Gross Output makes The Wall Street Journal

Mark Skousen has an opinion piece on 'Gross Output' in today's Wall Street Journal. Last week I presented estimates for the UK economy at the APEE conference in Las Vegas. You can view my presentation here. The chart below shows Gross Output for the UK economy (relative to GVA):

I plan to revise this shortly when the Supply and Use tables are published in July 2014, so this is only a rough treatment and I've not published the working paper. The data is released as separate tabs in an excel file but if anyboday would like the time series that I've created email me.

I also presented a measure of UK Payments. This also has data availability issues, with January 2010 figures simply missing from the data set. But here's what it looks like:


Bob Murphy on Hayek vs. Sraffa

I confess that I've never read the original sources of the Hayek vs. Sraffa debate, and suspect that it would be worthwile to do so. But I was never convinced that they would overturn or seriosuly challenge my existing understanding of Austrian business cycle theory. I recently read two accounts of the Hayek vs. Sraffa debate, and they validate this.

The first is Bob Murphy's "Multiple Interest Rates and Austrian Business Cycle Theory" (.pdf) He spends several pages outlining Sraffa's critique of Wicksell (and thus Hayek), several more pages discussing Hayek's response, and then even more on Lachmann. He essentially upholds Sraffa's point that in a world of multiple markets there is no singular natural rate of interest - "the" natural rate is a function of whichever good one arbitrarily decides to use as a numeraire. Murphy attempts to solve the problem of whether or not a natural interest rate exists in a barter economy by appealing to a concept of dynamic equilibrium. To be fair he credits Hayek with the basis for a dynamic, rather than static equilibrium construct, but he defines it as the following:

Austrians... should define a dynamic equilbrium construct where quantities, prices, resources, technologies, and even "spot" consumer preferences can evolve over time, but in a perfectly predictable manner

But in 'Prices and Production' Hayek cites "correct anticipation of future price movements" as one of the three criteria for neutral monetary policy (others being constant total income stream, and perfectly flexible prices, see p.131). This struck me as a solution in search of a problem.

In "The Clash of Economic Ideas" Larry White deals with the Hayek vs. Sraffa debate a lot more quickly. He says

Sraffa mistook Hayek's goal, which was not to replicate all the properties of a barter economy, but simply find a monetary policy that would not drive a wedge between savings and investment (p.92)

Isn't that the nub? When Austrians talk about "the" natural rate of interest it isn't because there is only one interest rate, but that there is one particular market that matters for intertemporal coodination. The market that bridges savings and investment. The market for loanable funds. Murphy's 40+ pages of text fail to mention "loanable funds" at all

Sorry Pierro, but I still don't see what the fuss is about.


Bank of England on money creation

The Bank of England have published an interesting note on money creation. Given that Kaleidic publishes our own measure of the UK money supply, there is plenty that could be written about it. For now though, I just want to nip some of the crowing being done by MMTers. The way I understand the "money multiplier" is that there's a ratio between narrow and broad money. It's a bit like saying that there's a link between changes in human generated CO2 emissions and in average global temperatures. But identification of a ratio says nothing about causality. In the case of global warming, it seems that there is a large and vocal group claiming that the ratio (or correlation) is stable, predictable, and underpinned causaility. There's others who dispute this. There's probably even some who argue the causation runs the other way.

In the BoE report they say:

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. 
central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits
And then the killer argument:
While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates
Obviously this depends on the textbook. In mine, I explain how central banks can affect the supply of money (through open market operations) or the demand for money (through interest rates) and the links between the two. I also mention that there is a ratio between broad money and narrow money. But I don't claim that the ratio is "constant". The term "multiplier" implies some sort of mechanistic causality. I think that's a strawman. I believe that considering the ratio between narrow and broad money, and the factors that cause that ratio to change, to be important. 
I suspect that the reason the "money multiplier" is used so much is because it's descriptive and intuitive. The MMT crowd have a grain of truth in their critique. The challenge is to present an alternative that is more accurate but also just as usable. Whenever people criticise "textbook" economics, I wonder if they've actually read any. Or at least if they recognise that textbooks are starting points, and *not* the codification of everything we know and claim to be true.

