In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy – while it should do all it can – cannot do the whole job
Cannot do… “the whole job”? It can do just part of “the job”? What is this job? Does monetary policy only work from Monday to Thursday, but takes a long weekend at the beach? Because surely these wise heads cannot be talking about AD management, can they? Is targeting the CPI rate one of these “jobs” for which monetary policy is now only partially capable? It’s all so confusing.
Sure, there is stuff in there which is reasonable, but the whole thing reads like a poorly disguised cry for more deficit spending. But at least they don’t mention Japan, do they, that would surely be foolish.
OH GOD THEY EVEN MENTIONED JAPAN.
Let’s recall how well Japan has done with deficit spending and “impotent” monetary policy. Here are the IMF numbers:
|Year||Nominal GDP||Govt Net Debt to GDP|
I think that counts as “not very well”. Here’s a simpler six word manifesto:
… and here’s the appropriate soundtrack for our demise:
Have a nice decade.
(WIth apologies to Scott and everybody else whose ideas I shamelessly rip off with every post.)
All the news about the GDP figures is bad, the recession worse than expected, etc etc; but every blogger must try to be contrarian. After all, “if it’s not bad, it’s not news.” (Sumner, naturally).
There is some decent news in the capital spending figures. Here’s a stats review, looking at the “volume” measure of gross fixed capital formation; giving the short term view of the rate (“slightly less bad”), and the medium term view of the level (“still really bad”) for balance.
- Business Investment hit a three year high, rising 14.8% since 2011 Q1. Business investment today drives productivity tomorrow, so this is great. But business investment is still 15% below its 2007 Q1 peak.
- Housebuilding also hit a three year high, rising 4.7% since 2011 Q1. Housebuilding is 26% below the 2008 Q1 peak.
- Total gross capital formation is basically flat, rising just 1.9% on the year; but this is despite a 32% crash in government investment. Total gross capital spending remains 18% below the 2007 Q4 peak.
The following graph shows the development of capital spending by sector, relative to 2007 Q4. (This is not an ideal way to present the data since it does not show the relative size of each sector.)
Note: In this post have I not used the cursed phrase “green shoots“, nor wish to imply such shoots exist. UK aggregate demand is stuck in a hole which we badly need to recover from. But I am sure there are several European countries which would die for stats this mediocre.
The Month 3 revisions for 2012 Q1 GDP are out, as well as updated data going back forever.
The shocking news is that 1949 nominal GDP has been revised down by 0.024%. This comes from the fact that the ONS use estimates of output volume as inputs, and then invent a deflator series to derive nominal spending. But then they revise the deflator; in this case the switch from an RPI to CPI-based deflator has caused downgrades to NGDP going back a long way.
A change to the treatment of insurance company output has upgraded the 2005 real GDP growth figure from 2.0% to 2.8%. The ONS explain all.
Back to 2012. As often happens, it looks like some nominal spending has been smoothed out across recent quarters. Look at those deflators. Just awful, and the Q1 deflator is flattered by NGDP at market prices growing slower than NGDP at basic prices. The
“ex VAT” basic prices deflator for Q1 would be +3.8%. What. The. Heck?
Quarter on quarter growth, seasonally adjusted annualized rates:
|Quarter||Nominal GDP||GDP Deflator||Real GDP||NGDP at Basic Prices|
I can never decide which is more outrageous:
a) the failure of central bankers to stabilise the path of aggregate demand, or
b) the apparent inability of (most) economists, politicians, and members of the press, to hold those central bankers to account for their failings, on behalf of the UK population.
Haven given up direct political control over UK aggregate demand management in 1997, a vast democratic deficit has emerged between the desires of the UK population and the intentions of the professional technocrats appointed to run AD policy. UK economists look at the real GDP figures, and shout at the
Treasury wrong place to provide demand. The MPC look at the CPI figures, and cower beneath their seats, afraid of… what? The hard money lobby? The inflation monster? Their own precious credibility?
Left Outside quotes Mervyn King at the Treasury Select Committee:
When this crisis began in 2007, most people did not believe we would still be here. I don’t think we’re yet half way through this. I’ve always said that and I’m still saying it. My estimate of how long it will take to recover is expanding all the time. We have to regard this as a long-term project to get back to where we were, but we’re nowhere near starting that yet. We’re in a deep crisis with enormous challenges.
This is an absolutely outrageous thing for Mervyn King to say. King’s MPC have been wrong in their reading of the UK economy since early 2008, when they caused this “deep crisis” by pegging Bank Rate at 5% all the way past the collapse of Lehman Brothers, fighting a spike in oil prices. Yet there is no remorse, no indication of culpability. Just a warning that they’ll carry on regardless.
