confidence fairy

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Debunking George Osborne’s “Recovery”

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George Osborne spouts some nonsense about some so-called economic recovery:

The UK economy is “turning a corner”, Chancellor George Osborne has said in a speech in London.

Mr Osborne cited “tentative signs of a balanced, broad based and sustainable recovery”, but stressed it was still the “early stages” and “plenty of risks” remained.

Mr Osborne said that recent months – which have seen more upbeat reports on the economy – had “decisively ended” questions about his economic policy.

At this point, I have absolutely no idea what he is talking about. He appears to be inhabiting a parallel universe, one entirely separated from the reality which has seen sustained unemployment about 8% for the last 5 years — that’s 2.51 million people out of work who are looking for work — and a slump worse than the one Britain experienced in the Great Depression:

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A tiny uptick after a huge and long depression is barely anything to celebrate. It is a probabilistic certainty that after falling off a cliff and lying prone on the ground awhile, things will one day sooner or later tick upward. Five years later is much later than sooner, and we’re not even back to the level of activity that existed in 2008. It could be eight or ten years at current growth levels after the initial events of 2008 that we make it back to that level of activity. And there is no sign that unemployment will begin coming down any time soon. In the long run, the sea will once again be calm and flat but no-one knows how long away the long run will be.

You cannot cut your way to growth. You do not stimulate growth by taking money and economic activity out of the economy. That is the manner in which you instigate depression. Supplies of capital and labour are both extremely slack — this is illustrated by the extremely low level of interest rates, and the high level of unemployment. Eventually the excesses of capital and labour will be used up, and the economy will return to full-employment and growth. But eventually could be a very long time. Waiting around when capital is available at the lowest interest rates in history and while unemployment continues to number in the millions is extremely dangerous and fragilising. Maybe the uptick will continue, and we will return to 2008 levels of activity by 2016 or 2018. Yet we would still have had a lost decade, one that probably could have been avoided had we not embarked on austerity in the wrong place at the wrong time. And it is possible that things may get worse, not better.

If I had been the politician who presided over this disaster, I would have resigned and hid myself away behind a rock. And it’s not just Osborne’s failure. The British media and other political parties have mostly failed to hold Osborne’s disastrous austerity policies to account. The fact that this depression has been a greater slump than the Great Depression is not the talking point that it ought to be. Perhaps that is because all the major political parties bear some responsibility, as Labour oversaw the start of the slump from 2008 to 2010, and the Liberal Democrats and Conservatives have overseen the continuation of the slump from 2010 to 2013. Whatever the reason, it is dreadful, and individuals from all sections of society continue to suffer for this disastrous mismanagement.

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On Policy Uncertainty…

Paul Krugman says that the notion that the weak economy is due to policy uncertainty has been thoroughly debunked. The Stanford/Chicago uncertainty index has considerably fallen:

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Without any considerable boost to job growth:

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While policy uncertainty is concerned with policy in general, and not executive policy in particular, Krugman’s analysis is that “policy uncertainty” is a thinly-veiled attempt to blame Obama for the sluggishness of the recovery:

One of the remarkable things about the ongoing economic crisis is the endless search for explanations of something that’s actually quite simple — the sluggish pace of recovery. You have a large overhang of private debt; you have a still-depressed housing sector; and you have contractionary fiscal policy. Add to this the well-established fact that recovery tends to be slow after recessions caused not by tight money but by private-sector overreach, and there’s just no mystery that needs explaining.

Yet we’ve seen an endless series of analyses declaring that there is indeed a deep mystery, and it must be Obama’s Fault. Probably the most influential of these analyses was the claim that Obama was creating “uncertainty”, and this was holding everything back.

This crude notion of policy uncertainty is often attached to the notion of the Confidence Fairy; the idea that by running large deficits, government is crowding out private investment due to fears of future tax increases. The corollary of the Confidence Fairy view is that the only way to bring back private investment is to have large-scale austerity, to solidify expectations of lower future taxes. This view has been the basis for David Cameron’s economic policy in the UK, which can only be soberly judged as a large-scale failure.

Krugman is right to trash the Confidence Fairy — austerity at this point in the business cycle is a catastrophic error, because it sucks money out of the real economy. And he’s also right to trash those who view the sluggishness of the recovery as solely Obama’s fault. But he’s wrong, I think, to throw policy uncertainty out of the window entirely as a proximate cause of some of the problem’s we’re now facing.

Broadly, policy uncertainty goes both ways. That is simply because not all entrepreneurs in the private sector are looking for or worrying about tax cuts. People are heterogeneous. While there are some entrepreneurs worried about the future trajectory of taxes, many other entrepreneurs may be hoping for fiscal stimulus either because they would expect to receive orders from the government (for example, construction firms, defence contractors, universities, energy companies) or because they would be hoping that with stimulus, more people would have money in their pockets and they would be spending it.

While this, of course, cannot explain the crisis itself, nor the long and slow deleveraging since, having a deadlocked Congress erring on the side of austerity could be a major headache for many private enterprises. The fact that the more severe austerity experienced in Europe and Britain has actually led to bigger budget deficits there could result in even deeper and greater uncertainty for businesses. Put more simply, many businessmen could be reading Paul Krugman and others like him, agreeing with their interpretations, and worrying about the confused and deadlocked approach that the Federal government has taken to the post-2007 economy, and the dangers of austerity. This could contribute to the uptick in policy uncertainty measured by the Stanford/Chicago Index experienced since 2007 just as much as Wall Street Journal-reading Republicans worrying about the Confidence Fairy and taxes.