UK Macroeconomic Policy Mistakes of the Past
Given that title, I’m not sure I need to write a post, since no one will read this post which is really a comment on Simon Wren-Lewis’s post “Left, Right and Macroeconomic Competence.” I thought this title was less openly twitty than “Commenting on Wren-Lewis,” but I will go on to comment on Brad DeLong commenting on another post by Wren-Lewis.
Mainlymacro has been even more a must read than usual and, it seems, has been very stimulating. the post on Macroeconomic Competence is excellent.
Wren-Lewis starts by saying it is unfair to the right to act as if US Republican presidents are representative. Then he looks at the UK and three alleged policy mistakes. One choice seems odd to me.
three major macroeconomic policy errors over this period, all of which occurred when the Conservatives were in power. However that alone proves nothing: Labour was in power for fewer years and might have been lucky. [1]
The period starts with Margaret Thatcher and the brief experiment with monetarism. Here you could use the inflation/unemployment contrast – the policy succeeded in getting inflation down very rapidly, but at high costs in terms of unemployment, which persisted because of hysteresis effects.
[skip]
The 1990 recession can also be linked to left/right influences. The rise in inflation that preceded the recession (and to some extent made it necessary) was partly down to Nigel Lawson’s tax cuts. I have been told by one insider that the key wish at the time was to cut the top rate of tax, but it was felt that to do this alone would be politically damaging, so tax cuts were made across the board. That was not the only reason for the late 80s boom – there was also the decline in the aggregate savings ratio that in my view had a great deal to do with financial deregulation – but it was a factor.
I am especially relatively ignorant about the UK, but I had a different story for the late 80s inflationary boom and subsequent recession. My story is that the 1987 stock market crash made the lady who wasn’t for turning, turn. I think that Thatcher feared a second great depression and demanded expansionary monetary policy by the non yet independent Bank of England. In any case, there was sharply expansionary fiscal (and I think monetary) policy and an inflationary boom, followed by a recession.
According to the conventions of both academic macro and policy makers, this was a bad mistake (they mistake they always fear). It is also the time when the Western border of schlerotic old Europe moved from the Atlantic to the English Channel. In 1985, the UK was the number one example of hysteresis, Eurosclerosis and all that. In the 90s it was the number two example of relatively healthy “Anglo-Saxon” economies (I typed the scare quotes, because I, like most anglophones, am not Anglo-Saxon).
I think the UK policy errors of the late 80s showed that “hysteresis” is Greek for “tight monetary policy” — that the extremely persistent unemployment problem was tractable, if one were willing to accept temporarily slightly higher inflation.
I’d tend to guess that the error was inducing an un-necessary inflation fighting recession in 1990, not inducing an inflationary boom in the late 80s.
Attempting to reduce my exteme ignorance, I went to FRED and slapped together this graph. I use the 3 month gilt rate as a safe short term interest rate, because it was easy to find. The 3 month nominal rate minus lagged CPI inflation is my index of monetary policy (the deviation from a super simple sub-Taylor rule). The registered unemployment rate follows with a lag of about one year (longer than the standard pre-hysteresis 6 months but not very long).
My reading of the graph is “keep the safe short term real interest rate below 5% (5%!) and you’ll be OK”.
Well that was long. I still haven’t mentioned Brad’s comment on the other post by Wren-Lewis. The other post, Understanding Anti-keynesians is also excellent. One point which is worth stressing is (bold mine)
I suspect we would not even think of questioning the central role of Keynesian ideas for macroeconomics today if it had not been for the New Classical revolution in the 1970/80s. This revolution was successful in the sense that it did change the way academic macroeconomics was done (microfoundations and DSGE models). Most academic macroeconomists – for better or worse – are deeply committed to that change. But the revolution was opposed by many in the Keynesian consensus of that time, and so Keynesian economics became associated with the old fashioned way of doing things. This association was encouraged by many of the key revolutionaries themselves. We now know, as a result of the development of New Keynesian economics, that there is no necessary incompatibility between the microfoundations approach and Keynesian ideas. However I suspect that, at least for some, the association of fiscal policy with old-fashioned Keynesian ideas set down deep roots. It certainly seems that some notable academics were surprised that New Keynesian models actually provided strong support for the use of countercyclical fiscal policy in a liquidity trap.