Does anybody remember February 2012, when the MPC refrained from doing “too much” QE because:
a larger increase [in asset purchases] risked sending a signal that the Committee thought the economic situation was weaker than it was
Well, what do you know! Now King admits that the economic situation really is exactly as weak as everybody thought it was all along. Oh well, never mind, Merv. We all make mistakes, eh?
Does anybody remember back to the sunny days of May 2012, when half the MPC decided it was a fantastic time to get the CPI rate down? Right after the UK had just experienced two quarters of falling output. Three and a half years into the worst depression since the Great Depression. From what bizarre perspective was that ever a good idea?
And now the MPC are here to tell us… we’re in a deep crisis which is going to last forever? Gee… thanks for the heads-up, Mervyn.
It’s time to step up. Economists, politicians, and the press must hold the MPC’s feet to the fire until they provide a robust revival of aggregate demand. Or effect their removal from office. Do not let me hear any rubbish about monetary policy being “impotent”, or I’ll stick Professors Bernanke and Svensson on you, followed by a rampaging horde of the under- and un-employed.
“Central bank governors are like the Pope. They must preserve the survival of the institution. The necessary legitimacy comes from infallibility. The church through the Pope because he speaks for God always speaks the truth. The incompatibility of legitimacy and admission of error means that every statement and action must presume the validity of past statements and actions. If central banks do commit error, there is no going back, only the compounding of the error. ”
Right on the money.
A common view is that the UK economy is weak because “consumers aren’t spending”; a view often paired with the conclusion that, as Tim Harford says:
… who is going to do the spending when consumers start trying to save up? Krugman says it will have to be governments.
Leaving aside the question of why aggregate spending is undesirably low, this argument is somewhat misplaced, at least in the UK context.
The remarkable aspect of the UK household consumption data should be obvious from the following graph, which compares nominal household consumption spending with the corresponding volume measure (i.e. the measured quantity of goods and services purchased):
(This analysis comes with a metric boat-load of caveats. We can’t extrapolate from one sector – albeit a large one at 60% of GDP by expenditure – to the aggregates. “Spending” can mean consumption or investment, and I am looking only at consumption here.)
Caveats in place, this picture is not simply a lack of consumer spending, but in large part a failure of the supply side. UK households in 2012 Q1 are not measurably better off than in 2005 Q1, in terms of volume of goods and services consumed, for a 23% increase in spending over that period.
As Tyler Cowen notes, it is unsatisfactory to blame the 2008 Sterling devaluation for this. When imports became expensive, we should expect a boost to domestic production and substitution away from those imports. That does not seem to have happened.
I think the view of many would be to blame the banking system for failing to reallocate capital towards this this end. Can it really be that simple? The country home to the City of London is struggling to efficiently allocate capital? (Nick Rowe has just put up an interesting post on this very topic.)
I am no way susbscribing to demand denial, but it would be useful to at least attempt to understand some of the apparent supply-side failures present in the UK GDP data, and think about what policy implications they have.
I’ve graphed here an adjusted version of the GDP deflator, aiming to avoid the VAT distortions by taking the difference between the rates of change of real GDP and nominal GDP at basic prices. (The “true” GDP deflator measures the difference between output and nominal GDP at market prices, where market prices include VAT and other indirect taxes).
As expected, this does not show up any significant supply-side pressure since 2009, with the “GDP deflator ex taxes” measure only once spiking above 2% in the fourth quarter of 2010.
A quick note. The MPC minutes for June show that Mervyn King was outmanoeuvred by the hawks:
Regarding the stock of asset purchases, five members of the Committee (Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale and Martin Weale) voted in favour of the proposition [no extension of QE]. Four members of the Committee voted against the proposition. The Governor, David Miles and Adam Posen preferred to increase the size of the asset purchase programme by £50 billion to a total of £375 billion. Paul Fisher preferred to increase the size of the asset purchase programme by £25 billion to a total of £350 billion.
There was also a brief discussion of removing interest paid on some of the “excess” reserves:
The Committee also discussed the possibility of changing the remuneration structure on banks’ reserves at the Bank of England by paying Bank Rate on only a proportion of those reserves. There were drawbacks with such a policy. There would be a large degree of arbitrariness involved in setting meaningful reserve requirements for individual institutions in an environment where their reserves were substantially in excess of the stable norms that had prevailed before the financial crisis. To do so would also change the nature of what was commonly perceived to be meant by Bank Rate, and its relationship with short-term market interest rates.
crazy loonshawks admit they are willing to move, but will “wait and see” how much worse things can get before they bravely step in and rescue us from Eurodoom:
While acknowledging that further stimulus was likely to become warranted at some point, most members noted that there were several key events occurring over the coming weeks that could have a material bearing on the situation in the euro area and that there was merit in waiting to see how matters evolved there before the MPC reached a conclusion on whether to add any further monetary stimulus.
Since disaster or delivery from the Eurocrisis is just around the corner, I’m sure this “wait and see” strategy will work out fine.