Wednesday, July 25, 2012

GDP figures

Today saw the announcement of the first round of GDP figures, the Office for National Statistics' first attempt at working out what happened in 2012Q2, or April, May and June of this year. They base these numbers on something like a quarter of the total amount of data available for that period, and hence sometimes these numbers can be a little inaccurate.

The announcement today was that GDP fell by 0.7% in April, May and June of 2012, contributing further to the recession that began in the last three months of 2011. Overall, according to these figures, GDP is now lower than it was when the Coalition came to power. There's plenty to be sceptical about in the figures though, as David Smith points out. There's more reflection at the FT also, and following the link about hysteresis takes you to the IMF's recent prognosis on the UK - the prospects are not particularly promising.

The IMF, contrary to its previous pronouncements on the UK economy, is now recommending continued loose monetary policy and fiscal policy - calling on the Coalition to abandon its austerity drive.  Of course, the government is never going to admit it's changing to Plan B, but recent announcements regarding public spending, as Jonathan Portes points out, are a tacit acknowledgement of this.  The deficit remains eye-wateringly large, while interest rates are only low because of a lack of growth prospects rather than any confidence in the government's economic policy (despite the government's insistence to the contrary), hence little has changed since 2010 when there was no alternative to austerity...

Monday, July 23, 2012

What would Keynes do?

The philosopher John Gray has written an article on the BBC News website entitled A Point of View: What would Keynes do? It's well worth a read to get some feel for who Keynes was, and how he thought.

Gray makes an important distinction in his article, notably that what Keynes might propose if faced with today's economic environment is different to what is generally described in the press as "Keynesian economics", i.e. tax and spend policies.

The other important thing about this article is the following - it's written not by an economist but a philosopher. What is always important is not to be parochial when studying economics - others can, of course contribute and we shouldn't be so arrogant as to think we can't learn from those in other fields. However, unlike any other science, almost everyone thinks they know something about economics, and often what they think they know is fused with their political beliefs, meaning that it will be very hard, if not impossible, to reason in such a situation. It's a good practice ground to try though - helps you to think about what you know about the economy if you're forced to think quickly on your feet in a discussion with a friend who shares different political beliefs to you...

And, of course, it's great if you can challenge your own political beliefs using what you've learnt in economics. Try not to simply take the bits of economics that suit your political beliefs but instead let your beliefs be shaped as much as possible by what you learn as an economics student...

Friday, July 6, 2012

LIBOR and Fixing Rates

I doubt this story has passed anyone by; Barclays bank decided to attempt to manipulate a market through lying about the price it was paying. According to this article summarising the whole thing by Sloman, they may have succeeded. If it did, it would then have ended up giving a better impression about how "safe" the bank was at the height of the crisis, thus most likely avoiding as much of a share price fall, and as high rates to pay to borrow money from other banks (that's what the interbank market is for).

There's a lot that will come out in time about this, but the whole episode neatly fits within a module I teach each year in Birmingham called Contemporary Issues in the UK Economy.  We have a section on the financial crisis, and naturally by the time I get round to teaching it next (February 2013), I will certainly be talking about this crisis, and the likely proposed response to it.

What should be noted most importantly though is that is shows the limited information available to regulators. Surely the regulation that was already heading through parliament should have been sufficient to "prevent a repeat of the crisis ever happening again"? It won't take you an economics degree to be sceptical about that commonly expressed sentiment, but hopefully it will help you to be constructive about it.

Of course, what's being talked about is the regulation heading through parliament being amended - amended already, before it's even got through? Then we'll amend it again next time something emerges - the point is that government doesn't have all the necessary information to prevent everything happening, and hence will like this always be fighting the next war. They may legislate against some manner in which the rate was "fixed" - banks will continue to have an incentive to do this, and will just find other ways to do that.

Probably the most important point though is the general direction of response - our response has been "let's regulate more!", because the problem was "there wasn't enough regulation!". Yet nobody ever explains why the regulation pre-crisis wasn't enough, and why adding more to the mix will somehow solve the problem.

What would be a much simpler response, and probably more effective, would be to empower us as customers in a more fundamental way - offer us more choice. Allow more competition in the banking sector. Change competition policy such that we don't encourage market consolidation until there are dominant players like Barclays and RBS who can abuse their position and get away with it because there isn't any realistic alternative. Why is it that the only way a new bank could emerge from the crisis was by Virgin buying the carcass of an old one?

If we could vote with our feet (and it may require some regulation to enforce that to be allowed since we share a lot of information with our bank that other banks haven't got to make us better more suitable offers), then we'd walk away from banks like Barclays who do things like they've been found to be doing. Then the incentive for Barclays not to do illegal, immoral things is that they will suffer on the bottom line - the most important thing for them.

Wednesday, July 4, 2012

Ideology or economics?

