Macrofinancial History and the New Business Cycle Facts

Jordà, Schularick and Taylor have produced a must-read paper, summarising the results of a decade-long research effort to create a long-run macro-financial data set for 17 countries. The paper is here (.pdf) and they provide some new stylized facts they document should “prove fertile ground for the development of a newer generation of macroeconomic models with a prominent role for financial factors”.Screen Shot 2016-04-17 at 21.57.06

In particular, they document a ‘hockey-stick’ effect of private sector creditto GDP for a range of economies, and one of the hockey sticks can be seen in the figure below. After about 1950, for most of the elements the authors study, finance and leverage takes a more and more central role in the development of modern economies.

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Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

25 thoughts on “Macrofinancial History and the New Business Cycle Facts”

  1. Macro cycle theory is banjaxed given the level of debt neoliberalism has generated. We are at the end of a Kondtratieff cycle that is going to involve insane levels of deleveraging given that debt is no longer a driver of growth, if it ever was. Saw some stats there. Bringing leverage down to 20x from 30x in the US (WTF) would generate losses of around USD 6tn , not including hedge fund losses.

  2. Hurrah! So some economists are finally catching up with what the corporate capitalist elite and so-called high wealth individuals and their armies of lawyers, accountants, advisers, functionaries, flunkeys, tame academics and pliant media types have known about and have enthusiastically abused and exploited for decades. And, whether or not all of them fully understood what was going on, we must include the suborned politicians, policy-makers and regulators who facilitated all of this.

    It’s all a bit late. The traditional mainstream parties which rotated office and oversaw and facilitated this grand larceny of the majority of citizens are being overwhelmed by a ride of self-defeating, but perfectly understandable, populism in many of the advanced economies.

    Still I suppose it’s nice to see some economists engage with the realities of the the 21st century.

  3. @PH
    the extent of pauperisation required to bestow 42% of everything to the richest 1% in the US was breathtaking. 58% of all income growth between 1975 and now went to them. Real median income is 10% lower than it was in the mid 70s. 45m Amzricans are fed with the help of food stamps. Demand has been destroyed. There is no way the Fed can raise rates.

  4. Data on the Irish Credit to GDP ratio is provided in this research piece from the Central Bank, published last week.
    http://centralbank.ie/publications/Documents/Economic%20Letter%20-%20Vol%202016,%20No.%202.pdf
    That data shows that the Irish ratio is much more volatile than experienced in the rest of the EU- we either have a feast or a famine. Right now it’s the latter, with the ratio more than 5o percentage points below trend. The ratio is now used by Financial Regulators in determining whether banks should hold additional capital in a credit boom ( the ‘countercyclical buffer’) which can be up to 2.5% of risk weighted assets. In Ireland’s case the buffer is currently set at zero as the credit / GDP ratio is massively below trend, although other factors can influence the decision.

  5. Some perspective is required here.

    The post-war Keynesian boom in the US and Western Europe up the to mid 197os with few economic blips came to a halt when the Arabs quadrupled the price of oil and imposed an embargo. The jump in the price of oil added to rising inflation and in Ireland CPI rose to 19% in 1975 and the GDP deflator rose by 22%.

    The Golden Age of growth in Europe with Greece the star performer in 1950-73, would never be restored and in the following quarter century, several countries would struggle with both large budget deficits, unemployment rates and debt. France’s debt GDP ratio was 22% in 1974 when it last achieved a budget surplus. Italy had its only annual budget surplus in any year in 1925/26 since 1861 and its debt ratio in 1974 was 34%. In 1973 the Greek public debt/ GDP ratio was almost 17%.

    Voters elected Thatcher and Reagan in response to the economic turmoil.

    As time went on again it looked like good conditions would prevail forever and the Fed could always be counted on to cut rates when things got choppy.

    While inequality has grown in the US and other advanced countries, it has fallen in other countries.

    In the period from 1988, global inequality fell for the first time since the Industrial Revolution.

    Global inequality in first fall since Industrial Revolution- Part 1

    US and European incomes from the 1830s onwards far outpaced the rest of the world — it shouldn’t be a surprise that this situation wouldn’t last forever.

