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November 13, 2014

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Posted: 13 Nov 2014 12:06 AM PST

Why are the Conservatives so Incompetent at Running the UK Economy?

Posted: 12 Nov 2014 10:58 AM PST

Simon Wren-Lewis:

Why are the Conservatives so incompetent at running the economy?: If that question seems odd to you, you are one of the majority in the UK who think the Conservatives are better at managing the economy than Labour. Why do people think this? My guess is that it is very simple. The financial crisis happened while Labour was in power. This led to the largest recession since the Great Depression.
But surely everyone knows that the financial crisis was a global phenomenon that started in the US? Surely everyone knows that if the Conservatives had been in power there would have been just as little financial regulation, so the impact of the crisis on UK banks would have been much the same?
The problem is that most people do not know this. What they hear is the Conservatives repeating relentlessly that it was all Labour's fault. ... It is hardly ever challenged by reporters in the BBC or other TV media. It has become so pervasive, that even some of my non-macro colleagues repeat elements of it back to me. [1] ...
Of course there is mucha more to say about all this, but the point I want to make here is fairly simple. Once we recognise that the financial crisis was a global event, then the three remaining major departures from trend growth happened under Conservative led administrations. In all three cases they can be associated with poor policy decisions taken by those administrations: money supply targets under Thatcher, ERM entry under Major, and austerity under Osborne.
So the idea that the Conservatives are more competent at macroeconomic management is a myth, and if anything the opposite appears to be true. ...

He also notes in closing that:

... In mediamacro, the deficit is all important, but the decline in average living standards not so much. And people wonder why many potential voters are disaffected from mainstream politics.
In a recent post, the US economist Robert Reich berates the Democrats for failing to campaign on falling median wages and the growing inequality that lies behind it. The reason he gives is simple: money buys votes in the US system, which Jeffrey Sachs calls a plutocracy. In the UK Labour has tried to raise the link between inequality and falling real wages, as my example above shows, but the UK media does not appear to want that discussion to take place. I would really like someone who knows the UK media from the inside to explain why.

'Potential Output and Recessions'

Posted: 12 Nov 2014 09:34 AM PST

The profession appears to be changing it's mind about the permanence of large shocks to aggregate demand:

Potential Output and Recessions: Are We Fooling Ourselves?, by Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson, Federal Reserve: The economic collapse in the wake of the global financial crises (GFC) and the weaker-than-expected recovery in many countries have led to questions about the impact of severe downturns on economic potential. Indeed, for several major economies, the level of output is nowhere near returning to pre-crisis trend (figure 1). Such developments have resulted in repeated downward revisions to estimates of potential output by private- and public-sector forecasters. In addition, this disappointment in post-recession growth has contributed to concerns that the U.S. economy, among others, is entering an era of secular stagnation. However, the historical experience of advanced economies around recessions indicates that the current experience is less unusual than one might think. First, output typically does not return to pre-crisis trend following recessions, especially deep ones. Second, in response, forecasters repeatedly revise down measures of trend.

Figure 1

... Economic models usually assume that recession-induced gaps will close over time, typically via a period of above trend growth. In our results, growth is not faster after the recession than before, implying that the recession-induced gap is closed primarily by revising estimates of trend output growth lower. Interestingly, much of the downward revision to estimates of trend output happens well into the recovery. In particular, as economies recover and the lower level of actual output persists, potential output is gradually revised down toward actual GDP. ...
Although these calculations are simple, they raise deeper questions about the impact of recessions on trend output. The finding that recessions tend to depress the long-run level of output may imply that demand shocks have permanent effects. The sustained deviation of the level of output from pre-crisis trend points to flaws in the way the economics profession models the recovery of output to economic shocks and raises further doubts about the reliance on measures of output gaps to determine economic slack. For policymakers, the results also point to the cost of recessions, especially deep and long ones, and provide a rationale for strong and rapid policy responses to economic downturns. ...
Disclaimer: IFDP Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than IFDP Working Papers.

[There is quite a bit more detail -- tables, graphs, etc. -- in the full article describing how they arrive at this conclusion.]

One note: I want to emphasize that "the results also point to the cost of recessions, especially deep and long ones, and provide a rationale for strong and rapid policy responses to economic downturns." An important question is how much of the permanent effect can be avoided with a correct and timely policy response -- something we surely did not get with fiscal policy in the most recent episode.

The Climate Breakthrough in Beijing

Posted: 12 Nov 2014 09:15 AM PST

Jeff Sachs seems to be pleased:

The climate breakthrough in Beijing gives the world a fighting chance: Today's US-China joint announcement on climate change and energy is the most important advance on the climate change agenda in many years. ... What they've said gives the world a fighting chance – and no doubt the last one – for climate safety. ...
An announcement is just an announcement, of course. .. The US and China have yet to put their cards on the table on how they intend to achieve deep decarbonization. ...
Not surprisingly, the incoming Republican Senate majority leader Mitch McConnell piped up immediately that he and his colleagues would oppose the deal. No doubt they will try. Yet my guess is that Mr McConnell and his buddies are soon going to learn a lesson in real democracy.
While the fossil fuel lobby may have helped finance the Republican victories last week, the US public cares about its own survival and the world that their children will soon inherit. ... The Koch brothers may have bought some 44,000 paid ads this fall to help put favoured coal and oil candidates over the top, but they did not buy the souls of the American people, who by a large majority will be gratified today by the announcements from Beijing. ...

I'm not so sure that Republican opposition can be overcome so easily.

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