Rogoff on UK Fiscal Strategy Post author By Philip Lane Post date October 3, 2013 His FT article is here. Categories In Uncategorized 35 Comments on Rogoff on UK Fiscal Strategy ← IMF GFSR Analytical Chapters → CSO: Sectoral Accounts for 2012. 35 replies on “Rogoff on UK Fiscal Strategy” So the logic of Simon Wren-Lewis, Paul Krugman, Martin Wolf and many others “is based on a shallow reading of the evidence” but they “do have some very solid points on their side” – well that puts them ahead of Ken Rogoff I’d say. And Krugmna “prognosticated the euro’s early demise” did he now? No, he actually said Barry Eichengreen is probably right; it’s a roach motel, though there is some chance a country can escape if it goes through a Greek-style collapse. A sad effort at apologetics. Daniel Davies could do it with a lot more contrarian panache. @Kevin Donoghue A sad effort at apologetics. Daniel Davies could do it with a lot more contrarian panache. And Daniel Davies is still funny, even if the European component of the global financial crisis has not been his finest moment. Also, when Rogoff says “There are good neoclassical arguments for higher government spending in a slack economy when resources are cheaper”, I smiled a little. If Rogoff can find a good neoclassical excuse for sensible Keynesian counter-cyclical spending he’ll allow it. How good of him. Presuming there are resources to spare for sociological analysis in twenty years time I think examining the psycopathology of modern conservatism, and how many intellectuals and academics became infected by it, will be a rich source of research papers. Ken Rogoff’s politics make it impossible for him to think clearly about dealing with the global financial crisis, and he is not alone. LOL, I assume, at least some of you have read the book “This time is different”. Could any of you tell me, in a few words, a) what you think you have learned from it, or vice versa, b) what statements there you are significantly disapproving? I’ve read This Time Is Different. Mostly it’s sound enough, though I would very much like to see an argument in support of their classification of the Goschen conversion as a default/restructuring. It looks specious to me. That aside, it’s a good book and Rogoff has written other goods books, notably with Obstfeld. That’s no excuse for calling the high-inflation era of the 1970s a “de facto default” however; as any fule kno, the reason people were getting interest rates of 14% or more on government bonds was that they expected to be paid in devalued money. That’s not any kind of default at all. It’s what they bargained for. I dunno if a housing boom (London prices up 10% ytd) is going to help the UK in the long term. Carney was warning borrowers about increases in interest rates yesterday. Simon Wren-Lewis replies to Rogoff, rather more politely than Rogoff deserves IMHO. I wonder what Rogoff makes of the Tea Party holding the States to ransom http://www.ft.com/intl/cms/s/0/39912e34-2b6d-11e3-a1b7-00144feab7de.html?siteedition=intl#axzz2gf1Jdi53 “There is precedent for a government shutdown, but there is no precedent for a default,” said Lloyd Blankfein, the chief executive of Goldman Sachs, after a meeting between President Barack Obama and top Wall Street chief executives. He was citing the threat of default if Washington’s feuding lawmakers fail to agree to extend the borrowing limit by October 17. A highly anticipated meeting Wednesday evening between Mr Obama, John Boehner, the Republican Speaker of the House, and other leaders ended without any sign of progress. “They will not negotiate,” Mr Boehner said, standing outside the White House. “At some point we have to allow the process to work out.” Would he have any idea how this could be modelled ? Is it perhaps like “Welcome to St Tropez” ? http://www.youtube.com/watch?v=Kh2FRFhS7QY “Haters keep hatin’, f***in’ these models “ You guys can stick your fingers in your ears and scream la la la all you want, but the UK is taking off. Services data indicates the strongest quarter since 1997. Employment at record levels, deficit falling, still amazing appetite for gilts… give it up guys, the race is run. @Johnny Foreigner You guys can stick your fingers in your ears and scream la la la all you want, but the UK is taking off. The UK’s economy is taking off like a veritable Hindenburg of sound economic planning but however dangerous Osborn’s policies are (“Help to Bubble” is a good one) the UK still enjoys the advantage of being outside the Eurozone. It might just be enough to keep the UK economy stable and since in two years the Tories will most likely be gone (especially if the crypto-communists at the Daily Mail have their way) and non Bullingdon club types will take the reigns again Blighty might just luck this one out. Good for Ireland too. @Johnny I fear that you may be hallucinating about long term growth based on very limited data “take the reigns” is used instead of “take the reins” when dealing with changes of government in a constitutional monarchy and I have full confidence in the wording. The problem with Rogoff’s article is not so much with what it says, as the critical matters from which it diverts attention. This was primarily a crisis of private debt, against the background of a deregulated and financialised economy. While state finance is an important issue, focussing on state finances in this context is fundamentally dishonest. Rotten economics. ‘‘We are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity.’ Tobin 1984’ http://www.ippr.org/images/media/files/publication/2012/12/dont-bank-on-it-financialisation_Dec2012_10058.pdf @ francis I did read R&R’s big fat book. The only bit that stuck in my head was the story about the French sovereigns routinely beheading their creditors. @ Paul Quigley The IMF agrees with you! http://www.imf.org/external/mmedia/view.aspx?vid=2693791836001 The only point missing is an express statement that the central issue confronting Europe, and the member countries of the EA in particular, is a political one; either they hang together or they will assuredly hang separately. I should add that no one in the real world IMHO is any longer paying any attention to these academic squabbles. @ Kevin Donoghue Thanks for pointing to Goschen. The UK seems to be much more used to do with government debt whatever it wants, than I was aware of. @ Paul quigley I really like this Tobin quote. He graduated about Keynes, and did his PhD under Schumpeter. Chopping heads was also a phrase I used in this blog with regard to the Sachsen LB With regard to the big, fat book, (R&R 875 grams that is) When I read the Röpke 1932 (170 gram, nice index, especially for that time and citing people from Russia, Dutch, France, UK generously), I also wondered what did I keep from R&R? That deficits are interconnected, private, corporations, government, and connected countries, we kind of knew already. The one thing which stayed in my mind was the Fig 16.9 which illustrates the breakdown of global trade, which we attribute here much more to the word “austerity”, taken from the “Monatsberichte des Österreichischen Instituts für Konjunkturforschung” (Hayek), due to the Smoot-Hawley tariffs. And beyond that very little to remember. Then I also looked at Paul Krugman’s (160 gram, paperback) “The return of depression economics”. I do enjoy somewhat the bile he throws at the Greenspan (bubbles) and the IMF, I couldn’t say it any better, but I also do notice that he doesn’t bother to have any Index or mentions others in a more than cursory way. He is an entity all to himself. Looking at it in R&R, no mentioning of Röpke or Schumpeter (the guy with the “creative destruction”), of course, but not even Keynes shows up in the register. Does any non-Bostonian have anything worth to say for these people? And I see them sitting in their little American academic economics only sandbox in Boston, playing with their forms, and from time to time throwing back some dog poop coming from the unruly Krugman single child, relegated to the Princeton corner of the sandbox. I see utter disregard of all other aspects of political decisions, law, treaties, property rights, history, (national) cultures, business and confidence, etc. That wouldn’t be that much of a problem, if not allegedly 60% of professors, people like Bernanke, of sort of respectable places in the US, come just out of the PhD programmes of just Bostonian MIT and Harvard, with Harvard Square having less diversity in international newspapers than the 25k town, I was born in. Politicians, global business employers, and internationalist union folks here don’t really see this kind of intellectual incest as very appealing. Coming back to the FT article, I wonder a little bit, what those “more infrastructure spending” should have been, specifically, in the UK, US, or anywhere else. NY State, for many years, had six sites open on display, “shovel ready”, for semiconductor fabs, with all infrastructures prepared for it, and pre approved building permits, and they got one, in Malta, before the crisis. But maybe that belongs to the FT style, those who say, we have to urgently improve on our global #3 ranking (WEF 2013) on infrastructure and education, in order to spent some money. FYI-bank restructuring,h/t FT. http://www.bankofengland.co.uk/financialstability/fsc/Documents/discussionpaper1013.pdf @ Francis To be fair to the UK, throughout history they have nearly always managed their debts with only a few questionable incidents to blemish their record – unlike many other nations, including advanced European ones. The >250% debt ratio they had after the Napoleonic wars