Tuesday, March 12, 2013

It's all a question of timing

One feature of economics is that policies which are very desirable at one period of time, may be completely undesirable in another situation. In particular, the current recession and liquidity trap, allow many economic paradoxes to come to the fore, and you find many rules turned on their head.

For example, is the rise in the UK savings ratio a good thing?  yes in the long-term, but not in a recession. As the saying goes - make me virtuous - just not yet.


In the long-term, a good level of saving helps promote investment. But a rapid rise in savings during a recession contributes to lower consumer spending and a fall in real GDP. (the rise in savings in 2008-09 mirrored the fall in real GDP)

The good news is that with an improved level of savings, there is the potential for the UK consumer come to the rescue of the UK economy - just a slight fall in the savings ratio could see a significant boost to economic growth. The interesting thing is savings is increasing - despite the squeeze on real incomes.
At least stock markets are doing well...

The mystery of global stock markets. Why are stock markets doing well, when the outlook for the global economy remain depressed? - The stock market often defies economic reality. But, it is worth remembering the stock market is no higher than in 2000 - still a long way to go. But, Q.E. did put money in the pockets of quite a few in the city.

Is UK monetary policy too lax?

Some commentators have started to criticise the Bank of England for ignoring inflation targets and allowing the Pound to slide. I offer a defence of monetary accommodation - at the moment, there are still more pressing things to worry about that inflationary pressures. Criticisms of Bank of England

The problem with deficits

OECD – Budget deficits 2012

Spot the countries with the biggest borrowing problem. Hint, it isn't UK, US and Japan who have the three largest deficits.

Austerity and timing

Economic news is dominated by the effect of fiscal consolidation (austerity). Research by IMF shows that for highly indebted countries, fiscal consolidation can increase the debt to GDP ratio in the short-term. The impact of fiscal consolidation depends very much when you implement it. There's a big difference to cutting spending in a recession and cutting spending when there is growth - as Europe is finding out.

Unfortunately, it all made it rather hard to support our PM's hope that fiscal consolidation helped increase economic growth. The PM's bizarre logic of fiscal consolidation

An alternative - 8 policies to increase economic growth.

Unfortunately, the EU rules on fiscal stability give little room for manoeuvre and display a lack of flexibility. Greater flexibility on the timing of fiscal consolidation would make life less painful for everyone.

Economic Concepts in action

Economic shorts
  • Universal credit - the new all encompassing benefit coming out in Oct 2013
  • RPIJ - a new inflation measure, like RPI but calculated using a geometric mean - who said economics isn't interesting?
  • Energy prices - they've gone up in past few years, but you probably don't need an economist to tell you that.
  • Fuel consumption. Prices go up, demand goes down. Who said economics was difficult?


Danny A said...

The increase in savings explains exactly why the deficit has not been going down despite efforts by the government. More specifically however, housholds have been saving by paying down debts. We are clearly going through a debt deflation period which means this depression is most like the 1930s rather than other more recent recessions. The lack of growth is because a significant chunk of incomes and profits are being spent on debt servicing rather than investment. It could be said that growth in the UK up to the start of the crisis was illusionary since much of it was built on expanding debt.

Given that the government puts money into the economy with spending and removes it with taxes, a government deficit effectively represents a private sector saving. (The deficit represents money that the private sector does not need to find). So the only logical conclusion is that, while the private sector is deleveraging, the government *needs* to run a deficit unless it's aim is to shrink the economy.

So I question your statement in the 9th March post:
"I can at least understand the argument that we should cut the deficit now"

Sumit Malik said...

i agree with your post... us economy is getting strong.. simply by looking at $.. i think 2011-2013 were very bad... moreover i think govt is now putting more money in economy and talking care of employment too