in contention – in fact they ignore the bulk of Ferguson’s arguments – it’s most likely your focus was for polemic motivations of your own. They certainly didn’t “pull apart” Ferguson’s arguments.
Richard, I must remember to enlist your help next time I’m fighting against Napoleon in a vacuum.
Thx Fyodor,
I think we’ve taken it as far as we can.
We don’t agree on the logic of point 4 and so can spare ourselves further effort.
On second thoughts there’s one way to reconcile what you’re saying with my standing of this argument. I’m saying it’s obvious that the stimulus had a substantial effect and that therefore it must have been largely in addition to the other factors. That is certainly what I think.
So simply demonstrating the stimulus’s impact does it for me – and the extent to which other things also influenced the economy is an academic issue for my argument.
So I’m arguing that because it had a substantial effect, it must have been a major factor alleviating any recession we wd otherwise hv had. The only way I can make sense of your response to point 4 is that you think it’s possible that the stimulus could have had sufficiently strong contractionary effects on the economy that they undid most or all of it’s expansionary effects. Is that what you’re saying?
We have been through this discussion already on Troppo — when the RBA dropped interest rates, the variable-rate loans (including both mortgages and business overdrafts) dropped very soon after (within a month or so if I remember). The stimulus caused by the interest rate drop was much faster to kick in than any government spending or special tax rebates. The boost to retail can almost entirely be credited toward mortgage holders being a bit better off, why in the world would households with better roof insulation suddenly start retail spending?
As I think I mentioned at the time, we also have John Howard to thank for building up a strong position before we hit hard times. Any dingbat can break out the emergency stores and hand round goodies, but it takes a bit of foresight to think of laying those stores down when times are good. Keynesians are brilliant at spending, they are crap at saving, and if the concept of leveling out the “business cycle” has any chance of working we need at least equal amounts of each. We also need someone to definitively recognise which phase of the cycle we are currently going through… but anyone who could reliably do that would also make a fortune with counter-cyclic investments so it’s kind of difficult to believe the holy grail even exists.
Nope. What I am saying is that we can’t say it was the fiscal stimulus that prevented a more severe recession. We likewise can’t say it had no impact.
IMO the fiscal stimulus was/should have been significant, but it’s clear that other factors were also significant, so there’s no way of attributing Australia’s lucky escape solely or even primarily to the fiscal policies of the ALP. That is Ferguson’s point, and it’s neither absurd nor idiotic.
So Fyodor – it seems we both agree that it had a substantial effect. That’s what I was arguing. Let’s leave it at that.
Let’s further agree that it had a substantial stimulatory effect but that it couldn’t have saved Australia from much more serious recession and we can both walk off into the sunset and pretend we’re on another planet.
It would be an interesting case study/econometric to examine the effects of the Asian crisis when there was no stimulus to the actions during the GFC. Certainly the exchange rate/ monetary policy were used quite aggressively at that time with no fiscal stimulus.
really Tel,
The lag concerning monetary policy is the shortest on record when financial institutions were unable to gain O/S funding for a considerable time despite having a government guarantee. Makes a lot of sense. Then of course theres the little problem of few interest rate sectors reacting. compares the first home market to the investor market. Why was one quite strong and the other very unusually weak? It shouldn’t be if monetary poicy was working properly.
Your view on Keynesians spending and saving means you do not really understand Keynesianism at all, a bit like monetary policy actually.
The budget being balanced over the business cycle and monetary policy being preferred to fiscal policy in normal circumstances is actually Keynesian to its bootstraps.
the GFC and Asian crisis are not even related. Why would anyone use fiscal policy during the Asian crisis?
Oh really Homer, so there’s never a period in the real estate markets where one segment is better bid than another? However in this case you immediately take segment differences as evidence that one of the biggest interest drops in the nation’s history was trumped by fiscal policy.
How interesting.
Put me in Nick’s camp on thie key point here: Ferguson’s really startling argument is that the resource tax proposal was transparently bad. Resource economists have held it up for some time as a major improvement on the royalties system. If someone is not at least aware that this is an important issue, then he is not the sort of person to listen to on Australia public policy.
Tel said: “The boost to retail can almost entirely be credited toward mortgage holders being a bit better off, why in the world would households with better roof insulation suddenly start retail spending?”
Well the roof insulation didn’t come until after the first stimulus payments and it seems much more likely to me that the initial stimulus payments were more important in maintaining consumer spending at the end of 2008, which was likely to be important in maintaining consumer and business confidence.
There’s also a bit of a problem with your analysis; according to http://www.loansense.com.au/historical-rates.html standard variable interest rates didn’t start to fall until 2009. So continued retail spending at the end of 2008 cannot be put down to interest rate cuts, which didn’t start until 2009.
Now a balanced view is given by the Reserve Bank (whom I think are a bit more reliable than Niall Ferguson).
