Or Generalissimo Francisco Franco redux.
In “UK: Economic growth, double-dips and the PMI,” (G. Buckley, Deutsche Bank, Nov. 4, 2011, not online):
UK GDP grew by 0.5% qoq in Q3, but the position the economy is in is now officially worse than it was in the aftermath of the Great Depression. Add to this the weakening in the composite PMI
survey for October (particularly the manufacturing report), also published this week, and escalating risks for a sharper euro area recession, and the stage possibly looks set for a much bleaker
picture by the end of this year/start of 2012.
With regards the UK PMI, if the composite index
remains at its October level of just above 50
during the remainder of the fourth quarter then
that would be consistent with only very modest
GDP growth of around 0.1% qoq. However, the
risks seem tilted to the downside with our
forecast for a technical recession in Europe
highlighting the possibility that we see the same
in the UK.
Here is the key graph:
Figure from G. Buckley, “UK: Economic growth, double-dips and the PMI,” Global Economic Perspectives, Deutsche Bank, Nov. 4, 2011.
This account reminded me about the heated debate over the strength of the empirical results about expansionary fiscal contractions — especially assertions (such as by the JEC-Republicans — the document is mysteriously no longer online, but I have saved this gem and posted it and here [edited 2:52pm to add link]) that the resulting expansion would follow on quickly after the fiscal retrenchment. Over the past few days, I’ve had several discussions about where the debate now stands. I think if we don’t see the phenomenon of a quick expansion in response to austerity in a relatively open, highly indebted economy like the UK, we are unlikely to see such an effect in the United States.
For a discussion of the problems of the empirical implementation in Alesina and Ardagna (2010), the paper cited by the JEC-Republicans, see this post, as well as the September 2010 IMF WEO Chapter 3.
Has fiscal profiglacy brought a boom in the U.S. or Greece?
You would appear to be endorsing the policies of Greece and Italy as superior to those of the UK or Ireland.
Are we oil-constrained or not? If we are, continued stimulus would appear to augur unmanageable deficits and ultimate default. If we’re supply-constrained on a binding input, then we have to adjust economic activity to the availability of that commodity.
also, UK is a good example of monetary policy leaning against contractionary fiscal policy, nd the BOJ’s willingness to tolerate higher inflation. Oh yeah, it also is a good argument why the market shuns italy while UK yields are down. having monetary flexibility is clearly valuable!
“Has fiscal profiglacy brought a boom in the U.S. or Greece?” In both the US and Greece, the fiscal deficit was caused primarily by insufficient income tax revenues. Hence, we did not see the boom we would have expected had the deficit been caused by excessive spending.
Are those first two comments serious or silly?
Folks, Italy and Greece are being crushed by a series of European austerity measures within and without their countries. People who think they are somehow blowing the roof off spending are not following along. Don’t subscribe to nordic nationalist propaganda – our at least remember where it took you in the last century. Indeed, austerity slowing the economy in combination with a lack of a lender of last resort are destroying the country and the eurozone.
And you might note further that the US private sector is much further along in delevering than any Eurozone country – and yet has outperformed economically. How is that possible? We should be under a pile of rubble. The answer is a willingness to run deficits near 9% of GDP, which allow for the creation of net private sector financial assets of like size dollar-for-dollar, replacing income leakage lost toown and default.
Menzie, you do these people too much honor. Only dimwits and delusionals ever expected austerity to be expansionary.
How much of the UK slowdown is due to contractionary fiscal policy and how much of it is due to the overall slowdown in Europe and Greek and Italy issues? Said another way, if there were no debt crisis in southern Europe, how much would the austerity package itself affect UK GDP?
If we extrapolate the 2005 to 2010 rates of change in Top 33 Net Oil Exporter production (negligible decline of 0.1%/year), in Top 33 consumption (+2.7%/year) and in Chindia’s net imports (+7.5%/year), Available Net Exports* (ANE) would fall from about 40 mbpd in 2005 to about 21 mbpd in 2020 (having fallen to 35 mbpd in 2010). Keep in mind this is with virtually no decline in production.
If we assume a 1%/year Top 33 production decline, and the other rates of change stay the same, ANE would fall from about 40 mbpd in 2005 to about 15 mbpd in 2020.
Incidentally, there have been some recent signs that China’s production may be hitting a plateau or declining. Note that US net oil imports increased at 11%/year from 1948 to 1970 (doubling about every six years or so). After we peaked, our net imports increased at 15%/year, until 1977, when Alaskan production kicked in and as our consumption started to decline (EIA).