    Trump and Sanders blame trade for the income stagnation of US workers — there are also gains e.g the price of furnishing a house is as low as it was 30 years ago.

    Technology and the tax system are also factors.

    An FT reader in a letter commented last week:

    truck and delivery driving is the most common type of job in 29 of the 50 US states. The self-driving vehicles — like Daimler’s 18-wheelers that hit the German autobahns last month — have the potential to displace massive amounts of low-skilled labour. The likely victims? Uneducated, downwardly mobile white men — ie the typical Trump/Alternative für Deutschland/Front National voter. The world’s Archie Bunkers. If we’re not honest about this looming crisis and don’t look for ways to address it, our democracies will be under serious threat.

    Ezra Klein of Vox last July that open borders is “a Koch brothers proposal” that “would make everybody in America poorer,”

  6. The problem with a model based on the last 30 years is that it won’t be able to deal with deleveraging or the political struggle to dispossess the 1% of their excessive wealth. Macro is really stuffed after 35 years of TINA.

  7. Interesting data on Irish Government debt position from the CSO.
    http://www.cso.ie/en/releasesandpublications/er/gfsa/governmentfinancestatisticsapril2016/

    General Government debt fell marginally to €201bn at end-2015. but the surge in nominal GDP reduced the ratio sharply, to 93.8% from 107.5%. That fall was largely in line with expectations but the General Government deficit was higher than generally thought, at €4.9bn or 2.3% of GDP instead of the sub 2% widely forecast. Eurostat has to validate the numbers and it decided that the State’s decision to swap part of AIB’s Preference shares into equity in late 2015 represented capital expenditure by the State. Normally such a move is deemed neutral as it exchanges one asset for another but in this case it was ”based on AIB losses incurred since the last capital injection was made in 2012 and on the uncertainty of a return on the investment when compared to the guaranteed return on the preference shares previously held”

    Excluding that transaction, the deficit would have been €3.2bn or 1.5% of GDP.

    1. A very significant quotation from the CSO, if I may say so.
      The import of that CSO quotation (above) is that we have an increase in Debt/GDP ratio, for no benefit whatsoever; the inference and the reality is that AIB was left off the hook on interest on the preference shares (by means of redemption) in order to improve AIB’s bottom line, with the state debt/GDP rising as a result.

      So the state increased national debt by 1.36 billion in Nov 2015, when the economy was growing at up to 9%, in order to give AIB, its principal commercial bank, a further dig-out!!!

      One wonders how the media might have reacted, if the state had borrowed 1.36 billion to build much needed housing, for the people really in need of a dig-out.

  8. Will take a while to go through this properly, looks like a useful paper.

    Is it really helpful to make claims like this though:

    “Our previous research (Schularick and Taylor 2012; Jorda, Schularick, and Taylor `2011, 2013, 2016ab) uncovered a key stylized fact of modern macroeconomic history: the “financial hockey stick.” The ratio of aggregate private credit to income in advanced economies has surged to unprecedented levels over the second half of the 20th century.”

    …obviously nobody had ever noticed that before…

  9. And of course, similar shunting of wealth to the 1% has gone on in Ireland. But you will never read about it anywhere. We have no meaningful wealth taxes. Income tax is progressive up to about €80,000 and flatlines after that. And any attempt to increase taxation on the wealthy is invariably met with servile cries of “but then the wealthy will leave!”

    Similar things go on with regard to the corporate tax rate which, as a matter of simple morality, should be increased with all “double-irish” style tax dodges stopped immediately, not in 2020 (or never). And the state should drop its absurd opposition to Apple paying the €19 billion it owes us and that we need more than they do.

    1. Well done, Ernie. If it moves tax it and if it doesn’t tax it anyway. That’ll show those nasty capitalists who’s in charge. Of course a broad-based, progressive enforceable taxation system is required, but it needs to be accompanied by effective competition policy and economic regulation to generate benefits for citizens as consumers and service-users. Some in the US seem to be waking up to this – first download in this link:
      https://www.whitehouse.gov/administration/eop/cea/factsheets-reports

      It’ll take a long time before this penny will drop in the EU – and even longer in Ireland.

