On Monday 13th May, I participated in a debate on austerity organised by the New York Review of Books, held in the Sheldonian Theatre, Oxford. The motion was: “Austerity in the Eurozone and the UK: Kill or Cure?”. Those arguing in defence of austerity were Meghnad (Lord) Desai and Sir John Redwood MP. On my side was Lord (Robert) Skidelsky. Here is the speech I presented – a version of which was published in the New York Review of Books, July 11, 2013, Volume 60, Number 12. It can also be found at www.nybooks.com. Read more

Humanity has decided to yawn and let the real and present dangers of climate change mount. That was the argument I made in last week’s column. Nothing in the responses to it undermined that conclusion. If anything, they reinforced it. Judged by the world’s inaction, climate sceptics have won. That makes their sense of grievance more remarkable. For the rest of us, the question that remains is whether anything can still be done and, if so, what?

In considering this issue, a rational person should surely recognise the extent of the consensus of climate scientists on the hypothesis of man-made warming. An analysis of abstracts of 11,944 peer-reviewed scientific papers, published between 1991 and 2011 and written by 29,083 authors, concludes that 98.4 per cent of authors who took a position endorsed man-made (anthropogenic) global warming, 1.2 per cent rejected it and 0.4 per cent were uncertain. Similar ratios emerged from alternative analyses of the data. Read more

The UK Treasury is, it is reported, considering the sale of parts of its student loan book. This provokes a big question: when should the UK government sell such an asset – given that it is both immortal and solvent?

The best answer has two parts. First, it must be believed that the asset would be better managed by the private sector. And, second, it must be believed that this superior private management can only be introduced by selling the assets – rather than introducing some type of private management contract. Read more

Last week the concentration of carbon dioxide in the atmosphere was reported to have passed 400 parts per million for the first time in 4.5m years. It is also continuing to rise at a rate of about 2 parts per million every year. On the present course, it could be 800 parts per million by the end of the century. Thus, all the discussions of mitigating the risks of catastrophic climate change have turned out to be empty words.

Collectively, humanity has yawned and decided to let the dangers mount. Professor Sir Brian Hoskins, director of the Grantham Institute for Climate Change at Imperial College in London, notes that when the concentrations were last this high, “the world was warmer on average by three or four degrees Celsius than it is today. There was no permanent ice sheet on Greenland, sea levels were much higher, and the world was a very different place, although not all of these differences may be directly related to CO2 levels.” Read more

A commenter, A.N., objects to my argument that the big reason for the explosion in government bond yields in Spain was not its debt dynamics, which are remarkably like the UK’s, but because it does not have a lender of last resort, as the UK does.

He responds that the debt dynamics of France and Germany were just like Spain’s. But they were not similarly punished. In any case, the facts are clearly otherwise. These are the relevant data for the three mentioned countries. It is quite clear that Spanish debt dynamics are far worse than those of France and Germany. Read more

Roger Altman of Evercore partners is a friend of mine, a distinguished public servant and a respected financial expert. But his column “Blame bond markets, not politicians, for austerity” is, in my view, gravely mistaken. Read more

I recently looked at what happened to private financial balances inside the eurozone. Today’s post looks at what happened to the current account deficits. It fills out the broad story of the eurozone’s across-the-board shift into becoming a very large capital exporter. It is complementary to an excellent post by Gavyn Davies, who addresses the sources of the ongoing adjustment.

As it happens Michael Pettis, professor at Peking University, and author of the excellent book, The Great Rebalancing (Princeton and Oxford: Princeton University Press, 2013) has a complementary post.

In this, he argues that Spain had no choice over what happened to it during the 2000-07 period, given the deliberate policies of Germany, which were aimed at generating a large current account surplus (“improving competitiveness” being the normal way of talking about this form of structural mercantilism). If one’s principal trading partner is seeking to generate a huge current account surplus and so exporting capital, he argues, then a country is effectively forced into running the counterpart deficits, whatever the consequences.

I agree with this analysis of what happened. Indeed, I have argued along these lines for several years, in trying to explain the roots of the eurozone crisis, which is a balance-of-payments cum financial crisis, of which fiscal deficits are a symptom, not, except in the case of Greece, a cause. Read more

What is to be done? This question has to be asked of UK economic policy. Only the complacent can be satisfied with what is happening. Yes, the 1 per cent increase in third-quarter gross domestic product is welcome. But GDP stagnated over four quarters and was 3.1 per cent lower than in the first quarter of 2008.

I remain convinced that the decision to move towards fiscal austerity so sharply in 2010 was a huge error. A salient aspect of the mistake was that the UK reinforced the move towards austerity in the EU. In an article entitled “Self-defeating austerity?” published in the October National Institute Economic Review, Dawn Holland and Jonathan Portes argue that UK GDP could well be 4.3 per cent lower this year and 5 per cent lower in 2013 than it would have been without these consolidation programmes, including the UK’s. Moreover, in 2013 the UK’s ratio of public sector debt to GDP might be 5 percentage points higher than it would have been without the co-ordinated contraction. This is a step forward and maybe two steps back.

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I entered into a heated US debate last week on whether the recovery has been surprisingly slow and, if so, whether the policies of Barack Obama’s administration bear responsibility for that outcome. In particular, I was responding to a post by John Taylor of Stanford University, a distinguished macroeconomist and adviser to Mitt Romney, who had argued that the recovery was exceptionally weak.

Prof Taylor has responded to my reply. In this response, he makes four points.

First, he argues that if we exclude the recoveries in 1973, 1981 and 1990 from the analysis, the gap between the average US recovery and the current recovery becomes even bigger. Read more

I have argued in previous posts that the policy of letting the government deficits offset the natural post-crisis austerity of the private sector makes excellent sense, provided the country in question has a solvent government. I have argued, too, in the most recent post, that the objections to this policy are not decisive. What matters is making the best of bad alternatives.