is I believe the largest debt burden in history that was successfully managed down over a period of decades without resort to default or high inflation. (We await with interest to see if the Japanese will beat this record). The similarly high ratio they ran up during WWII was also managed down, over 25 years, via 4% inflation and 2% real growth. The novelty of their current situation is that they piled up debt not by winning a war, but via a private sector credit party as Paul Q. mentioned. (On the plus side, nobody was killed). Total public+private debt is just under 300% of GDP, or a bit under 500% if you include banks. For the next 3-4 decades British policy will be severely constrained by the need to manage this burden. The Swiss have a talent for seeing things as they are as opposed to the rest of us who tend to have tinted glasses. While the quote is from a fringe group I tend to agree with their viewpoint. “However, as expected, the U.S. dollar and equities have finally started to fall, then they should already be much, much, lower if these markets were free . Stay short on the U.S. dollar and equities in general (U.S. and European). The American quagmire is total, with Obama and the Republicans are waging a constant battle on budget issues and the Fed monetizing the debt with a vengeance. On the other hand, the electoral defeat of Merkel and her CDU (curiously interpreted by the media as a victory) in Germany to obtain an absolute majority in parliament to enable them to govern alone or with allies CSU or liberal (which collapsed), lead to the laborious formation of a grand coalition with the Socialists that will sell very expensive (higher minimum wage, increase taxes, etc …) which will weaken the German companies and thus their overvalued stocks. Same in Italy, where the ruling coalition PD – PDL is hanging by a thread as a result of legal vendetta by the PD against Berlusconi, leader of the PDL, which can result at any time the government fell and chaos election with Beppe Grillo in ambush. Not to mention the risk of a military coup in Greece that says. German political situations, Italian and Greek difficult which also slowed the rise of the euro / U.S. dollar (currently double top at 1.3570).” The risk of a military coup in Greece in response to New Dawn is unfolding as a real possibility. From: http://www.forum-monetaire.com/blog/ Krugman’s reply (or challenge) to Rogoff seems to me to be worthy of a post in it’s own right; it’s the sort of thing students should be mulling over, especially at this time of year when exams are a long way off and they can afford to think about economics rather than grades. Since people may want to economise on NYT site visits, I quote the concluding paragraphs in full: My point is that what sounds like a straightforward claim – that loss of foreign confidence causes a contractionary rise in interest rates – just doesn’t come out of anything like a standard model. If you want to claim that it will happen nonetheless, show me the model! Now, you might argue that IS-MP is a model of the short-term interest rate, and we’re talking about long-term rates here. But long rates are largely determined by expected future short rates, so this argument doesn’t make sense unless you have some story about why short rates should rise somewhere along the way. Furthermore, as Wren-Lewis says, even if there is somehow a squeeze on long-term bonds, why can’t the central bank just buy them up? Yes, this is “printing money” – but when you’re in a liquidity trap, that doesn’t matter. (Alternatively, you can take a consolidated view of the government and central bank balance sheets, in which case what we’re effectively doing is refinancing at the zero short-term rate.) I know that many people find this line of argument, in which a loss of investor confidence is if anything expansionary, deeply counterintuitive. But macro, and especially liquidity trap macro, tends to be like that. So don’t give me your gut feelings; give me a coherent story about who does what, i.e. a model. I eagerly await a response. @ Mickey Hickey As a counterpoint to your link. http://www.irishtimes.com/news/world/uk/don-t-rule-out-britain-joining-the-euro-in-a-few-years-1.1545213 http://www.independent.ie/business/world/schaeuble-rules-out-any-retrospective-help-over-bank-bailouts-29630540.html Extract; Moves to establish an EU-wide banking union have developed at a rapid pace in recent months. Mr Schaeuble described the banking union as “perhaps the most impressive architectural change under way” in Europe. “The eurozone crisis had the potential to prise the continent apart. Instead, it has ushered in the most ambitious step towards European integration since the launch of the euro itself. With it, the creation of a single market for financial services, initiated in 