*Global Net Exports (Top 33 net oil exporters, BP + Minor EIA data, total petroleum liquids) less Chindia’s combined net imports
The OECD “Thelma & Louise” Race to the Edge of the Cliff
“Thelma and Louise” is an American movie that ends with the two main characters committing suicide by driving off the edge of a cliff. I’ve often thought that this cinematic moment is an appropriate symbol for the actions of many developed OECD countries that are in effect borrowing money to maintain or increase current consumption. The central problem with this approach is that as my frequent co-author, Samuel Foucher, and I have repeatedly discussed, the supply of global net oil exports has been flat to declining since 2005, with “Chindia” so far consuming an ever greater share of what is (net) exported globally. Chindia’s combined net oil imports, as a percentage of global net exports, rose from 11.2% in 2005 to 17.6% in 2010.
At precisely the point in time that developed countries should be taking steps to discourage consumption, many OECD countries, especially the US, are doing the exact opposite, by effectively encouraging consumption. Therefore, the actions by many OECD countries aimed at encouraging consumption in the face of declining available global net oil exports can be seen as the OECD “Thelma & Louise” Race to the Edge of the Cliff.
I suppose that the “winner” could be viewed as the first country that can no longer borrow enough money, at affordable rates, to maintain their current lifestyle. So, based on this metric, Greece would appear to be currently in the lead, with many other countries not far behind them.
I laugh at how Menzie frames his questions. When it comes to defending fiscal stimulus in the US he tempers expectations and says we should only expect minor improvements.
When it comes to criticizing fiscal austerity measures he finds the most extreme position he can and mocks them when their predictions don’t come true.
The best way to understand the problems of the UK are to compare it to Sweden.
From a June 2011 CNN Opinion article:
Between 1980 and 1992, Sweden lost ground relative to other rich countries, according to a McKinsey study. Since 2009, however, Sweden has one of the faster-growing economies in Western Europe. The growth has been led by the private sector, where jobs are multiplying at what Radio Sweden calls “a record pace.”
Sweden’s right turn started back in the early 1990s, but the turn is being institutionalized under the prime ministership of Fredrik Reinfeldt. Reinfeldt is a cautious conservative in the manner of Britain’s David Cameron. His party is formally known as the Moderates, and he goes to great pains to reassure Swedes that the party will live up to its billing.
American conservatives might find Reinfeldt disappointingly unconfrontational. Yet in five years in office, he has repealed Sweden’s wealth taxes and inheritance taxes. He has reduced the labor taxes that pushed almost all home repairs into the black market. He has championed a simple powerful idea: Work should pay better than benefits. He is prevailing.
As he prevails, he changes the country’s political culture.
Then from Bloomberg today:
“In 2006, when I became prime minister, the U.K. and Sweden had the same ratio of national debt to gross domestic product,” Swedish Prime Minister Fredrik Reinfeldt, 46, said in an interview. “The U.K. has now doubled and Sweden has gone below 40 percent and this is linked to dealing with the banks.”
Most government regulation is based on protecting the political class from the discipline of the market and the UK system is perhaps one of the worse. PM Reinfeldt has led Sweden to force the banks to be properly capitalized and do allow them to fail if they make bad decisions. Sweden did not create a Fannie and Freddie to socialize bad real estate policy and the result is clearly seen.
It is amazing how rational well thought out articles attract such poorly reason and inadequately supported reactions from the austerity clowns
“PM Reinfeldt has led Sweden to force the banks to be properly capitalized and do allow them to fail if they make bad decisions. Sweden did not create a Fannie and Freddie to socialize bad real estate policy and the result is clearly seen.”
Thanks Ricardo for again stating the obvious relative to banking. The capture of banking regulation at all levels by broker dealers has saddled most of the world’s economies with excessive leverage. That leverage clearly needs to be reduced, since “growing the economy” is untenable in a commodity constrained world.
I don’t understand why the creation of Freddy and Fannie was bad real estate policy. They provided a market apparatus to reduce home finance cost to the consumer. The bad part involved idiotic risk management decisions by F&F and poor bank regulation by both the Federal Reserve and the Federal Government. Since the Reagan administration, the securitization of mortgages was viewed as an easy way to fund the chronic US current account deficit resulting from excessive OIL IMPORTS.
Administration delays approving Keystone pipeline.
http://www.reuters.com/article/2011/11/10/us-usa-pipeline-idUSTRE7A64O920111110
Unbelievable. Really just unbelievable. These are the Keystone cops, unable to shoot straight, get their act together, and make a decision for the benefit of the US economy. It is incompetence, pure and simple.
On the face of it, one would have to conclude that Shell won’t get its Alaska permits, either.
Thanks for the cite Professor Chinn, I was looking for the Republican JEC report for several months with it clear implication that the path to U.S. prosperity was “lower labor costs” (e.g. lower real and nominal wages).
For the ideologues and trolls.
The United States, with half-hearted stimulus, has better growth than the U.K., Germany, etc. since the end of the recession. Germany’s unemployment is lower because of Government intervention and programs and demographics (the bady bust of the 1970s & 80s means smaller tranche of folks entering the labor force). The country that really went Big with stimulus was China, which resumed growing quickly after the Lehman contraction.