Yet let us also look at alternative ways of accelerating deleveraging. Broadly there are two: capital transactions and default. The latter, in turn, comes in two varieties: plain vanilla default and inflationary default. Read more

The role of fiscal deficits in deleveraging

“You can’t get out of debt by adding more debt.” How often have you read this sentence? It is a cliché. I am going to argue that, to a first approximation, this obvious, even banal, statement is the reverse of the truth, which is that the only way to get out of debt is to add more debt. What matters is who adds the debt and in what form. To put it more bluntly, it depends on who these“you” are.

As I have done in two previous posts on the theme of “balance-sheet recessions”, I am going to focus on the US, because it is the most important country now going through the post-crisis deleveraging process.

Let us start with an obvious and crucial fact: at the world level, net debt is zero. For an individual country, net debt is how much foreigners have lent to residents less how much residents have lent to foreigners. In the case of the US, net debt at the end of 2011 was 44 per cent of GDP, roughly an eighth of gross debt. Read more

Economic crises bring forth a great deal of nonsense. One of the most frequent bits of such nonsense is the idea that the countries in crisis in the eurozone are full of idle people, while the countries that are not in crisis are full of hard-working ones.

This, it so happens, is the reverse of the truth. Indeed, if one went by the hours worked on average by each worker, one would conclude that the fewer hours  people work, the less crisis-prone will be the country.

Here is a relevant chart for the eurozone, which comes from the Conference Board database I have frequently used. The reader will note that the crisis-hit countries are in the middle or right of the chart. (I have excluded former communist countries, which have somewhat different characteristics: most are much poorer than those listed below. But, again, the people in crisis-hit ex-communist countries, such as Estonia and Latvia, tended to work long hours.) Read more

I look at this through the lens of “sectoral financial balances”, an analytical framework learned from the work of the late Wynne Godley. The essential idea is that since income has to equal expenditure for the economy, as a whole, (which is the same things as saying that saving equals investment) so the sums of the difference between income and expenditures of each of the sectors of the economy must also be zero. These differences can also be described as “financial balances”. Thus, if a sector is spending less than its income it must be accumulating (net) claims on other sectors.

The crucial point is that, since sectoral balances must sum to zero, a rise in the deficit of one sector must be matched by an offsetting change in the others. It follows that if the fiscal deficit is increasing, the sum of the surpluses of the other sectors of the economy must be increasing in a precisely offsetting manner. Read more

My column this week We still have that sinking feeling examined the progress of post-crisis deleveraging, focusing on the US. I would like to elaborate on this issue.

 The chart attached to the column showed the cumulative total of gross private sector debt, relative to gross domestic product. In the chart below, I show total debt, including government debt, relative to GDP. The reader will notice that the economy as a whole has deleveraged, despite the rising debt of the government. Read more

The chart below comes from the Conference Board’s wonderful “total economy database”. It uses GDP per head, at PPP, in 2011$s (computed according to the Eltoto, Kovacs and Szulc method).

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On June 14 2012, I wrote a column [Two cheers for Britain’s bank reform plans] on the government’s plans to implement the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, of which I was a member.

I noted that the government had rejected the Commission’s recommendations on several points, in favour of the banks. After the scandal of the deliberate misreporting of the London Interbank Offered Rate (Libor), these concessions must now be reconsidered. Read more

In January 2004, I attended a property conference in Switzerland, to give a talk on the European economy. I talked about the end of European catch-up on US productivity levels. But the most interesting part of the conference was a workshop in which I argued that a number of European countries, the UK being one, had dangerous property booms.

The most dangerous of all, I suggested, was Spain’s, because it is a large European country which was experiencing a huge rise in property prices and, as a result, a huge boom in property development and a correspondingly overheated construction sector. The results could be extremely painful. This remark led to a heated altercation with a Spanish property developer. I understood why he was so angry. But he was wrong, of course.

The Spanish property sector created a huge boom and a huge crash. The big question is what the Spanish authorities should (or could) have done about it. Read more

“Against the background of renewed market tensions, euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. We welcome the significant actions taken since the last summit by the euro area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth. In this context, we welcome Spain’s plan to recapitalize its banking system and the eurogroup’s announcement of support for Spain’s financial restructuring authority. The adoption of the fiscal compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs. The imminent establishment of the European Stability Mechanism is a substantial strengthening of the European firewalls. We fully support the actions of the euro area in moving forward with the completion of the Economic and Monetary Union. Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance. Euro area members will foster intra euro area adjustment through structural reforms to strengthen competitiveness in deficit countries and to promote demand and growth in surplus countries. The European Union members of the G20 are determined to move forward expeditiously on measures to support growth including through completing the European Single Market and making better use of European financial means, such as the European Investment Bank, pilot project bonds, and structural and cohesion funds, for more targeted investment, employment, growth and competitiveness, while maintaining the firm commitment to implement fiscal consolidation to be assessed on a structural basis. We look forward to the euro area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the euro area.”


This was the section of this week’s G20 communiqué that dealt with the eurozone.

Let us examine it closely.

“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”

The crucial word here is “necessary”. We can safely say that agreement on what this means is altogether lacking. Read more

Last week saw some important statements on UK economic policy from the chancellor of the exchequer, George Osborne, and the governor of the Bank of England, Sir Mervyn King. I considered the implications for the reform of banking and for the supply of credit and monetary policy in two columns published last week.  I failed to note important implications for fiscal policy. Happily, Jonathan Portes, director of the National Institute for Economic and Social Research did not miss them. Maybe, he noted, we are beginning to see glimmering of light in the policy darkness.

This is what Mr Portes wrote: Read more