1999, would find its completion.” What is missing in this discussion is an examination of the value of public spending. The big fear for Statists is the possibility that the State contracts and the world says ‘meh’. @DOCM re Schaeuble on Independent link you provided. “A European banking union “emphatically is not and cannot be a mechanism to redistribute the burden of yesterday’s crisis among its participants”, he wrote in an article published in ‘Banker’ magazine yesterday. “Whatever legacy issues come to light now will have to be tackled nationally.”” With respect, the logic of that position is a move towards the exact opposite of what Schaeuble claims to be in process, ie a process of integration and ‘banking union’. If the citizens of countries are going to have to backstop all bank losses, past, present and future, then those countries have every right and every obligation to restrict the movement of deposits by depositors wishing to evade what are clearly now their European obligations, ie. to stand four square behind their banks, whether they like it or not. Banking Union, ala Germany, has now become a deposit grabbing exercise by the largest banks. It is another step, not in banking ‘union’, but in creditor country hegemony, using banking consolidation, to further control economic policy, monetary policy and now capital allocation throughout the EZ. @ Mickey “The Swiss have a talent for seeing things as they are as opposed to the rest of us who tend to have tinted glasses.” There’s a big vote coming up in CH on whether to limit company exec pay to 12 times the value of pay of the lowest paid employee. http://www.1-12-nein.ch/ This follows the March vote in favour of the “Minder initiative” against “Abzockerei” or “tearing the arse out of it” salaries http://en.wikipedia.org/wiki/Swiss_referendum_%22against_rip-off_salaries%22 @ sceptic01 I think we are pretty close in interpretation. In a slightly different way, looking at the http://epp.eurostat.ec.europa.eu/portal/page/portal/excessive_imbalance_procedure/imbalance_scoreboard Net international is neutral, goverment debt is 88% vs Germanys 80%, private debt is at 190%, not nice, but ok, especially not critical in comparison to the rest. What is not OK is the government deficit with 7.8%, and to call this austerity , that is a joke. That needs some fixing, but certainly not before the next UK elections, because somebody is going to get hurt, e.g. http://online.wsj.com/article/SB10001424052702303643304579105271407380600.html Obama waited with the GOP slaying for the 2nd term, Schröder for his Agenda 2010, Maggie …. : – ) My take is there will be a little of everything, somewhat lower benefits, a little higher taxes. Who is holding the gilts? My assumption is about half the UK pension funds, and a quarter UK pensioners, and the rest folks for whatever reasons. Would be nice if somebody would have relevant/compact data for that, Michael Hennigan maybe? Now, what would you do, if you would have to decide at a UK pension funds, what would be the alternatives? At least for the next 5 year part of obligations? TINA, even if the rating would go down to AA-. Now, what drove Rogoff to write this comment? Does he need this for some internal US consumption, or …..? I don’t understand this, and I don’t need Krugman drawing his funny IS-something diagrams to understand the situation. I also do not see Wren-Lewis as puzzled, but I am puzzled that Wren-Lewis seems to believe that QE could ever end. And that is where the interesting part begins. erm, “ever end” should be of course “never end”. Somebody wrote somewhere “It is good that popes have tenure”, leading to http://www.repubblica.it/cultura/2013/10/01/news/pope_s_conversation_with_scalfari_english-67643118/ The blogger francis likes most of what the Pope Francis says, especially in interviews with atheists. “Leprosy” and things like that. @ Joseph Ryan I don’t think many view the situation in the manner that you suggest. To me, it seems more like a euro bomb-squad, made up of finance ministers, who have already amply demonstrated their ability to fumble the ball, trying to sort out the problem of under-capitalised banks. If they get it wrong, they risk starting a generalised bank run. This coverage gives a flavour of the debate in Germany. http://deutsche-wirtschafts-nachrichten.de/2013/10/04/politik-kapituliert-vor-finanz-eliten-steuerzahler-muessen-banken-retten/ The UK, meanwhile, is attempting to stand on the sideline in its usual manner – “nothing to do with me guv'” – despite being one of the main armourers. @ Johnny Yeah, the private sector is great, And it’s so efficient as well http://www.ft.com/intl/cms/s/3/6a3734a0-2d04-11e3-8281-00144feab7de.html “According to analysts at Barclays, since 1999 reported profits at large European banks (ie those that actually