1. Sweden stil has a very strong welfare state with national health insurance, which the ideologues on this blog must find an anathema. http://en.wikipedia.org/wiki/Healthcare_in_Sweden.
Sweden also takes in 50% of GDP as taxes. So obviously, given it economic growth, we now have empirical evidence that high taxes do not constrain such growth. http://en.wikipedia.org/wiki/File:Tax-Revenues-As-GDP-Percentage-(75-05).JPG
2. Sweden also has its own currency and conducted a radical reform of its banking system in the mid-nineties when they went bust. Having its own currency means that it can devalue that currency so it can remain internationally competitive without internal wage deflation.
3. The current U.S. debt is the recession, high unemployment resulting from the recession, the Iraq and Afghan wars, the Bush tax cuts, and of course health care inflation. Your guys solution is to cut taxes for the 1%, cut everyone else’s benefits, tell the unemployed to find work or starve, and then promise that eveyone will get a pony.
4. The United States is not Greece, which has a GDP smaller than Chicago’s I expect. We could solve our economic problems, particularly our unemployment and growth problems, by returning having a short term, 2 trillion dollar stimulus over the next two years, half of just going out in tax rebates and half on infrastructure, start a five year path to reversing free trade policies for industrial items, then starting in 2014, reinstate the Clinton era tax rates, add a small VAT to supplement Medicare, raise the income caps on Social Security taxes, and implement AHCA cost control measures on health care. Voila, the budget is balanced!
When the economy resumes growing to trend, cut spending to obtain a surpluse and prevent a boom. That is afterall the true Keynsian theory, that Government should operate counter the economic cycle.
Steve,
I think that the most logical thing for the Canadians to do, from their point of view, is to put together a west to east transcontinental pipeline network that could move oil to markets on both coasts, and/or to domestic markets as needed.
And they could put Canadians to work on the pipeline project.
US Mid-continent refiners have been strongly encouraging the Canadians to go away, to the tune of about $1.5 billion per month (the WTI/Brent spread). Note that Cushing inventories are below year ago levels and about 25% below March, 2011, so the continuing WTI/Brent spread is a bit puzzling.
Right now, US refiners are only offering the Canadians an incentive of about a billion dollar per month to take their oil somewhere else. If someone offered me a billion dollars to go away, I would probably go away.
Incidentally, the WTI crack spread is huge. In other words, US refiners are paying WTI crude oil prices, but charging Brent based prices for product.
Jeffrey –
Yes, exporting to the east was also Jeff Rubin’s suggestion. There is no compelling reason the oil has to come to the US.
Independent oil and gas producer McMoRan had an interesting presentation here at the IADC conference in Austin. McMoRan is drilling deep wells (cc 25,000 ft) just offshore GoM. They are hitting gas and thinking they could deliver, from their current efforts, 235 mmcf / day at $2.50 / mcf. By way of background, only the Marcellus can produce profitably around $2 / mcf. Almost everything else, shales and conventional, are over $4, and much of it over $5. McMoRan’s proposed volumes are only 0.4% of US production, but if their efforts pan out and are more widely adopted, it could be yet another wrinkle in US gas markets.
Steven, how do you reconcile this statement: Unbelievable. Really just unbelievable. These are the Keystone cops, unable to shoot straight, get their act together, and make a decision for the benefit of the US economy.
with your previous statement:
the Keystone pipeline would not be anticipated to affect gasoline prices. Instead, it will increase WTI and related prices, with higher payments to oil producers from Alberta to Oklahoma, on the one hand, and lower margins to US refiners, on the other.
As you stated, the benefits of the pipeline accrue to the producers, not the consumers. Why should consumers care?
Steve,
Jeff and I had a long chat at the ASPO-USA conference on this topic. He had not really looked into the WTI crack spread angle.
All: Please try to keep the discussion on topic. Many of the above comments would have been more appropriately placed on the previous post, on which the thread is still running.
Steve Kopits The Administration did not say that they would kill the pipeline project, they said that they would delay a decision for 12-18 months in order to study an alternative route. How is that so unreasonable?
Look, when a car salesman tries to tell me that I have to buy that car today…it must be today…can’t wait a minute longer…has to be now, now, NOW…when I start to hear that I know it’s time to turn around and walk away. That’s exactly what the pipeline consortium is doing. They can’t wait another day or else they will kill the project themselves. As Seth Meyers and Amy Poulter might say: REALLY??? If this is such a long term benefit to the country, then why can’t they wait 12-18 months? It’s not like the project was going to be completed overnight anyway. My guess is that they don’t want to miss out on the chance to capture some rents that may not be there in a few years. Is that a good reason to jump the gun on an important public policy issue? And why are they so resistant to the perfectly sensible idea of an alternate route for the pipeline?
