There are many uses of the phrase “new normal” in economics these days. Usually, it is used to signify lower growth or a different type of growth than in the pre-crisis period. Mark Carney went onto the radio this morning to talk about the “new normal” in monetary policy.
Interest rates would be materially lower in future than the 5 per cent rate widely seen as normal before the crisis. The Bank of England governor’s words have been widely reported as a big new statement of policy.
Is this a new policy?
No. Carney first talked about future interest rates being “well below historical norms” in his January speech at the World Economic Forum in Davos, which confirmed the BoE had ditched its original forward guidance linking interest rates solely to unemployment. The important passage was reported clearly in the FT at the time and is copied below. Read more
Professor Thomas Piketty has given a more detailed response to the Financial Times articles and blogs on his wealth inequality data in Capital in the 21st Century (here, here, here and here). He says it is “simply wrong” to suggest he made errors in his data.
There are a few things on which we agree. First, the source data on wealth inequality is poor. I have written that it is “sketchy” and Prof Piketty says it is “much less systematic than we have for income inequality”. Second, it would have been preferable for Prof Piketty to have used a more sophisticated averaging technique than a simple average of Britain, France and Sweden to derive an estimate for European wealth inequality. Third, the available data suggests a broad trend of reduction in wealth inequality during most of the 20th Century. Read more
Ever since the Financial Times wrote articles pointing to data problems in Professor Thomas Piketty’s best-selling book, there has been quite a heated reaction online and in print. In this post, I will give what I hope are some more relevant details, address a few misunderstandings and reply to some of the very legitimate questions that have been raised over the past few days.
For those that do not like lists, I apologise because this is something of a long list. Read more
Professor Thomas Piketty’s Capital in the 21st Century has data on wealth inequality at its core. His data collection has been universally praised. Prof Piketty says he has collected,
“as complete and consistent a set of historical sources as possible in order to study the dynamics of income and wealth distribution over the long run”
However, when writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per cent. Read more
I am happy to see that FT journalists are using the excel files that I have put on line! I would very much appreciate if you could publish this response along with your piece.
Let me first say that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues (if there was anything to hide, any “fat finger problem”, why would I put everything on line?). Read more
In Threadneedle Street tomorrow, the Bank of England has some big questions to answer in its inflation report. How much slack does it think remains in the labour market? How is monetary policy likely to respond to falling estimates of spare capacity? And how much can the BoE rely on macroprudential tools in lieu of raising interest rates?
This post addresses the first question from which the other two follow. The answer for people who do not like spider-web diagrams is that not much slack remains in the labour market, at least if you believe the BoE’s analytical methods.
For context, Britain’s central bank said in February there is little spare capacity within companies, so the slack in the economy relates to unemployed and underemployed people. It has moved away from unemployment as the sole indicator of slack to a more holistic approach, one it first considered last August when it first used the spider-web diagram (top) in the chart below.
In this pentagon, the BoE said all five different indicators of labour market slack it considered for Q1 2013 were roughly one standard deviation higher than the 1992 to 2007 trend. In percentage terms, this finding equates to the BoE saying that the labour market at the start of 2013 was in a position where it had been historically stronger about 84 per cent of the time and weaker only about 16 per cent of the time. Read more
The world has known since Reinhart and Rogoff’s classic “This time is different” that financial crises are likely to cause persistent damage to economies. Even if growth returns to pre-crisis rates (and that is a big if), the level of output is generally lower. Persistently lower output is horrible as it generally requires households, governments and companies to tighten their belts in order to bring spending into line with the new expectations they are poorer than they had hoped.
The big question has always been by how much will economies suffer. Alongside the normal economic forecasts and recommendations for structural reform that always come with an economic outlook from the Organisation for Economic Cooperation and Development, the Paris-based international organisation has also published its latest guess at the permanent damage from the crisis and the different causes in different countries.
Every country has its own internal debate on the matter and it is often useful to have an external comparator, which is consistent across countries to challenge domestic views, which can often conclude that this time it is different for us.
