It was very good to see some monetarist analysis in the UK media this week – Ed Conway reported that “Households Raid Savings At Record Rate” for Sky News, and followed this with a blog post. The “raid” is actually a switch from long to short-term deposit accounts, which started mid-2012, as Ed’s graph shows.
Though the traditional broad money aggregates are growing steadily and at “decent” rates (M4ex at 4-5% this year), this shift towards liquidity naturally has a more profound impact on the Divisia indices. I would treat this more as an indicator of current monetary conditions; Duncan Brown has a very nice post earlier this year exploring the relation between UK monetary aggregates and nominal spending in great detail.
Here, anyway, is the current state of the data, showing M4ex, household divisia and nominal spending:
I started wondering about Switzerland.
Consider what would happen if Swiss productivity falls 50% tomorrow. What would happen to the level of Swiss output? Well, we know that Switzerland is at the ZLB, and so Swiss real GDP is determined by Swiss fiscal policy… right? Therefore, absent any change in Swiss fiscal policy, Swiss real GDP would stay the same, and the 50% fall in productivity implies that Swiss workers would immediately double their number of hours worked, so they could retain the same level of real income (output). That logic is unassailable. There is no other possible way that the Swiss could keep real GDP the same except by a doubling in employment, defined in terms of hours worked.
Obviously that argument is totally bonkers. Who really believes that the level of Swiss output is unrelated to the level of Swiss productivity? Now read the argument repeated endlessly by the likes of Martin Wolf (H/T Mr. Portes), writing today on the Autumn Statement:
Unfortunately, this heartwarming performance on employment is a mirror image of the dismal performance on productivity. Ultimately, real wages have fallen because output per hour has fallen. That has softened job losses. The OBR assumes the past productivity losses, relative to the trend, will not be recouped. Yet it hopes growth of output per hour will recover to close to 2 per cent by 2015.
“output per hour has fallen. That has softened job losses.”
Falling productivity is the mirror image of rising employment… because we know that UK output is demand-determined – is determined by George Osborne’s fiscal austerity.
I don’t see why that argument is any less bonkers. Does Martin Wolf really believe that the level of UK output is unrelated to the level of productivity? That is exactly what he argues.
The OBR’s March 2011 forecast appears to be the first time they published a forecast for total hours worked. I’ve graphed below the change in the level of UK real GDP since 2011 Q1 in three different ways:
1) The OBR forecast,
2) What the current ONS data say actually happened,
3) A supply-side counterfactual derived from:
a) The expected path of UK productivity (output/hour) from the OBR forecast, and
b) The actual observed path of UK total hours worked from the current ONS data.
This simple 5-minute counterfactual implies that the productivity collapse more than explains the entire shortfall of output (vs expected) since 2011. By 2013 Q3, hours worked is 3% higher than expected, and productivity is 7% lower.
Now consider the “fiscalist” claims that the weakness of UK real GDP since 2010 is evidence that the “fiscal multiplier” is real and large. That works perfectly, but not as a demand-side argument; as a supply-side argument it fits the data extremely well.
2.198 A garden bridge for London – The government will provide a £30 million contribution to support the construction of a new Garden Bridge across the River Thames in London. This will supplement funding from Transport for London and private donations.
These aren’t the supply-side reforms we were looking for,
What’s the appropriate name for progressives complaining about the “wrong sort of growth”… sado-Keynesians? ”Economic recovery is based on repeating the sins of the past” … ”We’re back in the old growth model” etc, etc. Some things are said best by Paul Krugman:
PAUL KRUGMAN: Everybody wants economics to be a morality play. Everybody wants it to be a tale of sin and excess, and then the punishment for sin.
And this notion that we had a bubble, we had runaway stuff, we had bankers run wild, therefore, the economy must suffer a sustained slump, and anything you do to mitigate that is somehow enabling the sin and we will pay for it, that’s …
PAUL SOLMAN: Even though there were sins?
PAUL KRUGMAN: Even though there were sins. But economics is not a morality play. There is nothing about the fact that bankers made bad loans in 2005 that says that ordinary workers should be out of work in the year 2013.