      We have the usual weeping and gnashing of teeth from the National Competitiveness Council:
      http://www.competitiveness.ie/News-Events/News%20Events%202015-2016/NCC%20Publishes%20Costs%20of%20Doing%20Business%20in%20Ireland%20Report%202016.html
      and the usual evasion of any substantive proposals to tackle the economic rents and inefficiencies that characterise the behaviour of the sheltered private, semi-state and public sectors.

      And as for Apple, rightly or wrongly, most of the tax owed is owed to the US Inland Revenue Service.

      1. For all your endless ranting about ‘rent-seekers’ (to which I am sympathetic), you don’t seem to realise that the 1% is made up mostly of the very same. When you think of rent-seekers, I gather the image of a nurse pops into your head. That’s beyond perverse.

        1. I find it interesting that your ad hominem attacks while hiding behind your psuedonym are tolerated while when I ruffled a few academic feathers I was banned for a considerable period.

  10. @docm
    I suspect that the EU context is changing. New ‘rules’ were introduced to tighten up the Stability and Growth Pact (SGP) at the behest of Germany, who (mistakenly) saw it as a necessary condition to save the euro. As with a lot of crisis measures, the flaws became apparent over time, and it is now widely recognised as unnecessarily complicated. More importantly, the European Commission has become secondary to the Council of Minsters, as became evident during the Greek crisis. The politicians want to run the show, and as a result the SGP is not being enforced; Spain’s deficit came in well above 5% last year and France has continually ignored the ‘Corrective Arm’ for almost a decade now, usually arguing that it is implementing ‘structural reforms’. I can’t imagine Mister Moscovici will announce a fine for France any day soon. The ECB is also becoming increasingly nervous that monetary policy has reached its limits, and is now more vocal about the need for a more ‘growth friendly composition’ of fiscal policy while ‘remaining in compliance with the fiscal rules of the European Union’. Those rules now appear to far less rigid than initially imposed . I’m not suggesting that Ireland should ignore sensible fiscal constraints, merely that political pressures across Europe mean that externally imposed ‘rules’ are less binding that once thought.

    1. I agree. The loosening of the constraints has been evident for some time. But that is not really directly relevant to the point that I have been making for some months now i.e. that a curious coincidence of electoral circumstances may lead to the adoption of a new budgetary approach which will introduce the necessary constraints by way of the introduction of a de facto top-down budgetary procedure. The Scandinavians have had such an approach since before even the introduction of the euro i.e. they have accepted that it is in their national interest as an essential element in the correct macro-economic management of their economies. And they have the results to prove it. The help from the EU in our case is coming in the form of the provision of the necessary outline framework cf.
      http://www.irishtimes.com/business/economy/next-government-will-have-scope-to-increase-spending-1.2623004
      It seems that the relevant deciders in FF have twigged this and see the benefit of being able to confront Sinn Féin with some hard budgetary facts in the Dáil (those in relation to water being, of course, the glaring exception), through their chairmanship of a Joint Budget Committee and the establishment of an independent Oireachtas Budget Office.
      https://www.fiannafail.ie/acting-government-should-proceed-with-publication-of-draft-stability-programme-update-mcgrath/
      Unfortunately, not the rest of the FF ranks; especially the recent intake of TDs.
      The deadline for the “draft” SPU is 30 April. One assumes that the officials concerned with its preparation have not simply been sitting on their hands for the last two months. The elements of the Expenditure Report must also be identifiable. Its submission to the Dáil in draft form would be the only approach that makes any sense with a minority government. And we are on our way.
      Or maybe not.

  11. I know it’s the wrong thread and we had a go almost 2 months ago (http://www.irisheconomy.ie/index.php/2016/03/03/scrapping-irish-water/), but, given the impasse that Irish Water has caused in government-formation negotiations, the issue is surely worthy of another go.

    The establishment consensus seems to be IW should be retained as a national utility and water charges should continue. Editorials in the IT and Indo today evidence this and our poster here and Colm McCarthy (among others) appear to be in support mainly because any alternative they envisage would be far more wasteful (absorbing scarce resources that could be allocated far more efficiently and effectively) and counter-productive.

