I agree with Ryan Avent when he says that “the current situation reinforces the idea that strong, well-anchored automatic countercyclical stabilisers—fiscal and monetary—are the best hope for avoiding prolonged economic crises”.
Unfortunately, these days in the eurozone you are more likely to read stories like this one.
8 replies on “Automatic fiscal destabilisers”
tl;dr for the second article Mr. O’Rourke links to:
The beatings will continue until morale improves.
Did the Japanese authorities run with procyclical deficit rules when they started their 20 year stagnation ? The FT at the weekend wondered if the West was going to follow Japan .
And we need to look at fine grained monetary policy. The best method of achieving this, is at lending bank level. Countercylical modifiers should be attached to all loans for certain regions and/or asset classes. In fact pretty much just that is allowed by Basel II (though that only allows for surcharges which are to be provisioned onto the bank’s balance sheet)
Another important counter cyclical stabiliser in mitigating the worst effects of an economic downturn is a regulated labour market. Across Europe comprehensive collective bargaining has ensured that labour market actors engage in a variety of strategies to manage cost adjustment whilst maintaining employment. In Ireland we often look to the German export model with awe but fail to appreciate that one of the core factors in sustaining this model is embedded ‘social partnership’. A set of bargained relationships between strongly organised employers and trade unions over vocational training, wages and economic policy. This ensures that ’employers’ are forced to think about long term high quality investments rather than quick short term profit.
In Ireland we are more concerned about cutting minimum wages than increasing aggregate demand, austerity rather than investment. Furthermore, we are overly reliant on the state to adopt public policies that occur via processes of regularised negotiation in the labour market among comprehensive peak level economic actors. Organised employers and trade unions in Ireland and the UK, for the most part, are considered a vested interest rather than comprehensive labour market actors. A deregulated labour market produces perverse effects in much the say way as it does in the finance-money market.
It should come as no surprise that the most successful export economies in Europe are underpinned by negotiated structures of social partnership and collective bargaining than pure deregulated markets. It should also come as no surprise that it is those labour markets that are most flexible created the most unsustainable in the boom years and high levels of unemployment in the bust.
That second article seems oddly brief, at 140 words or so — I wondered was the page failing to load properly.
Amen to Ryan Avent’s comment. Unfortunately Casey Mulligan seems to have a stronger grip on the thinking of policy-makers than he does. Teachers of economics might usefully ask themselves how that happened. It seems as if an entire generation has absorbed the notion that Robert Lucas demolished Keynesian economics. I’m not saying that’s what students were taught, but somehow that’s the message that the Bini-Smaghis and Trichets of this world seem to have retained, after more useful memories have been erased. So now they just can’t get their heads around the fact that the world has gone all Keynesian on them.
But I don’t entirely blame the teachers for this. Back in the 1980s I took a course on monetary economics given by Rodney Thom. It’s not his fault that the only thing I remember from his lectures is his throwaway remark that Harry Johnson was known to his students as Fat Harry.
Of course not. Look at Japan’s enormous debt, although they largely finance themselves. That’s how Japan managed to maintain its GDP, standards of living and employment despite such a massive collapse of a massive bubble.
And the emerging consensus among a circle of economists is that Japan’s “lost decade” is actually a best-case scenario for the new Japans. Unfortunately, none of them have the financial capacity (= savings, roughly speaking) or political will to even mimic Japan.
Aidan R wrote,
I’ll just throw out a couple of semi-related ideas here, if you all don’t mind. We are talking about labour markets, talking about Japan and it’s lost twenty years. Is Europe going the same way? One of the articles that Kevin linked talked about globe warming and run away trends. Consider a little example in the middle of all of this. The race to have the world’s fastest supercomputer. At some point in the early 2000’s NEC in Japan build a behemoth known as the ‘Earth Simulator’, in order to model effects of earthquakes, Tsunami effects, weather patterns etc, etc. That was around the same time as two Stanford Phd students were doing well with their new Search engine. Basically, the creation of the Japanese supercomputer took the wind out of the American’s sails for a bit. It wasn’t until later in the 2000’s, that they re-took the lead by a small margin with an offering from IBM. Lately the IBM successor to that, due to be rolled out by early next year, as failed at procurement stage. The item was half built, inside it’s new building, and IBM decided to give all the money back again.
Apparently, they found buyers who were willing to pay big dollars, for the same equipment, except in smaller, separate bundles. Good service contracts to go with it for IBM, so they pulled the plug on the large supercomputer and suffered the PR outfall.
How does this relate to climate change? During the Kyoto cycle of talks, the protocol was designed around the assumption that the atmosphere had most influence on climate. By the stage of Copenhagen talks last year, it was hoped the protocol could be extend to study the planetary ‘lungs’, the equatorial regions and forests, so it was hoped, a financial incentive carbon market solution could be found, to keep the same forests. But they required a good super computer in order to study the interaction of the atmosphere and the biosphere. Something, for which there wasn’t enough computing power available (you need a sustained petaflop performance apparently) in order to do the climate modelling. The fact is, in technological terms, in economic terms and in just about every other term, the western nation states are slowing down and cannot even channel the investment to support their own ambitious policy documents. Aidan’s comments about the labour force are very interesting. But you should be aware as economists, about the impacts of technologies to enable brand new markets to happen, that weren’t there before. Consider the example of eBay for instance, which brought together buyers and sellers, based on a trustworthiness system, that had never existed before. It is all very interesting, and there is vast scope for development of more new markets and ways of doing business. However, in the case of the IBM supercomputer, and other such public initiative projects, it often boils down to quite basic problems in our procurement process. Consider the following quote from a member of the supercomputing, mathematician community who has been very vocal online, about the subject. Robert Myers wrote recently,
Reading between the lines of the announcement, I conclude that the hardware met contractual specifications, but that the contractual specifications weren’t sufficient to create a machine that would really meet NCSA’s actual (and incredibly diverse) needs. In the world of real contracting, the change orders (oops, that isn’t quite what we needed/meant to order) is where a low-bidding fixed-price contractor breaks into the black. That assumes there is money to pay for the change order, which, if you have a private customer who really *has* to get something done, is usually forthcoming. In this case, the money wasn’t there, and there was certainly no chance of getting more from Congress.
Footnotes: I think what I was trying to say in the above, was that we do need automatic stabilizers in the economics area, to understand better the effects of labour market policy and so forth, which Aidan refers to. The same way as we require better understanding, to underpin the policy making we try to do to tackle climate change. But the point is, at the moment, western governments cannot even generate the required prosperity and resultant funding, by which to support the study programs and technological research required, to find out what exact stabilizers are needed, or not.
You may read between the lines in the above, to what I half nodded towards, in terms of Japan and it’s nuclear program, tidal waves and so forth, with the inability of our models to predict things. We don’t have the investment capability to build better models either. Also note, that part of the reason that the ‘biosphere’ was omitted from the Kyoto protocol, was not only the petaflop computer didn’t exist yet – it was also the fact that the markets didn’t exist yet – the eBay equivalent for bringing together the buyers and sellers of rainforest resources, that exist inside of national borders. The difficult is, that while the atmosphere may not be owned by anyone, the biosphere is divided legally speaking up, by the boundaries of nation states. With economic problems we are dealing with very, very similar types of problems, of how to devise the best international protocol, based on the best international understanding of the problem. If anyone here cares to add to my points, to attempt to translate them into somewhat better econ-talk, you are more than welcome. BOH.