I blogged yesterday about a post on Liberal Conspiracy (LC) which I decried for being too ideologically motivated rather than motivated by scientific investigation. As I said, I file LC under politics in my Google Reader. However, I do file Marginal Revolution (MR) under economics - along with a number of other blogs written by economists of a libertarian persuasion - however, I'm wondering whether I should reconsider.

There's a constant, ongoing debate between libertarian economists, and non-libertarians of various stripes; the latest instalment is summarised in the post that has motivated this post by Tyler Cowen at MR. It appears a few non-libertarians have challenged libertarians on a point I consistently think about libertarians - they are a little loose in how strictly they apply the need for liberty amongst all members of society, ignoring the cases where the price mechanism will not operate to yield liberty to all but will in fact restrict liberties to many.

While I don't agree with everything the critics (at Crooked Timber, another interesting if politically slanted blog) have to say, I find Cowen's response striking. He basically says two things:

1) Show me some data.
2) Employees behave just as badly as employers so let's shine the light on them.

I find response (1) a little weak - it's the kind of response one says when one can't think of a good solid, analytical response. I mean, for sure, it would be great if we had empirical studies on all these things, yet it hasn't stopped economists debating for years and years and years. The appeal to empirical work is all the more ironic because many of the more staunch libertarians tend to ignore all economic data and attempts to use it as useless since the world is so complicated and it's hard to control for all possible causal factors involved.

There is probably a 1(b) here too - Tyler says essentially "are you sure workers want this, or is it just the bloggers that want it?". For me this has to count as the most stupid question ever. If you approach workers and say "would you like some more rights and representation?", I don't think that many will say "no thanks!".

But on to (2), this is the biggest point of contention for me. Apparently, two wrongs make a right, to use common parlance. But more importantly from the perspective of being an economist, the question is the following: Which way is the causality? For sure, workers will steal in the workplace if they can get away with it, and for sure, firms will try and shirk their responsibilities to their workers also, if they can get away with it.

But why doesn't Tyler consider the idea it might be that workers steal from work because they feel they get ripped off daily, paid way beneath what they are worth to the company, etc?  Could it not be the case that a firm that makes all its workers feel like they are part of the company, valued, paid their worth, included in decision making etc., sees less workplace theft?

The causality could, of course, be entirely the other way - it could be that workers are just thieves, and hence firms respond by being nasty to their workers. I'd love to see an empirical study on this!

But why doesn't Tyler explore this? My sense is it's because of the libertarian leanings in him, rather than anything else. The economist should be asking this question, and an economist of Tyler's calibre could analyse these things infinitely better than I ever could, and hence should be asking this question instead of mouthing off in the way he does - invoking personal experience, another common trait of the libertarian.

So I'd file this post from Marginal Revolution, often a great economics blog, more under the "politics/ideology" section of my Google Reader, if I could.

Tuesday, July 3, 2012

Read with Scepticism

If you're studying economics, one important aspect of your education will be to enable you to be discerning. It's particularly important I think in economics because the subject, especially at the macroeconomics level, is so infused with politics.

In my Google Reader, I have a blog called Liberal Conspiracy listed under politics and not economics, and this post about Tony Blair, not to mention this one about the supposed banking commission to be set up in the light of the Barclays fiasco, reveal precisely why.

On the Blair post, the writer criticises Blair for saying we should not “deny the financial sector a say in putting it [the financial system] right”.

The writer suffers from something many suffer from when they aren't students of economics, notably that of an over-confidence in their own ability and information.

How, exactly, does the reader know sufficient amounts about the financial sector such that he is able to tell what the right level of regulation is without even consulting those in the financial sector?

For example, why would it be so horrendous if we said to the financial sector "we plan on these regulations; what are the easy ways in which you would get around them?", in order to get some idea how good/bad any planned regulations might be?

Too many in government, and advising government, believe government has the kinds of information required to step in an regulate a market appropriately. This, generally, is not the case. Many economic studies, including some of my own, have established that information is disaggregated amongst market participants, those actually trading, buying and selling. To simply disregard all of this information is patently absurd and self-defeating - it just means the regulations that are set up will be totally ineffective at best, and harmful to the economy at worst.

And of course, this links us on to the second post, a supposed scoop on Andrew Tyrie, the Tory MP heading up the planned banking inquiry.  Shock, horror, he isn't a big fan of regulation, apparently. It's a bit of a "is the Pope really Catholic?" moment, really.

But moreover, the kinds of quotes in the article from Tyrie are actually simply questions that ought to be asked. We should not be willing to simply accept, as it seems the author of the post (Sunny Hundal) is, that regulation is always and everywhere a good thing. We should be inquisitive, asking why it is necessary and when. This is what economists do, and if as you read this, you're inclined to side with Sunny, and if you also so happen to be entering your second year next year at Birmingham, let me encourage you to take econ217.

In that module, we spend a lot of time looking at things like banking, the financial crisis, and more generally government intervention in markets. I hope to see some of you there!