Showing posts from April, 2013

Richard Koo's "balance sheet recession"

On Thursday last week I participated at the ZSEM and Bloomberg Investment Conference , entitled " Redesigning Global and Regional Finance ". In addition to a series of interesting speakers, the keynote address was done by Richard Koo , Chief Economist at Nomura Research Institute, and the main advocate of the "balance-sheet recession" argument. This is, after all, the argument he is presenting in his 2008 book " The Holy Grail of Macroeconomics " (the idea has received a lot of attention in mainstream economics ).  The presentation itself was excellent. He has managed to keep my undivided attention for the whole two hours, which is even more surprising since I didn't agree with some of his major points. Not since Arthur Laffer at the IEA last year has a speaker caught me with so much enthusiasm.  Anyway, his major argument is that the current crisis is a "balance-sheet" recession, a term relatively new to the economic science, primari

CPS: "Re-evaluating Reinhart and Rogoff" (part 2)

Yesterday the Centre for Policy Studies published a joint article by Ryan Bourne and myself on the criticism of Reinhart and Rogoff's findings on the link between high debt and slow growth. Here are some parts of the text: ( You can read it in full here . For all my other CPS text see here . ) "Having had chance to think about it for a week, the reaction seems pretty hysterical. Sure, the coding error was a dreadful mistake to make. Period. And some policymakers and journalists have been too keen in the past to take the stylised fact which RR presented as if it was a gospel truth that the world would end once the debt-to-GDP ratio approached a certain threshold, which was daft. And, certainly, more attention should be paid to the intricacies of different country-specific factors and effects  But these points should not be used to re-write history, or in fact be used to rubbish the important work that RR have presented over the last few years on the fall-outs from fi

Graph of the week: British austerity, three years on

How effective has British austerity been so far? This graph from Ryan Avent  during the budget debates (taken away from the Spectator ) might shed some more light on the story ( I was meaning to comment on this before, but anytime is a good time ). It is entitled "Not what they had in mind" (click to enlarge) Source: The Spectator   I've written about European countries' austerity measures quite often and have almost every time emphasized the faulty of their tax-based consolidation approach. More and more research papers from both camps (the pro - and against - austerity) are stressing the failure of an approach focused on increasing the tax burden and keeping spending high at the same time.  Alongside the UK (which was the focus of the graph), we can see Ireland, Spain, Greece, the US (among others); all countries which had large government stimuli and more importantly large bank bailouts in the years in before the crisis. From an earlier post (and in

Clash of ideas: Sumner vs Kling

Scott Sumner has produced a post providing a neat introduction to the theory of money and monetary shocks. He did so in 9 short, concise and very interesting lessons (which he attempts to update regularly). I recommend it to anyone interested in some of the basic foundations of the monetarist school of thought (and NGDP level targeting ).  On the other hand,  Arnold Kling responds to Sumner's ideas calling upon some of his own previous essays on the state of macro, providing the answer of "what's wrong with the economics profession". These essays are also a welcomed reading for those interested in basic macro theories. Kling summarizes the main factions and explains each of them, starting of with conspiracy theorists and behavioral economists in the first essay , keynesians vs monetarists in the second , and the establishment vs anti-modernists in the third :  I recommend first reading Sumner's posts and then switch to Kling's second

Reevaluating Reinhart and Rogoff

This week one of the most cited papers and research findings in the past few years has been questioned. Reinhart and Rogoff's findings that GDP growth slows down after government debt levels reach 90% of GDP, which allegedly became the justification to use austerity as the best way to cut down the debt and reignite economic recovery, has been recalculated by three economists from University of Massachusetts  Thomas Herndon, Michael Ash and Robert Pollin . They have found coding errors in the excel spreadsheet, selective exclusion of some data, and unconventional weighting of summary statistics in the original paper. After fixing for these errors they found that GDP growth for countries above 90% public debt-to-GDP ratios is 2.1% on average, and not -0.1%, which was the initial Reinhart-Rogoff finding. This implies that it doesn't make a difference whether or not an economy is burdened with high public debt. You can read the details behind the mistakes on the Rotrybomb blog ,

Graph of the week: Thatcher's economic legacy

Following the death of Margaret Thatcher , her legacy still remains a controversial issue for some. However, the data on the economic recovery of the British economy during her tenure are relentless - they point out to declining unemployment (after an initial necessary spike in order to allow the economy to restructure ), falling inflation, lower government spending, lower tax rates, a balanced budget by the end of the tenure, falling debt-to-GDP by the end of the tenure, rising disposable income, rising productivity , and high levels of GDP per capita growth. Her reforms enabled a new sustainable growth model for the UK which kept their economy rising steadily for quite some time. Privatization of inefficient state industries, the fight against vested interest and oligopolies (both in the financial industry and among the unions), the Big Bang of 1986, opening up the country to new competition, and a whole range of other industrial, regulatory and legal reforms all led to the moderni

The Lady that brought the Great back to Britain

Margaret Thatcher , one of the greatest political leaders in the 20th century, has passed away earlier today at the age of 87. In the words of UK PM David Cameron , "today we lost a great leader, a great Prime Minister and a great Briton".  Source: The Telegraph Out of the many kind words expressed for her today, I particularly enjoyed the one from Nick Robinson at the BBC:  "As prime minister, she was determined to repair the country's finances by reducing the role of the state and boosting the free market. Cutting inflation was central to the government's purpose and it soon introduced a radical budget of tax and spending cuts.  Bills were introduced to curb union militancy , privatise state industries and allow council home owners to buy their houses .  Millions of people who previously had little or no stake in the economy found themselves being able to own their houses and buy shares in the former state-owned businesses . New monetary policie

Tracking the recovery (3): Business and Consumer Confidence

Continuing with the Recovery Tracking series in its third edition, we look at business and consumer confidence in the US, UK and Eurozone, comparing them to the situation from 6 months ago . The OECD once again offers the  database of tracking these indicators, in particular the Business Confidence Indicator (BCI) and the Consumer Confidence Indicator (CCI). As I've mentioned in the previous post , the consumer and business confidence indicators will give us a more precise picture on the effects of Draghi's speech,  and whether or not ECB's actions came through where they haven't done so before (recall the previous actions done in August 2011, December 2011, April 2012, and so on, when the effect on business and consumer confidence was either negligible or nonexistent).  Business confidence Source:  OECD Standardized Confidence Indicators . Latest data available for February 2013. Click on graph to enlarge.  So far, by simply looking at the main OECD busine

Tracking the recovery (3): Europe

After two brief intermissions which I simply had to comment on, the Tracking the recovery series continues in its third edition featuring Eurozone and the UK. This analysis, unlike the US one , will constrain itself only on observing the leading indicators from the OECD database and the Conference Board , and compare these to their levels from 6 months ago . ( Note: World Economics also has a decent overview of the recovery at their pages; they refer to it as Growth Monitors. Here is their  Eurozone Growth Monitor ).  As I've pointed out in the previous post , last year was apparently much better for America than it was for Europe. The graph below sums it up pretty well:   While the US was mildly recovering, Eurozone started to diverge into a double-dip recession (adding the stagnating UK into the above graph will only worsen the picture). The events from the begining of last year following the uncertainty in Greece and Spain, were extended to Italy and Cyprus thi