Monthly Archives: September 2013

On Thursday evening, I put out the following tweet after reading Martin Wolf’s trenchant column on austerity.

It was a throwaway remark relating to an academic paper by Òscar Jordà of the Federal Reserve Bank of San Francisco and University of California, Davis and professor Alan Taylor, also of UC, Davis. I will confess that I had not read the paper when I tweeted, but had read this summary on

The paper has gained celebrity status among economists and commentators who like to criticise the UK government’s fiscal policy. Martin Wolf has quoted it repeatedly, as has Jonathan Portes, director of the National Institute of Economic and Social Research and many others including professor Simon Wren Lewis of Oxford University.

Quite properly, Prof Taylor emailed me on Friday to ask why I was so “deeply unpersuaded” and asked me to account for my words. This has sparked a lively email exchange between us, which I think has informed both sides and certainly forced me to read the full paper closely. The emails are private, but I think the paper has gained such traction that my concerns deserve to be written down. Some of them were prompted by this excellent blog by David Smith, economics editor of the Sunday Times.

In a nutshell, while I think the new estimator in the paper is clever, its application to the UK as an example is wrong. The upshot is that the headline result — that three fifths of the UK’s growth disappointment is caused by austerity — is not supported by the evidence in the paper.

I am not claiming a “Reinhart and Rogoff” moment, and nor is David Smith to my knowledge, but it does serve to illustrate that understanding your data is as important as getting the right econometric estimator and that I am surprised that so many UK academics did not spot the causes for concern. If they did, they chose not to highlight them.

A separate point is that when academics have been using the paper as a weapon to bash the Treasury, they have not looked at the size of the effect Jordà and Taylor are claiming. They claim austerity from 2010 to 2013 has left the level of gross domestic product 3 per cent lower than it would have been had there been no consolidation at all. This is not a large number and very close to the view that the Office for Budget Responsibility would get using its modest fiscal multiplier. It estimated output was already 1.4 per cent below the level of “no austerity” in 2011-12 after which there were two more years of deficit reduction pain implemented.

So, the result, even if true, does not prove deficit reduction to be misguided. But that is for another time, the issue here is what is wrong with the claim that three-fifths of weakness is caused by austerity and that austerity has hit ouptut by 3 per cent. The short answer is “a lot”. Read more

James Mackintosh

Economists often seem to be living in a different world, not least when their forecasts of future recessions – or more precisely the lack of them – are examined.

Now two economists have confirmed that economists are on a quite different plane to the rest of the population, by exploring their views on policy issues facing America. Two Chicago-based finance professors, Paola Sapienza of Northwestern and Luigi Zingales of Chicago Booth, tried to identify issues on which economists generally agreed.

 Read more

Robin Harding

I have written masses about the upcoming FOMC meeting, the upshot of which is that a small taper is likely on Wednesday, but not guaranteed because of uncertainty about the growth outlook (and the prospect of an imminent budget crisis). What I want to do here is proceed on the assumption that the Fed tapers and discuss how it might do so. NB: this is analysis based on insight into how the Fed works. If someone had told me exactly what was going to happen it would be on the front page of the paper.

(A) Designing a taper

The first thing to note is that the FOMC did the hard part in June when it set out a tapering scenario that would see asset purchases end in the summer of 2014 with an unemployment rate of about 7 per cent. That scenario explains why there is uncertainty about tapering in September: with the main parameters already decided, the details of September’s decision do not matter that much, so if individual FOMC officials are passionate about a particular point they may be able to influence the outcome. Read more

Michael Steen

Blue sky thinking reaches Frankfurt (Getty)

Mario Draghi, European Central Bank president, has revived the idea of “reform contracts” — a policy that emerged in Brussels wonk circles last year and entails the EU contractually binding eurozone countries to economic reforms.

Speaking in Berlin on Monday, Mr Draghi told an audience of businesspeople that the eurozone needed two things to achieve sustainable growth: stabilisation and greater competitiveness.

To achieve the latter, he mentioned the need for “better ways of measuring economic performance – for example, more structural indicators of competitiveness.” And went on: Read more

John Aglionby

Mark Carney, governor of the Bank of England, is appearing before the House of Commons Treasury Select Committee for the first time since he introduced his forward guidance, which states that interest rates will stay at their current low level at least until unemployment falls to 7 per cent. The BoE said in August it does not expect this to happen until mid-2016 but the markets are increasingly pricing in an interest rate rise at the end of 2014 or early 2015.

By Claire Jones and John Aglionby


Emily Cadman

Hello and welcome to our live blog on the European Central Bank’s press conference. The central bank did what markets expected and kept rates on hold. Draghi is due to begin speaking at 13.30 UK time.
By Claire Jones and Emily Cadman