No need to worry; the consensus says inflation isn’t going to be a problem

Ever since the 2008 financial crisis, pessimists have been saying we are due a global inflation surge. So far they’ve been wrong. The world’s economies, particularly the rich ones, have sucked up fiscal and monetary stimulus and the biggest official concern has usually been that the inflation rate is too low.

But even a stopped clock eventually shows the right time.  Given Covid-induced monetary and fiscal overdrive, might the worriers finally be proved right?

Continue reading “No need to worry; the consensus says inflation isn’t going to be a problem”

Can the world economy continue to float on a cushion of debt?

Monetary policy is difficult.

Economist Scott Sumner describes in his blog how the thinking of an intellectual giant like John Maynard Keynes evolved through three distinct phases in the 1920s and 30s.  As the man himself is reputed to have said “When the facts change, I change my mind.  What do you do?”.  Sumner then argues that the thinking of the economics profession repeated pretty much the same pattern of evolution over the last decades of the twentieth century.  

It makes a persuasive case for intellectual humility in general, and in monetary policy in particular.  Even more so in unusual times.  The forcefulness and fluency of experts can conceal the fact that they are testing new ideas when they make policy.

Continue reading “Can the world economy continue to float on a cushion of debt?”

Covid: an endgame taking shape?

Things are moving fast on Covid, perhaps faster than we realise.  But as Europe painfully grinds its way through a second lockdown, it’s easy to miss this.

First of all, it’s more of a lockdown-lite this time.  Policy is more nuanced and – although most people are too polite to say – has more or less converged on a Swedish approach.

Secondly, the second wave so far looks less deadly. Excess mortality is considerably below the levels of earlier in the year. And while the institutional response hardly rates as an exemplar, there are plenty of signs of successful adaptation, of government policy certainly and, perhaps more importantly, of individual and business behaviour.

Continue reading “Covid: an endgame taking shape?”

Innovation works very well indeed

Matt Ridley – former science editor of The Economist and prolific popular science writer – has tackled a slippery subject in his book How Innovation Works’. He succeeds in painting a vibrant and at times counter intuitive picture of this process. One that policy makers and public alike can usefully ponder.

A major contribution is demystification.  He trashes the model of a tortured genius locked in the lab. Innovation comes from lots of people, competing or in concert, working by trial and error, sharing or stealing knowledge. It occurs when the conditions are right, because it bubbles out of the accumulation and testing of knowledge (hence the prevalence of simultaneous invention from calculus to light bulbs). ‘Ideas having sex’ is his metaphor of choice. And this tends to happen where innovators can gather and experiment free of restrictions.   

Continue reading “Innovation works very well indeed”

Covid: everybody loses – at first

As we emerge from the Covid panic phase, you might think that the situation bears an increasing resemblance to the slow motion crises of the 1970s and 80s.

Recall the political economy big picture. The old system had had a good run.  Patterns were familiar and tools had developed to manage political pressures – a nudge here, a subsidy there, a few more jobs in state forests or on the railways, an occasional long-term policy artfully planted and left to mature.

But as growth slowed, economic pressures built and became unmanageable in the old framework.  Political confusion ensued: the slogans stopped working because the voters’ demands couldn’t be reconciled.

This suggests we need to figure out what people expect of government as a result of the Covid crisis – and how that might be orchestrated and channelled through the voting system.

Continue reading Covid: everybody loses – at first

Trump’s (pre-Covid) economy gives clues for election strategy

One of the interesting things about the (pre-Covid) US economy was that, on the surface at least, it didn’t change all that much between Trump and Obama. Or so argues economist Pierre Lemieux in The Trump Economy: Three Years of Volatile Continuity for the Cato Institute.

His assessment on economic growth:

“Under Obama, the average annual growth [in real GDP per capita] starting in 2010 was 1.4%. Under Trump, it averaged 2.0%, though the upward trend slowed in 2019, falling to 1.8%, which is roughly the same level as 2017. These data are consistent with the continuation of a slow recovery from the Great Recession.”

And on labour markets:

“Overall, the poverty and unemployment picture improved slowly from 2009 to 2019, with no radical break when the occupant of the White House changed. The Obama economy and the Trump economy seem to be the same economy. This observation applies to many other measures of American prosperity”

OK.  An important general point – that presidents’ short-term influence on the economy is usually overrated and the influence of longer-term market and policy settings is underrated – is usefully made.  But you still ought to look at the changes in those settings to draw some conclusion about possible longer-term economic and political impacts.