First, the OECD agrees with Reinhart and Rogoff, saying: “For most OECD countries, the crisis has probably resulted in a permanent loss of potential output, so that even with a continuing recovery, GDP may not catch-up to its pre-crisis trajectory”.
For the OECD as a whole, the organisation compared outcomes since the crisis with the assumption that labour force participation, structural unemployment and productivity growth remained at the averages between 2000 and 2007. It finds a big variation among OECD countries with an average overall loss of economic output of 3.25 per cent as shown in the first chart.
It is almost a week since the International Comparison Programme produced new estimates for what people can buy with their money in different countries. The new Purchasing Power Parity series seeks to establish the real-world equivalents to $1 by estimating how much domestic currency is needed to buy a similar basket of goods and services in every state.
The estimates are difficult and care is needed in interpreting the results, but they are also vital for making relevant international comparisons. And it is all change in global economics in at least three different areas. Read more
The FT reported this morning that China will overtake the US as the world’s largest economy this year. This is a historic moment since the US has been the global economic powerhouse since about 1872. As Jamil Anderlini, the FT’s Beijing bureau chief explains, the news is an important geopolitical moment. Everyone has known the moment was coming (the IMF’s projections suggested 2019) but the report from the International Comparison Programme came as a shock, saying the Chinese economy was already 87 per cent of the US size in 2011. The figures are based on new estimates of Purchasing Power Parity (PPP) and inevitably raise a lot of questions. I will attempt to answer them here.
1. I’ve never heard of the International Comparison Programme. What is it?
The ICP is a loose coalition of the world’s leading statistical agencies, hosted by the World Bank in Washington. Eurostat and the Organisation for Economic Cooperation and Development produce the data for advanced countries and a series of regional offices, usually national statistical agencies, provide the equivalent data for the rest of the world. In total 199 countries are covered. The results are therefore much more comprehensive than any other comparable study. Read more
Many US citizens are proud of their Irish roots and have a great affinity for the Emerald Isle. In an otherwise rather dull International Monetary Fund fiscal monitor, this table might make them reconsider.
It shows the level of financial support given to banks in the financial crisis and the level of recovery to date. All the figures are in terms of percentages of national income so they show the relative burden of the support and the recovery. Read more
George Osborne has today made a pledge to restore Britain to “full employment”. It is not at all surprising that the chancellor is setting his ambitions in terms of jobs because that is the one area of the UK economy that has performed extremely well over the past four years.
Economic growth has disappointed as the economy stagnated in 2011 and 2012. Living standards are well below 2010 levels even with the growth that has been achieved. Tax revenues are causing concern across government because they are persistently weak. And productivity – output per hour worked – has been close to the worst among advanced economies, raising big and difficult questions over Britain’s ability to sustain rises in living standards once unemployment has returned to normal levels.
But what does Mr Osborne think constitutes full employment? Here are some possibilities.
Forget George Osborne’s speech; ignore Ed Miliband’s response. Politics does not tell you anything about the nation’s finances. These charts do. The big message is that the public finances in Britain were terrible, are terrible and still need lots of work to repair the damage.
1. The deficit is still terrible
Borrowing is falling and public sector debt is not rising so fast, but these facts are small comforts. The big picture is that Britain is still borrowing hugely – more than almost any other advanced economy – and will do so for many years to come.
The good news from the red line is that the borrowing outlook is better than a year ago, but still falls short of expectations in the 2012 Budget.
This is a question to which I have not given a huge amount of thought, since all central banks have declared an intention to unwind QE eventually and have given the impression that any other policy would be disastrously inflationary.
The Bank of England has always had an eventual unwind as part of its declared policy. Normally the logic goes that without selling assets back to the private sector and destroying the money the central bank has created, the price will be a huge credit boom once the recovery is underway. In this world it’s best to get back to a more normal level of base money in the system to prevent the money supply growing out of control.
This logic is challenged by the BoE’s quarterly bulletin article on money creation in a modern economy. The article attacks those who think QE is automatically inflationary because it will lead to a ballooning supply of money chasing too few goods. Wrong, says the bank. Commercial banks lend because there is demand from households and companies, not because they have base money burning a hole in their pocket. And furthermore, the BoE adds, it can always control the demand for loans with monetary policy.
