UK recovery: stronger than Italy, weaker than US & Canada. http://t.co/C0TEsbzMm3—
Jonathan Portes (@jdportes) April 28, 2015
Recoveries from recessions across the G-7
28 Apr 2015 Leave a comment
in business cycles, economic growth, Euro crisis, global financial crisis (GFC), great recession, macroeconomics, politics - USA Tags: British economy, Canada, Eurosclerosis, France, Germany, Italy, Japan, recoveries from recessions
The impact of the top tax rate in the depth and severity of the great depression
24 Apr 2015 Leave a comment
in business cycles, fiscal policy, great depression, macroeconomics, politics - New Zealand, politics - USA, public economics Tags: capital taxation, New Zealand, taxation and the labour supply, top tax rate
Source: Ellen McGrattan.
There were large differences in increases in the 1930s in the top marginal income tax rate between Sweden, the UK, France with Australia and New Zealand and between the USA and Canada and the rest as McGrattan explains:
These data show that there is a strong negative correlation, roughly −94%, between the change in the top income tax rates and the deviation in per capita real GDP relative to trend in 1933.
Levels of output are nowhere near returning to pre-crisis trends
21 Apr 2015 Leave a comment
in business cycles, economic growth, Euro crisis, global financial crisis (GFC), great recession, macroeconomics Tags: Eurosclerosis
The role of unions in prolonging the Great Depression
20 Apr 2015 1 Comment
in business cycles, fiscal policy, great depression, labour economics, labour supply, macroeconomics, politics - USA, unemployment, unions Tags: capital taxation, FDR, Herbert Hoover, Leftover Left, Leo Ohanian, New Deal, union power, union wage premium, unionisation
Our friends on the left at the Economic Policy Institute were good enough to remind us of the link between rapid unionisation of the US labour market in the early and mid-1930s and the petering out of the recovery from the great depression. That recession within a depression is the Roosevelt recession.
New blog on Mind The Gap: on labour #unions and income #inequality
oxfamblogs.org/mindthegap/201… http://t.co/FyrOboCaRk—
Ricardo FuentesNieva (@rivefuentes) April 17, 2015
Harold Cole and Lee Ohanian analysed in depth this double-dip depression in the USA in a paper in the Journal of Political Economy titled “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis” about 10 years ago:
The recovery from the Great Depression was weak… Real gross domestic product per adult, which was 39 percent below trend at the trough of the Depression in 1933, remained 27 percent below trend in 1939. Similarly, private hours worked were 27 percent below trend in 1933 and remained 21 percent below trend in 1939.
The weak recovery is puzzling because the large negative shocks that some economists believe caused the 1929–33 downturn—including monetary shocks, productivity shocks, and banking shocks—become positive after 1933. These positive shocks should have fostered a rapid recovery, with output and employment returning to trend by the late 1930s.
The focus of the paper by Cole and Ohanian in explaining the weak recovery – the double-dip depression in the 1930s – are the New Deal cartelisation policies designed to limit competition and increase labour bargaining power through extensive unionisation of workforce.
The recovery from the depths of the Great Depression was weak but real wages in several sectors rose significantly above trend despite mass unemployment.
The view that limiting competition in product markets and the labour market was essential for economic prosperity was influential in the 1920s and 1930s. Both FDR and Hoover believed high wages were the key to prosperity.
FDR’s recipe for economic recovery from the great depression when he came to office in 1933 was raising prices and wages and the promotion of unions:
Union membership rose from about 13 percent of employment in 1935 to about 29 percent of employment in 1939, and strike activity doubled from 14 million strike days in 1936 to about 28 million in 1937.
The result of this suppression of market competition and the encouragement of unions was real wages increase despite the weak recovery:
The coincidence of high wages, low consumption, and low hours worked indicates that some factor prevented labour market clearing during the New Deal.
The combination of government interference with competition and strong unions stifled the recovery from the great depression rather than speed it up as was the plan of FDR:
New Deal labour and industrial policies did not lift the economy out of the Depression as President Roosevelt had hoped.
Instead, the joint policies of increasing labour’s bargaining power and linking collusion with paying high wages prevented a normal recovery by creating rents and an inefficient insider-outsider friction that raised wages significantly and restricted employment.
Not only did the adoption of these industrial and trade policies coincide with the persistence of depression through the late 1930s, but the subsequent abandonment of these policies coincided with the strong economic recovery of the 1940s.
U.S. unemployment fell from 22.9% in 1932 to 9.1% in 1937, a reduction of 13.8%, but was back up to 13% by 1938. The Social Security payroll tax debuted in 1937 on top of tax increases in the Revenue Act of 1935. In 1937, the economy fell into recession again. Cooley and Ohanian argue that:
The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible.