Lemieux’s analysis identifies three substantial policy divergences between the two administrations.

Comprehensive tax reform in 2017 is the first.  This pushed down the cost of capital and increased investment. Lemieux cites evidence that it spurred economic growth in the following year by 0.8 percentage points.

But the tax cuts were not backed by reduced government spending.  So rising government debt, further boosted by Covid payouts, will require a response at some point.  The choice on how this is done – either spending restraint or higher taxes – remains a key dividing line between America’s political tribes.

The second divergence is on regulatory policy. Trump’s administration actually managed to stop (rather than just slow) the growth in the stock of regulation.

“… the Trump administration has roughly capped the total volume of federal regulations at, or slightly over, the 185,000 pages [in the Code of Federal Regulations] they comprised at the end of the Obama presidency”

The process was probably more shuffle than standstill but, even so, it represents a decisive change of intent from the sweeping regulatory surges in areas like resource use, financial services, healthcare and energy policy launched by enthusiastic politicians of all stripes and predating the financial crisis.  And it almost certainly needed a clear lead from the top (plus some excellent regulatory economists on the ground).

The third area is Trump’s break with the orthodox consensus on world trade.  

Managed stability has been replaced by an attempt to batter concessions out of China, win votes from the losers of globalisation, and challenge China’s bid for geopolitical hegemony.  The best you can say about the economics is that so far he seems to have got away with it (despite increased trade barriers reducing US GDP by an estimated 0.4%).

If you are a market liberal, you ought on balance to prefer the Trump mix – although you would be entirely justified in having some conniptions with regard to opportunism and lack of consistency.

And you might also want to use this analysis to evaluate how a Biden or Trump presidency might approach things after the November election.

First up, the case for more continuity.  Despite the rhetoric, both parties will at bottom be relying on workers and businesses in the private sector to generate post-Covid recovery by adapting to changed economic conditions.  Both are likely to spend freely to support those economically hurt by the pandemic (although it’s also reasonable to expect the winner to direct more pork towards ‘his people’).  Both are likely to favour strategic competition with China over market integration. No one wants to tackle the national debt before the market makes them do it.

And now the differences.  

Biden Democrats see a much bigger role for government in the recovery and are already talking about higher taxes on the usual suspects (business and the rich) to pay for extra spending on green subsidies, childcare and unionised jobs.  One can also safely predict a resumption of normal service from the regulatory bureaucracy. Trump and his allies seem less likely to take this path.

So in some ways, Covid might be clarifying the economic choices facing Americans  in November.  Which will surely be helpful after all that continuity.

Britain’s Battle of Brexit has an internal dimension

One of the chores of the Brexit process is the repatriation of powers from Brussels to Westminster.  Simple as making a list you might say.  But one aspect – bringing home the state’s economic regulatory powers – is causing a spat.

When the UK joined the European Economic Community (as it then was) in 1973, these powers were held at the national level.  But since then, in addition to ceding further powers to Europe, the central government has devolved substantial retained powers to regional administrations in Edinburgh, Cardiff and Belfast.  And the local politicians – seeking to advance their localist and autonomist agenda – are clamouring for a share of the handback.

So Westminster’s mandarins and politicians have come up with a plan, with a refreshingly deep foundation in history, economics and – yes – politics. Continue reading “Britain’s Battle of Brexit has an internal dimension”

How a crash (of sorts) might come

History looks for a trigger for the economy crashing:  the 1929 stock market panic, the 1970s oil shock or the 2008 subprime meltdown.  But while the headline events can be a catalyst, sober analysis usually gives a more complex backstory of growing economic imbalances and disastrous-with-hindsight policy settings.

So casting the Covid shock as the proximate cause, what might be underlying drivers of a sustained deterioration in the economic climate? Continue reading “How a crash (of sorts) might come”

Don’t expect too much if we get negative interest rates

Are central bankers jealous that epidemiologists are the rock stars of the current crisis?

There is talk that both the British and New Zealand central banks might institute negative interest rates as part of the policy response to the Covid shock.  Continue reading “Don’t expect too much if we get negative interest rates”

Let’s hope Europe’s economic policies are better than its approach to lockdown

So just how effective were the different lockdown policies implemented by Europe’s diverse states?

Bloomberg has tried to make a comparison using an index complied by the Blavatnik School of Government at the University of Oxford. Continue reading “Let’s hope Europe’s economic policies are better than its approach to lockdown”