Wren-Lewis is kind enough not to name the notable academics who were clueless about what the actual math actually said. I might add that the confusion is understandable, since New Keynesian models are reverse engineered to get old Keynesian policy implications out of DSGE models. To be less rude, one might say they are engineered to reconcile DSGE models with the stylized facts, that is with reality. But one might risk rudeness by noting that it is impossible to tell what New Keynesians are up to, since, by the standards of macroeconomic research, reality and old Keynesian models are indistinguishable.
I wanted to comment on Brad’s comment. This is related to Wren-Lewis and civility vs rude people. Brad’s post A Question for Simon Wren-Lewis: How Can You Not Think That It Is All Ideology on the Other Side? begins
“Simon Wren-Lewis bends over so far backwards to be fair that, I think, he loses sight of the ball:”
and as a counter argument quotes Douglas Holtz-Eakan with as the only further comment “And how can you not think it is all ideology on the other side of the hill.”
I cut the Douglas Holtz-Eakin quote down. it is from
Structural Reforms to Reduce Debt and Restore Growth:
Even if one believed that countercyclical fiscal policy (‘stimulus’) could be executed precisely and had multiplier effects, it is time to learn by experience that this strategy is not working. [] have all failed to generate growth. The policy regime of macroeconomic fiscal (and monetary) fine-tuning backfired in the 1960s and 1970s, leaving behind high inflation and chronically elevated unemployment, and it is working no better in the 21st century…
I wish to feed the troll and respond to these claims
1) “precisely” is setting up a straw man. Precisely zero Keynesians argue that stimulus can be executed precisely. The assumption that if something can’t be done precisely right it should not be done at all is indefensible and Holtz-Eakin doesn’t argue it.
2) “multiplier effects” is ambiguous. Does it mean a multiplier greater than zero (that which is needed to justify stimulus in a liquidity trap) or greater than one ? Anti-Keynesians (I am thinking of Lucas, Fama and Cochrane) assert that the multiplier must be exactly zero, so fiscal stimulus is bad policy. Then another set of anti Keynesians (including Cochrane) argue that the data don’t prove that the multiplier is greater than one, so the data show that Keynesians are wrong. The fancy mathematical point that 1>0 escapes them.
3) “fine-tuning backfired in the 1960s and 1970s, leaving behind high inflation and chronically elevated unemployment,”
unemployment was not chronically elevated in the US in the 60s (certainly) or the 70s. This was a period of extremely rapid growth of employment with v shaped inflation fighting recessions which caused temporarily, not chronically, elevated unemployment. The chronically elevated unemployment occured in the 80s and (in Europe) early 90s. This followed a shift in policy (and in academic macroeconomics). Prominent rational expectations revolutionaries (Lucas, Sargent — really prominent) said that their theories implied that inflation could be defeated without causing unemployment (certainly not chronically high unemployment). The chronically high unemployment followed the abandonment of Keynesian economics.
Holtz-Eakin could just have well have written “Adam Smith’s proposals were disasterous as the publication of TheWealth of Nations was followed by chronically hing unemployemnt (after an interval of roughly 2004 years).
Holtz-Eakin is, quite literally, playing heads I win, tails you lose. “followed by” is as strategically vague as “precisely” is strategically narrow. He holds his arguments to the standard of getting the time right give or take a decade or two.
Commenting on Brad who was commenting on Holtz-Eakin to comment on Wren-Lewis, Howard wrote “Ideology is much too generous a description for partisanship.”
heh indeed.
In what world does anyone think Holtz-Eakin is still an economist? I’ll give him a break(perhaps undeserved) that he might once have been an economist, but the last couple of decades has to have changed that, as he has never been right about anything.
Not many professional QBs remain professional QBs when they have not completed a pass in a couple of decades. The only way that is possible is if they are real close to the owner.