The Great Depression in the USA was unique in the fact that it was so long and the recovery, so weak:
Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933… Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita non-residential investment averaged about 60% below trend.
After 1933, productivity growth was rapid, the banking system was stabilized, deflation was eliminated and there was plenty of demand stimulus as the Fed more than doubled the monetary base between 1933 and 1939. As Lee Ohanian noted:
Depressions are periods of low employment and low living standards. The normal forces of supply and demand should have reduced wages, which would have lowered business costs and increased employment and output. What prevented the normal forces of supply and demand from working?
Central to the faltering of this recovery by 1937 was the regime change when the Supreme Court finally upheld revised laws promoting unionisation:
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court’s 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing.
The "recession in a depression" thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment.
Lee Ohanian argues that the defining characteristic of the Great Depression was this failure of real wages to fall in the face of mass unemployment:
The defining characteristic of the Great Depression is a substantial and chronic excess supply of labour, with employment well below normal, and real wages in key industrial sectors well above normal.
Policies of Hoover and of FDR of propping up wages and encouraging unions and work sharing were the most important factors in precipitating and prolonging the Great Depression. The Great Depression was the first time U.S. wages did not fall in that you were administered a period of significant deflation.
The manufacturing sector, where unions and the threat of unionisation was much stronger which was much harder hit initially than the agricultural sector both in terms of loss of jobs and wages not falling. The Great Depression did not start as an ordinary garden variety recession, as argued by Milton Friedman. It was immediately severe and sector specific with industrial production declining by about 35% between late 1929 and the end of 1930.
This decline in industrial production occurs before any banking crises. Despite this sector specific nature of the onset that Great Depression, monetary policy might have some role in explaining the start of the Great Depression but not in its prolongation:
any monetary explanation of the Depression requires a theory of very large and very protracted monetary non-neutrality. Such a theory has been elusive because the Depression is so much larger than any other downturn, and because explaining the persistence of such a large non-neutrality requires in turn a theory for why the normal economic forces that ultimately undo monetary non-neutrality were grossly absent in this episode.
Source: A different view of the Great Depression’s cause | VOX, CEPR’s Policy Portal.
Average tax rates on consumption, investment, labour and capital in USA, UK and Canada, 1950-2013
17 Apr 2015 5 Comments
in business cycles, economic growth, economic history, fiscal policy, global financial crisis (GFC), great recession, macroeconomics, politics - USA, public economics Tags: British economy, Canada, sick man of Europe, tax incidence, tax reform
Income taxes in the USA and UK didn’t change all that much after the mid-70s. Prior to that, income tax rose quite steadily in the UK in the 1950s and 1960s and not surprisingly, Britain was the sick man of Europe in the 1970s. Income taxes rose quite steadily in Canada for most of the post-war period up until 1990 and then levelled out for most of that decade before a small tapered downwards.
Source: Cara McDaniel.
Taxes on consumption expenditure were very different stories across the Atlantic. There has been a tapering down in the average tax rate on American consumption expenditure since 1970 after modest increases before that. Canadian taxes on consumption expenditure rose steadily until the 1970s, then drop steadily in the 1970s and than rose in the 1980s and dropped again after 1992. British taxes on consumption expenditure rose sharply in the late 1960s, dropped sharply and then rose again in the 1970s and was pretty steady after that.
The sleeper tax in all three countries was payroll taxes to fund social security and the welfare state. These rose steadily in the USA, UK and Canada up until the 1990s.
Source: Cara McDaniel.
Despite all that nonsense about neoliberalism from the Left over Left, the average rate of tax on capital income did not appear to change much at all over the last 50 years. There was a modest taper in US capital income taxation from the mid-30s to the mid-20s over the entire post-war period. The average Canadian tax rate on income from capital rose steadily in the 60s, fell steadily in the 70s before rising again in the mid-1980s and fell again after 2000. The average British tax rate on capital income rose steadily in the 60s and 70s, coinciding with the emergence of Britain as a sick man of Europe, and then stabilised in the the 1980s onwards but with a dip in the late 80s before a rise in the early 1990s.. Despite the large cuts in the statutory corporate tax rate in the UK, there was only a mild taper in the average tax rate on capital income in the UK.
Source: Cara McDaniel.
The average tax rate on investment expenditures is pretty stable in the USA for the entire post-war period. The only significant increase in the average tax rate on investment expenditures in the UK coincided with the emergence of the sick man in Europe after a drop in the early 70s. The average tax rate on investment expenditures do not change at all in the UK after the 1970s. The Canadian average tax rate on investment expenditures is higher than elsewhere. It rose steadily in the 50s and 60s, dropped in the 70s and rose again in the 80s before tapering from 1992 onwards.
