The ONS delivered a variety of Christmas presents this week in the form of the labour market data (which is very good, per Lars), and the Q3 national accounts. There is bad news and good news in the GDP revisions.
First the bad news: the impressive Q3 nominal GDP growth rate has been revised down from 6.9% (q/q annualized) to a still-respectable 5.7%. The good news is that the level of nominal GDP has been revised up for recent quarters. This moves the year-on-year growth rate up from 3.8% to 4.5% over the four quarters to 2013 Q3.
The “double-dip recession” has reappeared at the beginning of 2012, though the latter half now looks better. The revisions make 2012 look even stranger; Q4 nominal GDP was revised up to a growth rate of +5.5% (annualized) and yet real GDP growth is still recorded as falling that quarter!
Here is the data, table at quarterly rates of GDP (annualized), and chart of annual GVA growth, as usual:
Keynesians love to say that the deficit will come down with growth. This is 50% wrong, because when Keynesians talk about “growth” we know they mean real GDP growth 100% of the time. But it is nominal GDP growth which determines the course of the public finances; tax revenue follows nominal GDP and NGDP is the denominator in debt/GDP. (When we talk about “debt/GDP” it is the only time that “nominal” is implicit!)
Japan had positive real GDP growth for some of its “lost decade”; but it never had any nominal GDP growth. That is why Japan’s public sector debt/GDP went off the charts; not merely because Japan had insufficient real growth (though that is probably also true).
Keynesians are also 50% right, because under inflation targeting real GDP growth “determines” nominal GDP growth. This assumption is embedded in many macro models; we read that improving productivity will improve the public finances, which is true because higher productivity ⇒ higher real GDP growth ⇒ higher nominal GDP growth – if inflation is always held constant.
Maybe I’m beating a dead horse here, but Keynesians should be more open about the insane implications of macro models which embed the assumption of price stability. For example, such models tell us that it is roughly true that the collapse in productivity since 2007 has caused the collapse in the public finances.
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.