go to shareholders) have been €100bn lower than underlying profits. Not all of that is due to conduct charges. Non-core assets, gains or losses on disposals and restructuring charges are also to blame. But that is an awful lot of shareholder value destroyed.” @ francis On ownership of gilts, overeas holders have stabilised @ 30% while the Bank of England overtook declining holdings by insurance cos/ pension funds. http://www.economicshelp.org/blog/1407/economics/who-owns-government-debt/ @ MH thanks for the link! The way I interpret it, a) the UK held their absolute part, making their relative fraction half of the doubling debt. b) the same foreigner, who buy up London Real Estate like crazy, accompany this with some rents in the local currency, and whether that falls by 20 % or so in value does not really matter for them, and the BoE makes up for the rest what is needed. For folks interested in discussing Krugman’s IS-something graphs (like Kevin D), Nick Rowe is again trying to get the attention of PK at the canadian http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/10/twin-debt-equilibria.html Maybe somebody should write him an approving entry with the name of PK to make him happy : – ) Sometimes I feel I ll already become a little bit like the 2 old guys in the balcony of the muppet show : – ) With respect to the deutsche wirtschafts nachrichten, they seem to have some pretty small (thousands ?) but dedicated followership, who believe any nonsense, like the 8% inflation in the US, I mentioned here before, and sent me on Sunday 5 am emails about the mutiny of the US military forcing Obama to abandon his Syria plans : – ) We have a lot of crazy gullible people here in Germany, but at least this version seems to be still very small, not representative of any kind of larger “German public” What is however interesting is that DOCM seems to read it. grrr, I am getting sloppy “the UK held” should be “the UK pension funds hold” @ francis I read a lot of things and, as I like to think that I have an open mind, I assess what I read on its own merits. The NRW link in question is sourced from an original story in Handelsblatt relayed by Reuters. Do you also wish to dismiss these two sources? http://de.reuters.com/article/domesticNews/idDEBEE99101120131002 The fact of the matter is that Germany may well be insisting on the impossible i.e. combining a rigorous assessment of the trading position of banks with insistence on national backstops only while this process is being completed. DOCM, I also read many things. But I do not trot out e.g. zerohedge as representing the average american retail investor. That this tiny and obscure deutsche wirtschafts nachrichten, I thought that is in Hamburg, and not in NRW, regurgitates mostly snippets from other news outlets to stew them then up to their constant hate and panic mongering, does not make their result respectable or representative of a general german public. @ francis You should also read what I write. I referred to the link “giving a flavour of the debate in Germany”. Were it not based on the other links to which I referred I would not have used it. These hint IMHO at negotiations for a possible solution to the issue of adequate backstops to circumvent a problem that finance ministers – in response to German pressure – have themselves constructed. @ All FYI Colm McCarthy sets out the conundrum with which European finance ministers are now confronted in the matter of the ECB carrying out banking stress tests without simultaneously bringing the house down. http://www.independent.ie/opinion/columnists/colm-mccarthy/banking-reform-must-be-high-on-ecb-agenda-29637604.html DOCM I did read you carefully, and that is why I clarified that this obscure DWN does NOT give “flavour of the debate in Germany”. It connects some snippets from somewhere else (a search on google and the Handelsblatt did not turn the alleged phrases up there) to cater to some tiny lunatic fringe. What is interesting is that the same attac Greenie Sven Giegold, who paid his wrecked SPD family lawyer friend for some “expertise” on constitutional matters, trying to legitimize the EU commission to lay their hands on German savings accounts (we had this here in this blog),.now seems to cater to such hard right parts of the AfD. It is one thing to promise people pie in the sky. When you promise people pie on earth, like these CIEPR paper restructurings, folks like me ask, who is paying for that, how. And that is the one thing this Rogoff pointed out correctly for the UK, who will pay for the coming necessary significant corrections of UK public deficits? @ DOCM JP Morgan isn’t in great shape either. It might be an interesting 12 months for the banking industry. http://www.ft.com/intl/cms/s/0/a120e2aa-2d03-11e3-8281-00144feab7de.html Comments are closed.