Source: Cara McDaniel.
These higher on rising taxes and the UK and Canada did nothing for either country in catching up with the USA. The figure 1 below shows real GDP per working age per American, Canadian and British.
Figure 1: Real GDP per Canadian, British and American aged 15-64, converted to 2013 price level, updated 2005 EKS purchasing power parities, 1950-2013
Source: Computed from OECD StatExtract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics
The USA is pulling away from Canada and the UK in GDP per working age person. The exception is British economy from about 1990 onwards which caught up with Canada.
Figure 2, which is detrended GDP data, illustrates the British economic boom in the 1990s. Each country’s annual economic growth rate is detrended by 1.9%, the detrending value currently used by Ed Prescott. A flat line is growth at 1.9%, a rising line is above trend growth, a falling line is below trend growth.
Figure 2: Real GDP per Canadian, British and American aged 15-64, converted to 2013 price level, updated 2005 EKS purchasing power parities, detrended 1.9%, 1950-2013
Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics
Figure 2 shows that Canada has been in a long-term decline since the mid-1980s with much of this decline coinciding with periods of rising taxes on income from labour.
The British economy boomed in the 1990s, after the tax hikes of the 1970s and early 80s were reversed. This growth dividend was squandered by the Blair government in the 2000.
Figure 2 also shows that US growth was rather stable with some ups and downs up until 2007, expect during the productivity slowdown in the 1970s. The first major departure from trend growth of 1.9% was with the onset of the great recession.
New Zealand, Australian and US real housing price index, 1975–2014, 2005 base
12 Apr 2015 Leave a comment
in business cycles, global financial crisis (GFC), great recession, macroeconomics, politics - Australia, politics - New Zealand, politics - USA, urban economics Tags: GFC, housing prices, land supply, zoning
The housing spikes in Australia and New Zealand preceded the global financial crisis, starting in about 1999, and were largely unaffected by the GFC. Housing prices in the USA were pretty calm except in the lead up to the GFC, and took a dive with the onset of the global financial crisis and great recession.
Source: Dallas Fed; Housing prices deflated by personal consumption expenditure (PCE) deflator.
.
Employment losses after recent financial crises
09 Apr 2015 Leave a comment
in business cycles, economic history, Euro crisis, global financial crisis (GFC), great depression, great recession, job search and matching, macroeconomics Tags: financial crises, global financial crisis, great recession, recessions and recoveries
@TimDuy @profsufi Compared to other financial crisis, this recovery is OK. http://t.co/eGU5lOxKnu—
Bill McBride (@calculatedrisk) December 24, 2014
Recent New Zealand economic growth
06 Apr 2015 Leave a comment
in business cycles, economic growth, fiscal policy, global financial crisis (GFC), macroeconomics, politics - USA Tags: GFC, great recession, recessions and recoveries
Trans-Tasman trends in real equivalised mean household income since 1982
04 Apr 2015 Leave a comment
in business cycles, economic growth, global financial crisis (GFC), macroeconomics, politics - Australia, politics - New Zealand Tags: GFC, Rogernomics, Trans-Tasman income gap
@JimRose69872629 @JohnQuiggin @pagdavidson Largest fall in real mean incomes in NZ was in the early 1990s http://t.co/DDVgeMIGsj—
Peter Whiteford (@WhitefordPeter) April 04, 2015
Real household mean incomes rose during Rogernomics; fell during the deep recession at the beginning of the early 1990s; then rose strongly until 2009 and the onset of the Global Financial Crisis.
Skyscrapers in the business cycle
03 Apr 2015 Leave a comment
in business cycles, macroeconomics Tags: Austrian business cycle theory
The world is in the middle of a skyscraper boom. Does this augur badly for the world economy? econ.st/1MgAQrF http://t.co/V96FedP97b—
The Economist (@EconEconomics) March 29, 2015
The three lags on monetary policy
31 Mar 2015 1 Comment
in business cycles, economics of information, inflation targeting, macroeconomics, Milton Friedman, monetarism, monetary economics Tags: lags on monetary policy, monetary policy
There are large uncertainties about the size and timing of responses to changes in monetary policy. There is a close and regular relationship between the quantity of money and nominal income and prices over the years. However, the same relation is much looser from month to month, quarter to quarter and even year to year. Monetary changes take time to affect the economy and this time delay is itself highly variable. The lags on monetary policy are three in all:
- The lag between the need for action and the recognition of this need (the recognition lag)
-
The lag between recognition and the taking of action (the legislation lag)
-
the lag between action and its effects (the implementation lag)
These delays mean that is it difficult to ascertain whether the effects of monetary policy changes in the recent past have finished taking effect.