Getting back on topic….
Last night I steeled myself to at least try and watch some of the GOP debate on CNBC. It didn’t last long and somehow I fought off the urge to throw my shoe through the TV, but I eventually gave up when the clownshow turned to a question on what should be done about the euro mess. Ron Paul, clueless as ever, repeated the “liquidate, liquidate, liquidate” mantra of Mellon and Schumpeter. Romney told us how bad TARP was and said that US banks with Italian assets should go be allowed to go under. I’m assuming that he left it implied that it would be up to the Democrats to act like the adults and clean up the mess. I’m not a big fan of Kramer or Bartiromo, but I could feel their pain as their jaws hit the table in disbelief. Their prescription was more austerity, more pain, more spinach, more castor oil to purge the Euro-intestinal tract of socialist bile. I’m honestly not sure that a single one of them understood the euro issue at all. Beki-beki-beki-euro.
W.C. Varones Greece has lots of problems, but if supply side remedies were the cure then how do you explain that Greeks actually work more hours than most advanced countries? Greece’s problem is that they all act like baby boomer Republicans. They want lots of government services and don’t want to pay taxes.
Ricardo Sweden’s experience with contractionary growth is a very special case for three reasons. First, Sweden devalued their currency. Kind of important for a country that is dependent on exports. Second, the rest of the world was growing, so a beggar thy neighbor policy was viable. Third….hmmmm…third….uhhh…let’s see, devalued currency, rest of world was growing…uhhh. Oops.
Several readers have alerted me to the fact that the JEC report on expansionary fiscal contractions was not taken off-line. Rather, the link was changed from what I originally had used, and I could not find the document on the JEC-Republican site using the search command. I have amended the text as of 2:52pm Pacific, included the link, and apologize for the error.
“Unbelievable. Really just unbelievable. These are the Keystone cops, unable to shoot straight, get their act together, and make a decision for the benefit of the US economy. It is incompetence, pure and simple.”
As someone with ties back to Nebraska, let us say that there is sufficient blame to go around. Transcanada has been adamant about routing the pipeline across a portion of the Nebraska Sandhills region, currently classified as the largest wetlands ecology in the US and unique in many ways. Yes, rerouting would probably have added somewhat to the length and cost of the pipeline; but so has the multi-year delay they’ve incurred by being stubborn about it.
Jeff: I am gratified that you consider the JEC-Republican study as representing “the most extreme position”. I would not have gathered that conclusion from your previous comments, but am glad that you have now come to that realization.
Ricardo You brought up Sweden as an example of a successful austerity policy. There is a brand new NBER paper that looks in detail at four experiences with austerity policies for recovery, and Sweden is one of those countries: “The Austerity Myth: Gain Without Pain?”
http://www.nber.org/papers/w17571
The gist is that Sweden’s experience was positive because they took advantage of a massive exchange rate depreciation that drove exports. The tax cuts you mentioned were part of a larger deal that also included wage moderation.
The lesson to be learned is that the Swedish experience is not at all relevant for the euro countries because they do not control their own currencies, is not relevant for the UK because an export led recovery is hard to envision right now. And it is not relevant for the US.
Slug wrote:
Ricardo You brought up Sweden as an example of a successful austerity policy.
Not at all Slug. I have criticized the UK for their austerity policy from the beginning.
The US is in trouble because the Democrats want to increase our deficit and raise taxes and do anything they can to expand government, while the Republicans want to cut benefits to real people without eliminating any real government growth. Both parties leave government as the Leviathan. Their only difference is the Republicans do it with by strangling the people whole the Democrats do it by drowning them in debt.
Look again at this portion of the first quote I posted.
American conservatives might find Reinfeldt disappointingly unconfrontational. Yet in five years in office, he has repealed Sweden’s wealth taxes and inheritance taxes. He has reduced the labor taxes that pushed almost all home repairs into the black market. He has championed a simple powerful idea: Work should pay better than benefits. He is prevailing.
Reinfeldt is creating an environment of economic growth as he leads the economy to become more of a private sector working economy. This is pure supply side. Most people (you are an example) have no idea what supply side actually is. Most simply say that supply side is the spawn of Gorver Norquist. That demonstrates near total ignorance of supply side.
Without out pro private sector growth policies our economy is going to mimic Japan.
“quick expansion in response to austerity”
It all depends what you mean by “austerity” and “quick expansion”.
There have been several periods in UK history where fiscal spending dropped as a percentage of GDP whilst real GDP grew strongly. 1993-2000 would be a good example, where fiscal spending/GDP dropped from 40% to 34%.
(40% is the level of spending/GDP which we are attempting to return to by 2015, by co-incidence.)
“Expansionary fiscal contraction” is clearly possible. The real question is whether it is possible at the ZLB when the central bank is doing inflation targeting.