This is what Resolution’s Matthew Whittaker had to say about inflation in a piece for the Independent earlier this month, titled “Why the Bank of England should target wages as well as unemployment“:
Nothing at all. There is no mention of the word “inflation”, nor of the “CPI”, nor even “prices” in a piece purportedly about UK macroeconomic policy – about UK monetary policy. I’m sure Matthew is a good guy, and I’m not trying to pick on him specifically, but that is a beautiful illustration of how I see centre-left/progressive economists addressing UK inflation over the last five years. The motto is “Don’t mention the
Yet at the same time the centre-left political movement has been obsessing about inflation – that is literally what the “cost of living crisis” means. Yes, you can come up with a different translation of that phrase, but the CPI really is how we measure “the cost of living”. It is going up, and that is a “crisis”. In fact it is even worse: progressives love to exaggerate the extent to which the “cost of living” has risen, by deflating nominal wages by the RPI (rather than the CPI) to show just how badly real wages are suffering.
This is all both depressing and frustrating to watch. I’d roughly agree with Mr. Whittaker’s eventual conclusion, that targeting nominal wages (or nominal incomes) is a good idea. But he gets there from talking first about real wages, and then median wages (which is almost as bad), without use of the word “nominal”, so it is not totally clear he even wants a nominal target, but let’s assume he does. And so does Mr. Whittaker want the Bank to continue targeting the CPI… and unemployment… and add nominal wages as well? Really? All of those things at once?
I have a relatively simple narrative about what the BoE has been doing for the last five years: roughly what they’ve always done, keeping the “risks to inflation broadly balanced”… around the 2% target. I construct that narrative based on what the MPC have been saying for the last five years, month after month after month. What that means in practice is that the Bank steer a course for nominal demand (NGDP) which is sufficient to keep the CPI on target.
And so the Bank defend their policy stance based on those damn CPI numbers. Is that wrong? Why should it be – hitting the CPI is their legal mandate! How can anybody possibly argue that UK macro policy was too tight ex post, at the same as attacking the government because “the CPI is too damn high”. That would be utterly ludicrous… and it is the critique of Coalition macro repeated endlessly for the last three years.
There are more complicated narratives too. Maybe that unexpected shocks to nominal demand have resulted somehow more in lower measured productivity and output, less in lower prices/inflation. OK, maybe that is a bit true, and I hope it is a bit true. But if that is even a little bit true, then inflation targeting is the worst possible monetary policy you can have, and you need to be openly screaming about that fact. ”Inflation targeting is not working“, you might write.
Instead the best and brightest on the centre-left have been producing critiques of UK macro policy along the lines of:
a) Monetary policy is not a panacea. (Well, thanks so much. Jens Weidmann totally agrees with you.)
b) We need more infrastructure spending. (Brilliant. And what about macro policy?)
c) No really, we need more infrastructure spending. (Yeah, but that’s not a macro policy, is it?)
d) I insist there is a big output gap because X, Y, Z. (Fantastic! The Bank are still targeting the CPI.)
e) Infrastructure spending? (Please stop.)
f) How about we target a real variable like unemployment? (Yeah, the 1970s were brilliant.)
All of that serves only to duck the real question… the nominal question. The nominal question appears to me to be remarkably simple:
What is more important: (1) output/consumer price stability, or (2) nominal wage/income stability?
If you want “price stability” then you can’t have nominal income stability. We’ve tried that. Productivity shocks are horrible, and inflation-targeting seems to make them much worse. And if you want nominal wage/income stability then you can’t have “price stability”. We need to be open about that, with the politicians and the public; “price stability” was a good idea which failed. Can we do better?
Now, please, get off the fence and decide what you really, really want.
Egon Spengler: There’s something very important I forgot to tell you.
Peter Venkman: What?
Spengler: Don’t cross the streams.
Spengler: It would be bad.
Venkman: I’m fuzzy on the whole good/bad thing. What do you mean, “bad”?