But if QE never can create inflation, the article raises a bigger question, which it fails to answer. Why bother to unwind QE? Read more
In a talk delivered on 3 January, which the ever-so-slightly disorganised Andy Haldane has just got round to writing up, the Bank of England’s head of financial stability beautifully sets out the new central bank orthodoxy on the benefits of macro-prudential policy.
First, he clearly defines the term:
“In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends.”
Next, he looks back at the crisis and asks the correct question: what would have been different had macro-prudential policy been fashionable (it was invented) rather than deeply unfashionable in central banking circles. Read more
Once upon a time, the Bank of England’s Monetary Policy Committee sounded like a group of nine individuals with differing views. One of the most interesting aspects of Mark Carney’s arrival is the monotone now coming from the interest-rate setting committee.
It has been noticed: for example Fathom Consulting put this slide up at its recent monetary policy forum.
In a note last week, JP Morgan also made a rather damming comparison between the BoE’s reticence to acknowledge any discussion over a new form of guidance with the Federal Reserve’s minutes which demonstrated a healthy debate over the options. Allan Monks, the author of the note, concluded:
” In our view, the lack of discussion about the presentation and specifics of this new ‘framework’, or the consideration of any alternatives, does not suggest the committee as a whole is strongly invested in it. While Governor Carney may suggest policy-setting has undergone another innovation, the rest of the MPC has merely acquiesced and views the changes through a different lens.”
The question seems absurd. John Rentoul of the Sunday Independent would be tempted to add it immediately to his list of journalistic questions to which the answer is “no”. I think the answer is obviously “no”.
But the Treasury and the Information Commissioner believe anyone revealing details of the Bank of England’s forecasts is doing something that is:
“likely to have a destabilising effect on the financial markets and thus have a prejudicial effect on the economic interests of all or part of the UK”.
Hence, in the eyes of government, Mr Carney, who revealed details of the BoE forecasts on Wednesday, is something of a traitor. At least that was the view of the Treasury last year. Read more
At the World Economic Forum in Davos, Mark Carney got to speak briefly at the main debate on the global economy. Asked about the news on forward guidance he talked about it coming to the end of its “first phase”. He said:
In terms of exit, I am not signalling an exit on UK monetary policy, just to be clear. Our first phase of forward guidance with a 7 per cent threshold of unemployment rate is approaching – we don’t know exactly when – the achievement of that threshold. We will assess the overall conditions in the labour market; more broadly the supply capacity of the economy, just as we’ve said all along that we would do at that point and set policy appropriately.
Headlines are headlines. British unemployment plummeted from 7.4 per cent between August and October to 7.1 per cent between September and November. This puts it 0.1 percentage points away from the point the Bank of England said it would start considering raising interest rates. It is a big story but there has to be a question whether the unemployment rate is a false friend to the BoE. Could it be suggesting strength in the labour market and a drop in slack that other labour market measures do not show.
Luckily, when the BoE introduced guidance, it published a pentagon diagram of other labour market indicators. It is inserted below and each point shows the same degree of slack, pretty much, (1 standard deviation from normal levels). I call it the BoE’s presumptive pentagon. It was presumptive because it was suspiciously regular (rarely things show such a consistent message in economic data) and it presumed unemployment would behave similarly to other indicators. The time has come to find out. Read more
On Wednesday, the Office for National Statistics for the first time published regional growth figures for the UK. The obvious question that popped into my mind was to compare the Scottish growth with that published by the Scottish government.
I produced the following chart and wrote what looked like a cracking story because the ONS measure showed little over half the growth of the Scottish Government data, raising questions over the strength of Scotland’s economy. Read more
A wealth of data was published by the Office for National Statistics today, as officials try to clear the decks before Christmas. In chart form, here is a condensed version of the inflation statistics, producer price figures and house price statistics for November.
1. Inflation is getting close to the 2 per cent target Read more