Secondly, it is difficult to ascertain when proposed changes in monetary policy will take effect. Thirdly, feedbacks must be assessed. The magnitude of the monetary adjustment necessary to deal with the problem at hand is never obvious.
It is common for a central bank to act incrementally. The central bank makes small adjustments to monetary conditions over time as more information is available on the state of the economy and forecasts are updated.
Most discussions on monetary policy focus on the implementation lag. This lag depends on the fundamental characteristics of the economy.
A long and variable implementation lag means that it is difficult for central banks to ascertain what is happening now or forecast what will happen. Central banks may stimulate the economy after it is well on the way to recovery and tighten monetary policy when the economy is already going into a recession.
In his classic A Program for Monetary Stability, published in 1959, Milton Friedman summarised his empirical findings on length and variability of the lags on monetary policy:
on the average of 18 cycles, peaks in the rate of change in the stock of money tend to preceded peaks in general business by about 16 months and troughs in the rate of change in the stock of money to precede troughs in general business by about 12 months. For individual cycles, the recorded lead has varied between 6 and 29 months at peaks and between 4 and 22 months at troughs.
With lags as variable as those estimated by Friedman, it is difficult to see how any policy maker could know which direction to adjust his policy, much less the precise magnitude needed. Long lags greatly complicate good forecasting. A forecaster cannot know what the state of the economy will be when his policy takes effect.
Many Keynesians, Friedman notes, advocate “leaning against the wind.” By this they mean, in some sense, that the monetary (and fiscal) authorities should try to balance out the private sector’s excesses rather than passively hope that it adjusts on its own.
Friedman tested the Fed’s success at leaning “against the wind” by checking whether the rate of money growth has truly been lower during expansions and higher during contractions. He admits that this method of grading he Fed’s performance is open to criticism, but decides to go ahead and see what turns up. He finds that Fed has – for the periods surveyed – been unsuccessful.
By this criterion, for eight peacetime reference cycles from March 1919 to April 1958. Actual policy was in the ‘right’ direction in 155 months, in the ‘wrong’ direction in 226 months; so actual policy was ‘better’ than the [constant 4% rate of money growth] rule in 41% of the months.
Nor is the objection that the inter-war period biased his study is good since Friedman found that:
For the period after World War II alone, the results were only slightly more favourable to actual policy according to this criterion: policy was in the ‘right’ direction in 71 months, in the ‘wrong’ direct in 79 months, so actual policy was better than the rule in 47% of the months. [2]
One of the best ways to parry a metaphor is with another metaphor. Keynesians have a host of metaphors in their rhetorical arsenal; one frequently voiced is that a wise government should “lean against the wind” when choosing policy. Friedman counters:
We seldom know which way the economic wind is blowing until several months after the event, yet to be effective, we need to know which way the wind is going to be blowing when the measures we take now will be effective, itself a variable date that may be a half year or a year or two from now. Leaning today against next year’s wind is hardly an easy task in the present state of meteorology.
By scrutinising the practice of monetary policy over the decades, Friedman manages to produce objections that both Keynesians and non-Keynesians must take seriously. A key part of any response to Friedman rests on the ability of forecasters to do their jobs with tolerable accuracy.
The impact of drought on the 1998 mild New Zealand recession
31 Mar 2015 Leave a comment
in business cycles, economic growth, macroeconomics, politics - New Zealand Tags: 1998 recession, drought, real business cycles
Reserve Bank of New Zealand has these conclusions about the contribution of drought to the business cycle in the late 1990s in New Zealand and in particular the mild 1998 recession:
a back-of-the-envelope estimate of the impact of the drought-induced fall in supply would suggest a contribution from the agricultural sector to production GDP for the March quarter of 1998 of around -0.4 percentage points out of the total 1 per cent fall in production GDP. In the June quarter of 1998, the contribution from these sectors was close to zero.
Figure 27:
In 1998, agricultural and hunting industry contributed per cent of real GDP. . That included the production of livestock, wool, dairy, horticulture, and crops, as well as the provision of agricultural contracting services and hunting. In the same year, the primary food manufacturing industry contributed 3 per cent of GDP. This category covers the processing of meat and dairy products for export and local markets.