2016 GOP Campaign Song(unless they use the original verses)
Give me that dynamic scoring
Give me that dynamic scoring
Give me that dynamic scoring
It’s good enough for me
Makes me love Holtz-Eakin
Makes me love Holtz-Eakin
Makes me love Holtz-Eakin
It’s good enough for me
Give me that dynamic scoring
Give me that dynamic scoring
Give me that dynamic scoring
It’s good enough for me
It was good for Brother Laffer
it was good for Brother Laffer
It was good for Brother Laffer
And it’s good enough for me
Give me that dynamic scoring
give me that dynamic scoring
Give me that dynamic scoring
It’s good enough for me
It was in The Paths To Prosperity
It was in The Paths To Prosperity
It was in The Paths To Prosperity
It’s good enough for me
Give me that dynamic scoring
Give me that dynamic scoring
Give me that dynamic scoring
It’s good enough for me
It will do when I’m wealthy
It will do when I’m wealthy
It will do when I’m wealthy
It’s good enough for me
Give me that dynamic scoring
give me that dynamic scoring
Give me that dynamic scoring
It’s good enough for me
It can take us all to heaven
It can take us all to heaven
It can take us all to heaven
It’s good enough for me
Give me that dynamic scoring
give me that dynamic scoring
Give me that dynamic scoring
It’s good enough for me
EM:
Found it.
In your chart you have some data for unemployment, deposit rates and CPI. I suggest you draw another line. The Pound Sterling was devalued during the late 80’s and early 90’s. This ended with the infamous attack by George Soros on STG that lead to the devaluation in 1992. (Black Wednesday)
The policy mistake back then was the Bank of England attempting to force a fixed rate on the currency. Ultimately market forces prevailed. The UK has done well with floating FX rates since.
Just a different take of the history. I was trading the currency in those years. The blow up in the FX market dominated the economy.
The data: (USD/GBP – “all”)
http://fxtop.com/en/historical-exchange-rates.php
bk:
This was in spam and I may have put it there myself by accident. If someone else did this, they will have to do it again.
I have a great deal of respect for the technical experts at CBO but the pure fact is that since its inception its Directors as appointed from both Party’s have had their thumbs on some of the top line pronouncements. In much the same way as the Trustees of Social Security (and some outside folk on the SSAB) use the Annual Report Summary to subtly (or not so subtly) skew the underlying numbers.
Is Elmendorf better or worse than Holtz-Eakin? Or either than original Director Rivlin? Does anyone who actually reads AB on a regular basis really want to put Orzsag, Penner, Reischauer in any sort of “neutral bi-partisan technocratic” category? Has anyone but me noted how many CBO Directors have had paid spots on Peter G Peterson’s Concord Coalition/Fix the Debt/etc Fiscal Responsibility Tours?
The best that can be said about past and present CBO Directors is that they are Deficit Fetishists. Something they share with just about every Central Banker out there not named Janet Yellin. Now all of them including Holtz-Eakin have excellent credentials as academic economists. Then again even Darth Vader started out as a Jedi.
Something about being confirmed as CBO Director seems to induce even the nicest person (for example everyone says Alice Rivlin is nice and most people like Orzsag) into a Deficit Sith Warrior intent on crushing the Little Folk.
(Of course I never watched the Pre-quels, which probably shows).
I meant to post the following list of CBO Directors. (From Wiki).
It would take seconds of internet research to document the paid links to the Peter G Peterson Foundation. Particularly if you subtracted the ‘Acting’.
Name[5] Begin Date End Date
Douglas W. Elmendorf January 22, 2009 Present
Robert A. Sunshine (Acting) November 25, 2008 January 22, 2009
Peter R. Orszag January 18, 2007 November 25, 2008
Donald B. Marron Jr. (Acting) December 29, 2005 January 2007
Douglas Holtz-Eakin February 5, 2003 December 29, 2005
Barry B. Anderson (Acting) January 3, 2003 February 5, 2003
Dan L. Crippen February 3, 1999 January 3, 2003
James Blum (Acting) January 29, 1999 February 3, 1999
June E. O’Neill[6] March 1, 1995 January 29, 1999
Robert D. Reischauer March 6, 1989 February 28, 1995
James L. Blum (Acting)
—
March 6, 1989
Edward Gramlich (Acting) April 28, 1987
—
Rudolph G. Penner September 1, 1983 April 28, 1987
Alice M. Rivlin February 24, 1975 August 31, 1983
“Now all of them including Holtz-Eakin have excellent credentials as academic economists. Then again even Darth Vader started out as a Jedi. ”
gotta love it
well some roundup.