There are few things I hate more than reading headlines saying “GDP growth driven by X” – especially where X is usually something deemed “bad” like “consumer spending”, or “household debt”, or “rising house prices”. There is much fallacious thinking packed into these headlines, and it usually plays out in the articles. ”Rising spending leads to rising incomes”, “rising incomes lead to rising spending”, “rising employment leads to rising demand”, “consumers can’t spend more with real wages falling”, and so on, and so on.
All these phrases want to take the macro out of macro; incomes rise then spending rises, or vice versa. In aggregate, spending and incomes are always equal by definition at every point in time because “spending” and “income” are just two different ways to record the exchange of goods and services for money.
What really “causes” rising aggregate spending (income)? Well, of course, the expectation that aggregate spending (income) will rise. Expectations above all else… house rules.
Anyway, my point is, Larry Elliot is very confused:
Fears that Britain’s consumer-led recovery is losing momentum are increasing amid signs that the rising cost of living is hitting confidence and high-street spending.
There is no more a “consumer-led recovery” than there is an “household income-led recovery”. Expectations of income (spending) went up and hence income (spending) went up. Forget about the grossly deceptive partitioning. And do you think the falling cost of living is raising confidence in Spain or Greece, Larry? Maybe UK macro policy is just not tight enough for the Guardian econ editor, who is still addicted to the opium marketed as “price stability”?
So here is some “cheerleader for growth blogging” as a counterpoint to media doom and gloom: the EC’s Economic Sentiment Indicator update for November was published today, and it is says UK “confidence” is up slightly on October and still up in “boom” territory.
The Q3 nominal GDP figures are out. I cannot be too unhappy with NGDP growing at nearly a 7% quarterly rate. If this rate of nominal growth can continue consistently for a couple of years that is close enough to what I’d hoped we’d see.
Here is the quarterly growth profile, at seasonally adjusted annual rates:
On the annual view, I’ve used GVA not GDP to factor out the VAT changes as usual; real and nominal GVA continue to move in lock step, with the GVA deflator still stuck around 1-2% since the beginning of 2010:
And for the all-important fiscal arithmetic, for a change nominal GDP is growing faster than OBR forecasts, hence debt/GDP and deficit/GDP should come in a little better than expected.
The Bank’s forecasts for real GDP growth over the next two years. 2014: 2.8%, 2015: 2.3%. WHAT A BOOM. What an explosion of growth! In the Inflation Report press conference today, the press first asked lots of sensible questions about forward guidance and monetary policy – you know, the things the MPC are actually responsible for. But there was an elephant in the room, something was weighing on the minds of assembled hacks… see if you can spot it.
Richard Barley, Wall Street Journal: … Because I guess the concern is that so far we’ve seen perhaps some worrying signs of returning to the old normal and greater lending, reliance on house prices.
Guy Faulconbridge, Reuters: Just a follow on on the housing, I see you have a section on property. Do you see any signs of a bubble in any regions of the British housing market, because overall it’s fine to say that perhaps prices are still below the 2007 peak, but in London dinner parties the prices that you pay for prime real estate in London is kind of the main topic of discussion.
Tim Wallace, City AM: Governor, another one on housing.
Maybe hold the press conference up North somewhere next time?
Chris Giles’ post on demand vs supply made me very gloomy – look at the comparison with US productivity, the “cost of living crisis” is right there in that data. Here is a slightly different take based on today’s labour market figures.
You could say based on that, the UK demand-side recovery is basically complete. Hours worked is back on trend. The demand-side debate is dead. The stagnation of UK output is, and always has been, purely supply-side.
The fact that supply-side optimists find excitement in one month of a still-above-target CPI rate is even more depressing. Has nobody learned anything at all? If the CPI rate is irrelevant when it tells an “inconvenient story” about the aggregate supply/demand balance, it does not suddenly become relevant because one data point confirms your biases. Recognize that oh-so-wise policymakers might not share your rose-tinted view of the UK inflation data, and what implications that has for macro policy when the CPI rate is above target (see also 2008, 2010, 2011, 2012). Yes, the MPC really are steering us towards price stability.
And Dr. Carney… great job, really, great job.