The most important aspect of monetary strategy is timing
28 Mar 2015 Leave a comment
in business cycles, economic growth, economics of information, macroeconomics, Milton Friedman, monetarism, monetary economics, Robert E. Lucas Tags: Keynesian macroeconomics, lags on monetary policy, monetary policy
The simplest statement to make about the lags in monetary policy is they are long and variable. This simple statement is also the key insight to understanding the actual implementation of monetary policy. Hence, how many months or years in advance must a central bank forecast to achieve its monetary goals? In 1994, the Economist said:
But [central banks] cannot afford to wait until inflation is actually rising before they act. Monetary policy does not change the speed of the economy instantly: it can take 18 months or more for a rise in interest rates to have its full impact on inflation. The target of policy ought therefore to be future not current inflation, in order to prevent a surge in 1996. The earlier interest rates are raised, the better the chances of engineering a smooth slowdown to a sustainable rate of growth before slack in the economy is exhausted.
Economists differ about the length of those lags. Uncertainty about the average length of those lags and the variability of those lags makes discretion most difficult. Activist policy can improve welfare only if the information about economic structure and economists’ ability to forecast is sufficiently accurate.
Friedman is the most famous and persuasive critic of Keynesianism on the grounds of lags. He has two main arguments: first, that there are “long and variable lags” between the identification of a problem and the effects of the designed remedy; second, that activist policy often itself becomes a source of instability since policy itself becomes a variable that the market must guess.
Friedman’s critique does not depend on the quantity theory of money. Keynesian policies do not necessarily follow even if the Keynesian theory of the business cycle were conclusively proved.
It must also be demonstrated that the government has the ability and willingness of the government to act as the theory prescribes. We are therefore further assuming that central banks have the incentive to stabilise the economy. If the government lacks the information required to stabilise the economy, issues of public choice incentives become fully redundant. Incentives to pursue an objective do not matter if the objective itself is unattainable.
Competing visions of central banking
25 Mar 2015 1 Comment
in business cycles, economic growth, inflation targeting, macroeconomics, Milton Friedman, monetarism, monetary economics, Robert E. Lucas Tags: Keynesian macroeconomics, monetary policy
The competing visions of central banks over monetary policy have been defined by Franco Modiglani and Milton Friedman respectively. Modiglani considers the Keynesian vision of macroeconomic policy to be:
a market economy is subject to fluctuations which need to be corrected, can be corrected, and therefore should be corrected.
The Keynesian claim implies that central banks have sufficient knowledge of the structure of the economy to be able to choose the policy mix appropriate to a given set of circumstances. It is possible to target unemployment, interest rates and inflation in such a way that they can be maintained (and hence made predictable) by constant adjustment of policy instruments to new shocks.
The Keynesian approach assumes that the economy can slip into recessions for all sorts of reasons (Barro 1989). Business fluctuations result from shocks to aggregate demand. The principal source of these shocks are expectations induced shifts in investment demand. The role of the central bank is to make prompt, frequent policy responses to counteract this instability.
The task of government is to discover the particular monetary and fiscal polices which can eliminate shocks emanating from the private sector. A key finding of recent macroeconomic research is that anticipated monetary policy has very different effects to unanticipated monetary policy.
The Keynesian vision thus presuppose that government can foresee shocks which are invisible to the private sector but at the same time it is unable to reveal this advance information in a credible way and hence defusing the shock because it is no longer unanticipated. In addition, the counter cyclical monetary policies of governments must themselves be unforeseeable by private agents, but at the same time systematically related to the state of the economy (Lucas and Sargent 1979)
Of course, the Keynesian view of central banking is also premised on a goodwill theory of government. Governments pursue policies that are in the public interest. That is a public interest that is well-defined and is free of conflicts over income distribution, electoral success and power the could lead policy-makers to pursue goals other than full employment, stable prices and efficiency. Thus, if the latest forecast is a recession, additional stimulus is the usual prescription. However, since most Keynesian economists accept the permanent income and natural rate hypotheses, more stimulus implies less later at some unknown time.
Friedman’s vision of central banking is far more circumspect:
The central problem is not designing a highly sensitive [monetary] instrument that offsets instability introduced by other factors[in the economy], but preventing monetary arrangements becoming a primary source of instability (Milton Friedman 1959).
Friedman considers that a key element in the case for policy discretion is whether the sufficient information is available that can be used to reduce variability and assist the economy’s adjustment the unforeseen. A well intentioned policy-maker will destabilise if he is mislead by incomplete or incorrect information.
From the monetarist standpoint, price stability can be approximately attained under a well chosen and predictable monetary policy rule. Under this view, the unemployment and interest rates are unpredictable and can manipulated only at a prohibitive cost. The Keynesian and monetarist views are mutually incompatible and lead to very different policy recommendations (Lucas 1981).
Utopia, you are standing in it! 
Recent Comments