@EMichael
What makes Holtz-Eakin’s hackitude so depressing is that, when he was head of the CBO, he refused to score dynamically. He was on Paul Krugman’s list of “reasonable, reasonably honest conservatives ” until Mar 27, 2010. http://krugman.blogs.nytimes.com/2010/03/27/file-under-vile/ . I don’t know what happened.
@ Bruce Webb
First I think that Rivlin is genuinely an honest technocrat with no thumbs on the scale. There is evidence in The Journal of Public Economics, a top peer reviewed journal to this effect.. When the CBO was founded, its forecasts were much better than the old OMB forecasts. Later the accuracy of OMB forecasts improved until they were even better than the CBO forecasts. Notably the accurate forecasting followed Rivlin.
I think it is clear that Elmendorf is fairly close to a call em as he see’s em umpire. For one thing CBO forecasts about the affordable care act have been excellent. I’m sure he was sympathetic to the ACA, but he was tough about scoring unproven cost containment strategies.
I don’t think either is at all similar to the Trustees of Social Security who put a whole hand on the scale (always alarmist).
Robert,
As I remember, Holtz-Eakin did score the Bush tax cut(s?) dynamically.
They still didn’t work. I am assuming the next group of fresh water hacks will pay attention to that and score on a curve.
Robert as to Elmendorf I would suggest you look at the rationale between the adoption of the “Alternative Fiscal Scenario”
http://www.cbo.gov/publication/42905 in which CBO simply ditched its decades long “Current Law” approach (which for better or worse retained its role as independent scorekeeper) for one where they asserted the ability to call future policy decisions. In a way that made for much worse scores for ACA than simply using their existing methodology. Not that they may not have been correct in their assessment, but prior to Elmendorf that kind of assessment wasn’t in their remit.
Similar hijinks (so they appear to me) occured when CBO radically changed its approach to Social Security demographic projections. Previously they simply and explicitly adopted those of the SocSec Trustees Intermediate Cost projection even as they substituted their own differing economic projections. Which change if it had arguably come from a more robust methodology might have been justified, but instead they argued that since the future was uncertain the only proper way to project future mortality was to use straight line extrapolations. I kid you not. People will just keep living longer and longer. No need to try to do, you know, actual demography. This change literally overnight added about 40% to Social Security’s long range actuarial deficit.
Now again you might differ on the substance here, but the result was that CBO’s numbers for ACA scoring and Social Security scoring can no longer be compared with past health and SocSec scoring on an apples to apples basis. With no motivation to do so that I can see other than to reinforce the Peterson backed version of “entitlements crisis”.
As to Rivlin. Well her record as actual CBO Director may be what you perceive. But in recent years she has practically been bound at the hip with “Former Comptroller General” David Walker as “Non-Partisan Deficit Hawks” in event after event and working paper after working paper even as such things as Peterson’s original and continuing funding for Concord’s Fiscal Wakeup Tour (featuring Alice and David) and Walker’s former job as President and CEO of the Peter G Peterson Foundation go largely unremarked upon.
Anyway I have a hard time seeing either bookend CBO Director of Rivlin or Elmendorf as simple “call them as I see them” types. And instead see both sets of thumbs on the scales.
Webb’s hard to please. He doesn’t like Elmendorf, wait till he hears who Ryan and company will appoint to replace Doug.
The business with Gruber suggesting that CBO got fooled with how ACA was written means the end for Doug.
Who is on Webb’s” Least Likely to Like” list? It will be the one the new congress will put in charge.
http://www.cato.org/people/michael-cannon
“Michael F. Cannon is the Cato Institute’s director of health policy studies. Previously, he served as a domestic policy analyst for the U.S. Senate Republican Policy Committee, where he advised the Senate leadership on health, education, labor, welfare, and the Second Amendment. ”
Perfect combination: polymath and sociopath. A Libertarian’s Libertarian in other words.