Welcome to the great stagnation

Yesterday was the 11th quarterly meeting of Kaleidic Economics, and the topic was Tyler Cowen's 2011 thesis on "The Great Stagnation". There is a TED talk with Cowen here. The report is called "Welcome to the great stagnation". All of our reports are here

Here's a chart showing the breakdown of the increases in median incomes in the US, from 1980-2005. The data comes from Steven Landsburg. He shows how median income for all workers rose by just 3%, but that this masks what was happening within different groups. Since women represented an influx into the labour market, and their wages were typically below median, this dragged down the total. But every group rose.

To quote our report,

time series data on median income gives the impression that we’re seeing what is happening to people’s incomes over time, but it doesn’t. It shows what happens to various income groups. This gives a misleading impression if the composition of those groups is changing. It’s like looking at Euston station during rush hour, and noticing that there are almost always 400 people on the concourse. This doesn’t mean that no one is getting home; it just means that for every train that departs, more people arrive. Immigration will continue to top up the lower income group, such that median incomes appear stagnant. But this is a positive demonstration of the dynamic effects of the economy. It’s a strength, not a weakness

Overall though we are sympathetic to the view that the rate of growth in incomes, productivity, and technological innovation has slowed. This doesn't necessarily mean that living standards are falling, since we are getting better at learning how to consume the technologies that we do have. We can be utility optimists but output pessimists. 

Here's our introduction:

This report confronts Cowen’s argument, and considers how it relates to some specific questions relating to the UK economy. In particular, why has productivity nose-dived since the recession? And are lower growth rates, and lower interest rates, part of a “new normal”?

Read the full report here.


Which battle are we fighting?

The second estimate of GDP came out recently, and with it the first estimate of NGDP for Q4 2013 (see Britmouse here, see our guide to UK national accounts here). Once again, the growth rate is strong. Here's the quarterly rate:

Here's a chart showing the quarterly rate, compared to the same quarter of the previous year (series code IHYO):

I am incredibly sympathetic to market monetarism and feel that they have been consistently ahead of the curve. But identifyng a shortfall of NGDP growth expectations as being the primary reason for the recession, does not necessarily mean that a shortfall of AD is the current problem. Obviously, the charts above leave us some way off where NGDP would be absent the recession. But as with most Austrians, I don't believe that this counterfactual is plausible. Even the most monetarist of market monetarists would agree that an NGDP growth rate of 500% is suboptimal, even if anticipated. Austrians think that the same applies (albeit to a much lesser degree) with one of 5%.

The chart below takes a longer look at what's been happening to NGDP (also QoQ of previous year): Clearly, the focus on inflation targets rather than collapsing NGDP was a major oversight by the Bank of England. We'd all be better off if monetary policy was more neutral during 2008, rather than being highly contractionary. What I'm less sure of, however, is the argument that monetary policy is too tight right now. The stable door is open. The horse has bolted. Optimal monetary policy would ignore past errors and guide NGDP expectations towards a sustainable growth path. A level target means that bygones are not bygones when shocks occur, for a given target. But since part of the debate is what an optimal NGDP level target would be, it's ok for market monetarists to be wary of loose monetary policy. 

P.S. This post is focused on the UK economy. The argument that monetary policy is too tight in the Eurozone is a lot more convincing, and it's plausible that deflationary pressures may become a problem for the UK economy too. If it does, I will change my position.

P.P.S I shouldn't have used the term "annualised" in the charts above. I was confused because I'd just been reading Britmouse's analysis, and he likes to annualise the data. There's two reasons why I prefer to look at the quarterly growth rate, relative to the previous year. Firstly, it is publicly available. When the ONS release the National Accounts you can look at Table A2 and there it is. There's no need to do any calculations. This is preferable because it's easier, and more credible. And secondly, it seems more indicative of what's going on. The chart below compares three quarterly growth rates:

  • Quarterly growth compared to previous quarter (IHYN) BLUE
  • Quarterly growth compared to same quarter of previous year (IHYO) ORANGE
  • Quarterly growth annualised (my calculations) GREEN

OK, I've cheated and put my favoured one in a thicker line. But if you want a snapshot of NGDP, I believe this is the least erratic, and most useful measure. It also avoids the fact that I've probably made an error calculating the annualised version...