When is a double dip not a double dip?

The Office for National Statistics (ONS) reported that GDP fell for the second successive quarter (January to March) and so the press have heralded a recession. The much feared 'double dip'.

What are the implications of this? The most important is the impact on confidence. Consumer and business confidence is incredibly low and this will do it no good at all. We can expect people to save more and firms to hold back on investment. This is going to reduce the rise in AD over the coming months and that will hamper recovery.

An important question about the data has to be asked however. The definition of a recession as 'two quarters of falling GDP' is not a technical one. It was coined by the semi-technical press and has now passed into the literature as if it is true. Actually it is at best a guide in order to point out that a single quarter of falling GDP is not a trend. So is this definition accurate?

Actually a better definition of a recession is six months of continuously falling GDP. That is GDP falls in each month of the six. The problem of ONS data is that it is based on calender quarters, January to March, April to June etc. But this means it is quite possible for two bad months, say December and January, to make GDP appear to fall in two quarters, while in fact there was growth in four and the current trend is still for growth.

In this case it is not at all clear that there is a recession, and it is not even certain that the Jan to March figure won't be revised back to very low growth. In addition a recession usually is accompanied by rising unemployment, and yet the latest figures show falling unemployment.

What is clear is that the news alone is potentially damaging, especially as the idiot Balls will cynically exploit figures he knows to be exceptionally dodgy and encourage the very behaviour that will further damage the recovery.

The BBC page shows the news in context here

Monetary policy dilemma continues

It is possible that we are now approaching the point at which we can say interest rates will move up, possibly at the end of the year. Adam Posen, the most enthusiastic member of the MPC on easing monetary conditions, believes that the Bank has now done enough (or at least all it can).

Of course this had to happen. The markets decided this was a bit of a surprise and the pound was bid up in price, as the expected rise in interest rates was moved forward. The link between exchange rates and the interest rate couldn't be more clearly indicated.

But Posen also makes the point that interest rates alone are not enough to induce growth. Expectations, based on business confidence, are also crucial, but so is the ability to borrow money.

If the financial sector cannot lend money to businesses then even when firms believe it is worth investing and can afford the loan then the investment won't happen. The attached article shows how important it is to get all the pieces in the jigsaw in place.

The Independent article is here

Inflation figures a blip, but a blow too

The CPI figure rose last month to 3.5% (from 3.4%). The Bank of England has been saying that there was a danger of being below the 2% target by the end of the year and this is a concern for them.

The cause of the rise in inflation was mainly due to energy prices (which rose but more slowly than a year ago), food and clothing prices. These are items that monetary policy finds difficult to control as they are supply side or exchange rate driven and monetary policy works on AD.

However there is a concern in these figures for the pace of recovery. The higher inflation rate means that real disposable incomes are falling faster. Wage rises are less than 3.5% and so it means that households have less real income to spend on consumption. Also as households are very aware of inflation rates (indeed they exaggerate the rise in their minds) and this rise in inflation will affect consumer confidence. As we all know consumption is around 2/3 of AD and so short-term growth can easily be reduced.

It is pretty much impossible for the Bank of England to do more. They also believe, as do most economists, that inflation will fall for the rest of the year. (RPI did fall this month.) But this change in the direction of inflation, however temporary, may have a much bigger impact than the actual small change suggests.

The Guardian covers the story here

Just getting supply side labour market policies in perspective

This week the government changed the law on how long an employee has to work before they can claim unfair dismissal. It rises from one to two years.

This restores the situation to the pre-1997 situation and is another move that has seen the period vary between six months and two years. The argument is about getting the balance right between protecting workers from being used by employers and then discarded, and encouraging employers to take on new staff.

If employers feel that there is a financial risk in taking on staff they may not do so. If they can terminate employment without cost then they might take the risk. Under the current situation the point might be welcomed by prospective employees, but many feel it just transfers uncertainty from employer to employee and is unfair.

The aim of UK policy is a flexible labour market. Making the UK capable of responding quickly to world events and keeping the economy competitive. Contrast this with the Australian view, where even moderate reforms are seen as unacceptable, and the legislation is loaded massively in favour of employees.