    While it would be easy to dismiss it as characteristically opportunistic and self-serving and despite running against the grain of this apparent establishment consensus, FF’s stance has a solid basis in political economy. FF, of course, is reluctant to spell out this basis, but it, probably more acutely than other political parties and politicians, eventually cottoned on to what had really annoyed so many ordinary voters. These voters, for the first time in more than a generation, had seen aspects of the establishment of a semi-state entity which was being conducted in an extremely cunning fashion to square a number of powerful special interest groups and to meet political objectives – and they had glimpsed the division of the spoils and the sense of entitlement of well-positioned insiders in the sheltered private, public and semi-state sectors at their expense. They were, quite understandably, disgusted and angered.

    The usual left-wing and pseudo-left-wing elements were equally well aware that the eyes of many voters were being opened – in particular to the usual costly shenanigans of the big semi-states – and frantically sought to create a distraction. So the story was spun that IW was being established the way it was to ready it for privatisation. Nothing could be further from the truth. But the spin worked and the idea got traction.

    So we are where we are and, from a purely political economy perspective, FF’s approach has a lot to recommend it. IW will have to be re-established, but retained as a national utility. And it needs a serious rebranding – the “Not the Irish Water Water Agency” (NTIWWA). And charges will have to be suspended for a considerable period. The amounts that households have paid will have to be treated as savings accounts (with, perhaps, interest accruing) and will be drawn down when charges are re-introduced. There is no reason why NTIWWA could not be re-established as a semi-state capable of borrowing on its own account. Eurostat’s assignment of this borrowing to the government sector doesn’t really matter much since Ireland’s GDP (and the debt/GDP ratio) is so distorted by the MNC enclave. And the role of the CER, not only in relation to the water sector, but also in relation to the electricity and gas sectors would have to be thoroughly overhauled. Its antics are a sick and costly joke on electricity and gas consumers.

  12. A pertinent blog post by Sean Whelan of RTE.
    http://www.rte.ie/news/business/2016/0426/784306-sean-whelan-blog/
    One might usefully add that the largely pro forma approval of the revised estimates by the Dáil, when most of the money has already been spent, is exactly what is wrong with the current system. Another boondoggle with the “social partners” aka “civil society” in a few weeks is also not the way to go and, luckily, seems, at the present juncture, unlikely to be repeated. Submission to the Dáil of a draft Expenditure Report (built around the concepts developed by the EU; expenditure benchmark etc.) for the period 2017-2019 is, almost self-evidently, the right path to follow.

  13. The increase in household leverage and home ownership in advanced economies is in the process of being reversed.

    Land prices have been the main driver of housing prices since 1950 and since 1995 house prices have been in an upward trajectory. With the exception of Spain, even where there was a Great Recession correction, real prices for example in Ireland remain well ahead of 1995 levels.

    House prices will continue to outpace average earnings.

    Where as manufacturing plants can be distributed over a wide geographical area, international services cluster in capital or leading commercial cities.

    Social housing demand and the artificial scarcity of land in a country that is 4% urbanised, the poor return for the second highest health spending in the advanced world, the poor skills of the workforce and the very poor pension coverage in the private sector, are challenges for a future government with a mandate — water charges of €3 per week seem like small potatoes by comparison.

    House ownership exclusion rising in UK, Ireland, elsewhere

    Robert Frank, a professor of economics at Cornell University, who has done a lot of research work on executive pay and inequality, has said that the rising US executive pay gap has spawned expenditure cascades throughout the economy.

    The median size of a newly constructed single-family house, which stood at 1,600 square feet in 1980, had grown to more than 2,300 square feet by 2007. Since the median wage was essentially stagnant during this period, this growth cannot be explained by growth in income.

    http://inequality.stanford.edu/_media/pdf/pathways/summer_2010/Frank.pdf

    The economist said middle-income families felt they had to spend more on housing because other families like them were spending more. And those families were spending more because of an expenditure cascade launched by higher spending at the top. Failure to keep pace meant sending one’s children to inferior schools, a step few middle-income parents were willing to take.

    In Ireland calls for pay restraint will not mean that senior executives will be satisfied with single digit pay rises while the people trying to get on the housing ladder will fall further behind.

    Irish Competitiveness 2016: The little people must wait

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