According to the RBA in the March 2011 Financial Stability Review:”Between August 2008 and April 2009, the average standard variable mortgage interest rate fell by almost 4 percentage points. There is evidence to suggest that some households used this period as an opportunity to pay down their mortgage ahead of schedule, for example by maintaining the size of their regular repayments despite required repayments falling. Around 58 per cent of the households with mortgage debt reported being ahead of schedule on their mortgage payments as at the 2009 survey, compared with 51 per cent as at the 2008 survey (Graph C2, Table C1). The increase was especially apparent among the high-income households that owe the bulk of the debt. Nevertheless, around 54 per cent of households with mortgage debt did actually reduce their mortgage repayments between 2008 and 2009, compared with only 26 per cent between 2007 and 2008, when interest rates were rising. Households were more likely to reduce their mortgage repayments if at least one member experienced an adverse labour market transition. But households whose wage and salary income fell were no more likely than others to reduce their repayments; this might reflect that temporary fiscal policy measures during 2009, including tax cuts and one-off bonus payments, were supporting households facing income shocks. In line with the reduction in mortgage repayments, the median debt-servicing ratio (DSR) – the percentage of household disposable income required to service actual principal and interest payments on an owner-occupier mortgage – also fell, from 26 per cent to 21 per cent between the two surveys. For many households, the DSR on the required repayment would have fallen by more.
In the 2009 survey, a larger share of households improved their repayment position (by moving from on schedule to ahead, or from behind schedule to either on or ahead of schedule) than did the reverse – 18 per cent compared with 11 per cent. Almost one half of indebted owner-occupier households were ahead of schedule in both 2008 and 2009, with only 1 per cent reporting that they were behind schedule in both survey years. Households that had high debt-servicing requirements were more likely to take advantage of the low-interest-rate environment and improve their repayment position; they had been less likely to be ahead of schedule in 2008. Of the households with owner-occupier mortgages, those that experienced an adverse labour market transition were slightly less likely to improve their repayment position than those that did not – 15 per cent compared with 18 per cent.
Together with the pattern of payment reduction, this suggests that at least some households experiencing an adverse labour market outcome in the 2008–2009 period were able to cushion its effects using the fiscal transfers and falls in interest rates that also occurred in that period. ”
So the RBA tells us that it was a mix of both fiscal stimulus and cuts in interest rates that helped – but let’s be clear, cuts in interest rates in 2009 are extremely unlikely to have maintained and increased consumer spending in 2008 (although if some people want to come up with a theory about how this is possible, I would not necessarily be surprised).
There appears to be a lot of parsing going on these comments – it’s all fiscal stimulus or it’s all other factors. Well it’s pretty clear that it’s a mix of many factors, which is what I read Nicholas as saying.
Now my reading of Ferguson is that he is more inclined to it being all other factors rather than any influence of fiscal stimulus. If Tel, Fyodor orothers can point to other parts of what he says that give a nuanced view, I stand to be corrected.
There is also the point that implicit in what people are saying is that the Chinese fiscal stimulus saved Australia.
A couple of other points – it’s clear to me that if there had been a Howard or Turnbull government in power in 2008, then Treasury would have given pretty much the same advice to a Liberal government as 0to a Labor government (“temporary, targeted and timely”. Now there are bits of it that Labor ran with that I wouldn’t expect the Liberals to run with, but my (unprovable) counterfactual is that we would pretty much in the same fiscal situation as now if we had a Liberal government.
Also the ideas that the insulation programme and the BER are some sort of unmitigated disaster (s) are to put it mildly complete rubbish. I entirely agree that the BER should not be described as “an education revolution” – what it should be described as is “ the keeping builders, carpenters, plumbers and electricians employed” programme.
I wouldn’t trust the Loansense data, Peter. They claim to source it from the F5 series from the RBA, but the original data (which you can access here) doesn’t match up, and shows home loan variable rates fell around 275bps between Aug-08 and Dec-08. They fell another 100bps by Feb-09. Remember also that the RBA had RAISED rates in late 2007 and early 2008, which was also speculated at the time to have dampened consumption in early 2008.
The financial crisis only struck in earnest over Sep-Oct of 2008, Peter, and the first round of fiscal stimulus was only paid out in December of 2008. I don’t see how you could argue any connection between fiscal stimulus and consumption in 2008. You CAN argue, however, that interest rate cuts in late 2008 (i.e. 25bps in Sep-08, 100bps in Oct-08, 75bps in Nov-08 and another 100bps in Dec-08) were already having an impact in the December quarter. Just think about the signaling effect for indebted households of those cuts. If you had a mortgage at that time, you KNEW your debt service costs would fall dramatically in the following months. And that’s leaving aside the impact on business of significant cuts in the reference rate.