This makes the Australian economy quite staggeringly uncompetitive. There are high wages for shifts, young people can't work short shifts preventing them competing in the labour market and add on costs for staff are very high. The article from The Age is a typical response to any attempt to bring supply side reform to Australia, but for us its main use is to contrast the UK and a 1970's style labour market.

You may conclude Australia is doomed once the mineral prices fall.

The Age article is here

New Keynes papers prove Keynesian's wrong

Papers belonging to John Maynard Keynes were discovered in the archives of King's College Cambridge last year. Since then academics have been studying the manuscripts dated between 1940 and 1946.

Keynes was engaged in war work throughout that period and published nothing on economic theory, although he had stated that he intended to write a revised edition of the 'General Theory' in 1938 and had told Hayek that he could 'easily deal with' those such as Joan Robinson who were using his ideas for their own purposes. Keynes died in 1946 before the revised edition had been submitted and many of the papers are his revised draft of that book.

To the distress of many Keynesians, recently crawled out from under their stones, Keynes revises his view of the economy and states that demand management techniques only have a role in the very short term.

One section states; "In periods of severe restriction of aggregate demand, such as in the period of the recent depression, {1929 - 33} then it is the role of responsible government to abandon the pursuit of a balanced budget and boost national output through deficit finance."

He continues later; "Many have taken my meaning to be that government should seek to manage the level of national output through persistant budget deficits. This would lead to unsustainable debt and ignores the crucial importance of increasing productive capacity. Generally government should seek to balance their budgets to allow the industrial sector to create the wealth necessary for growth and improved living standards."

Professor Bob Williams of the WBO commented "Keynes was clearly preparing to put the world straight on a massive mis-interpretation of his work. He makes it clear that demand management is an emergency measure only and that classical, or monetarist views were those that should be used in normal times."

Professor Lord Robert Skidelsky, Keynes' biographer is quoted in The Sunday Times as saying; "I was wrong. I am devistated. These papers make it clear that Keynes never changed his views from 'The Treatese on Money' in 1930 but saw the Great Depression as a special case. I don't know what I will do now."

Well I always said Keynesians were wrong!

Full story here

Workplace parking tax in Nottingham

Nottingham is introducing a tax on workplace parking if a firm has more than ten parking places for employees. The aim is to provide a further disincentive to using private transport and reduce congestion.

The fee for a parking place is £288 a year and employers can pay it or charge their employees. Presumably if the employer pays the fee then employees will need to declare it as a 'benefit in kind' for tax.

Will £288 be enough to reduce congestion very much? Well probably not. But the scheme should raise £14 million and that is going to fund two new tram lines and provide a cheap and efficient improvement to public transport.

Trams are incredibly cheap to provide compared to other types of public infrastructure and if they have good routes will be very fast (but not if they head down crowded streets and compete with cars of course). They are also very environmentally friendly and fit into a sustainable transport policy very well.

We know from places like Singapore that congestion policy needs a series of supporting measures. This increases the effectiveness of each (making the cross price elasticity of demand more elastic). So Nottingham are also introducing parking restrictions to avoid people avoiding the charge by parking on the street. With the investment in trams they are probably doing all a local authority can.

Many people object to this move but it really does seem to be a policy informed by our understanding of transport economics.

Local coverage of the policy is here

Red tape - a legitimate target for supply side policy?

Today the new Planning regulations for England are published. They are to be 50 pages, not 1000, pages long.

What prompts this move is the desire to speed up development plans. At present it can take two years to get permission for even a moderate development and while the planners and councils consider their opinions and check against the regulations labour stays idle and growth is stalled.

Good supply side policy allows the Long Run AS curve shift to the right more quickly. This cutting of red tape seems to fit that bill. It should give a one-off boost to growth, at least in construction, but also in the faster building of private and public infrastructure and may allow improved growth in the future.

However it is worth asking why there were 1000 pages in the first place? Often it is to prevent environmental damage and to protect the sustainability of development. Do we really want no gaps between urban areas?

In reality 1000 pages was certainly too much. Petty rules to preserve old fashioned and outdated ideas, but 50 may be far too few and we may have endless appeals as planners have to make personal judgements.

The Independent covers the story here

So the Budget.....

As Budget's go this one had a lot of different things in it. You might not agree with the direction but you have to admire the width. There were both demand side and supply side measures.

Demand side measures

Included raising the income tax allowance to £9,205 from next April. This is effectively cutting income tax and so increasing AD by raising consumption.

Indirect taxes have risen on tobacco and alcohol. This will reduce AD by raising prices, but there is a clear justification on this on the grounds of market failure.

The Budget deficit will continue to fall over the rest of the parliament reaching just £21bn bu 2017. This is a contractionary stance and will push AD down.

Corporation tax will fall from 26% to 24% from this April. This should boost profitability and so raise the incentive to invest, so raising AD.

Higher stamp duty and the closing of 'loopholes' means that really high earners are not as well off as tax cuts appear.

On the supply side there were a number of measures.

There is help in gaining finance for small businesses with a loan guarantee scheme.

The top rate of tax will fall from 50% to 45% from NEXT year. It is argued that this will increase incentives to work and will therefore increase output and benefit the economy. Combine this with the cut in Corporation tax and this can be seen as a clear attempt to make Britain appear a better place to locate your business than other countries.

Faster broadband speeds in the major cities to improve infrastructure.

The income tax and corporation tax measures listed in Demand side also have a supply side incentive effect.

Overall

There are a lot of measures! I have listed only a few and you should read the papers on this, but looking at them in a list does not really do them justice. Is there an overall philosophy behind the budget and does it make economic sense?

I think the Budget can be summarised as a mixture of short term details and long term vision:

In the short term the economy is growing, but slowly, and can manage with less fiscal support in the future. Some people are really struggling and the higher tax allowances and concessions of child benefit are designed at help them a little. Some people are too generously dealt with and they must pay more.

In the long term there is a need to re-balance the economy by reducing the deficit and encourage growth. The Chancellor has avoided short-term popular measures in favour of a long term view.  The supply side measures really stand out here.

Of course some policy objectives are so low down the list they have pretty much dropped off. Can you order the priorities?

As usual the BBC provide excellent coverage with plenty of interactive bits

Road privatisation - is this the death of sensible road pricing as an option?

The Prime Minister announced that there is to be a consultation on putting the road network, at least partially, into private ownership.

This move has many implications and Transport Economics will be changed forever.

The Independent article raises most of the important issues. How will the roads be 'privatised', will the same mistakes be made as in past privatisations? Has PFI ever really worked? Will this scheme bring the investment the roads need?

But there are two issues I need to highlight.

The report suggests the cost of congestion is £7bn a year. I know this was estimated at £15bn in 1990, so this seems far too low a figure. I have asked for information on the source of The Independent's figure, but the difference seems to me to be so massive that it would change the result of any Cost-Benefit Analysis.

The issue that really bothers me about this plan is that it effectively abandons any thought of a national road pricing scheme. Such a scheme, where charges vary according to the time of day and level of congestion and co-ordinated on a national basis, holds the answer to the road problem.

Road pricing will pass on external costs, reduce road use and encourage alternative modes of transport. Such a scheme uses all the principles of charging that economists know can lead to an optimal outcome and a sustainable transport policy.

Can you imagine a road network with a mixture of public and private roads, a variety of tolls and SatNav's that direct traffic down the cheapest route, which will probably be past a school or old peoples home? Let's not even start on what happens when firms and investors walk away from their franchises!

Vital reading for Grecians, but important for everyone.

The Independent article is here

What should be in the budget?

Fiscal policy works well once it actually gets to be implemented. The first stage is the Budget, which will announce the measures that will be put in place over the next financial year (or two or three).

At this stage the long process of considering possible measures is concluding. What objectives the government will try and achieve, and what measures they will use will now have been decided. One thing is for certain, the Chancellor has not wanted for advice.

Some people are very keen to have more supply side incentives, others want an expansionary budget to boost aggregate demand. This reflects the deep concern people have for the state of the economy.

The piece below comes from The Guardian and is an opinion piece on what should happen. This is a thoughtful article, but does represent one point of view (a Labour front bench MP) so please remember that when reading it.

The Guardian article is here