Sunday, January 13, 2013

Sunday Snippets - fires, global warming, problems with benefits & with multipliers

It's been a slow blogging start for me this year. There has been plenty to write about, so much in fact  that I have found it difficult to select. So this morning just some snippets.

This has been a bit of a funny week, dominated by heat and fires. The three posts I wrote on the fires (Saturday Morning Musings - fires, land management & risk, Hysteria over fire risk, A view from the ground in a "catastrophic" fire risk area) drew some interesting comments. The comments provide a base for a new post, for they highlight some of the practical issues involved in responding to bush fires. I also finished the first post in the series noting that I had been going to finish the post by looking at new land management techniques, but that would have to wait until later. So I have two potential posts linked in some way to the fires.

One feature of the discussion flowing from the heat and the fires was a resurgence of the habit of linking current events to climate change. We saw this during the last drought, too. Then came flooding rains, and all the previous prognostications and the more extreme policy responses based on them suddenly looked rather silly. Something of the same thing has been happening this time.

I have made my own position on climate change clear before. On the balance of probabilities, I think it likely that the globe is warming and that that warming is linked at least in part to human activity. However, not all climate change skeptics or at least agnostics are either irrational or ideological.

Professor Don Aitkin is a case in point. He argues that the the current IPCC analysis is inherently biased because its mandate is to measure the impact of human induced climate change. As a consequence, less attention is paid to alternative views and, more importantly, to the broader pattern of, and general causes of, climate change. I have put forward somewhat similar arguments, although my focus has been more on the sometimes silly policy responses to climate change arguments.

In all this, I am left with an uncomfortable feeling that if the climate is changing and for whatever reason, then we had better get ready for bigger and faster changes than presently projected. When the old continent of Sahul was split by rising sea levels, the sea advance across the low lying areas of what is now the Gulf of Carpentaria was a metre a year. That is why I would like more research focused not on human induced causes, but on climate change in general.

In The error fallacy, I referred in passing to the in passing claim made by Commonwealth Families Minister Minister Macklin that she could live on the Newstart Allowance or dole.  She made the comments on the day that more than 80,000 single parents were shifted from the parenting payment to the lower Newstart allowance, leaving some up to $110 a week worse off. Since then, Labor ministers have been backtracking all over the place,

One of the difficulties in a complex integrated welfare system is that one change can have consequential effects. Now it appears that Centrelink, the Commonwealth agency that administers the welfare system, has issued letters to 60,000 single parents telling them to cut up their pension card since they are no longer eligible to use it. If you read the story, you can see that confusion apparently abounds. The issue is significant since the pension card gives you discounts on things like travel and electricity bills, making for a double whammy in reduced benefit payments and reduced discounts. If the newspaper report is in any way correct, we appear to have another example of bungled public policy.

The release of an IMF discussion paper suggesting that they had got the multipliers wrong in their earlier analysis of the impact of austerity measures in Europe has been widely reported. This is an Australian example. In simple terms, every dollar reduction in Government spending reduced national income by $1.50 instead of an expected 50 cents. This wasn't totally new news, for International Monetary Fund chief economist Olivier Blanchard had indicated just this back in October.

I must say that I was a little staggered, though. Economic models are just that, models. Their results always have to be checked by alternative analysis. In a growing world economy, actions by one country to restructure don't affect the whole. In a stagnant global economy, the application of simultaneous austerity measures by interconnected economies must have obvious flow on effects.

You can see this in Australia in the latest job vacancy figures. All Governments have been cutting spend and jobs. Public sector job vacancies in November 2012 were down a whopping 29.5% from the year before. Graph: Job Vacancies, Total and Private sector—TrendNow in a rapidly expanding economy, reductions in Government spend free up resources for use by the private sector. But in the Australian case, the economy is slowing. Private sector job vacancies were down too, if by a smaller amount. 

The graph shows the trend. The downward trend in vacancies has been running for two years. That's a problem.

One of the issues drawn out in the discussion surrounding the IMF discussion paper is the way in which macroeconomic policy has become dependent on monetary policy and that's not working. In a world awash with money, the old Keynesian idea of the liquidity trap has come back into vogue. Quantitative easing doesn't work if people don't want to use the extra cash. It's as simple as that.      


Evan said...

Do you follow Steve Keen? - he is trying to re-do economics to make it more theoretically consistent and closer to experience.

His book Debunking Economics points out that classical economics is incoherent in it's own terms.

Winton Bates said...


I don't think it is that simple. Quantitative easing works on expectations about the future growth of aggregate demand - and hence influences the willingness to hold cash.

If a central bank says it will keep buying assets until nominal GDP is growing by x per cent per annum -and back that up with action - that is likely to work.

Winton Bates said...

I could have been more constructive in my comment.
I rarely cite Keynesians, but this article by Paul Krugman in October 2011 might be worth considering.

Jim Belshaw said...

Evan, I have read a little of Steve Keen's work, but should read more.

I stand to be corrected Evan, but as I remember the liquidity trap neither extra liquidity nor low interest rates work if no one wants to consume or invest. The biggest risk is an asset bubble and inflation once things start picking up.

Fiscal policy is more effective because it can directly stimulate economic activity. The best results come from a combination of the two.

If the EU was a Federation like Australia, then equalisation would have tempered the results. The Greek Government would still have been forced into dramatic measures a la Victoria under Kennet, but the downside would have been more balanced by central transfers.

Jim Belshaw said...

Woops, the last comment should have read in part I stand to be corrected Winton!

Anonymous said...

To Winton via Jim:

In your comment which ends with "that is likely to work" I would be very interested to understand what you mean by "work"? i.e. how you would assess that the action had 'worked'.

To you both: it is a frustration to me that I have been unable to find any commentary on the late last year announcement by the US that they would continue to pursue QE until a target unemployment figure had been achieved. Perhaps I even have that basic statement wrong (Winton talks about 'aggregate demand'?), but it is very difficult to pursue on an iPhone screen.


Winton Bates said...

Jim: As I understand it, once QE makes people expect higher inflation, then we don't have a liquidity trap. I agree that there is a risk of over-shooting inflation targets - but outcomes will depend on expectations of what central banks will do.

Whether government spending stimulates economic activity depends to a large extent on how it is funded. Foreign borrowing works - the government is solvent enough to be able to borrow. Monetization of government debt does tend to inflate aggregate demand.

I understand that high unemployment in Greece is associated with high real wages. That problem is aggravated by relatively low labour mobility within Europe. It would remain a problem even with more budgetary assistance from Germany and France. If we rule out large wage cuts, I don't know how the problem can be resolved unless a) either Greece leaves the Euro and devalues or b) inflation rates rise in Europe as a whole with nominal wages remaining stable in Greece.

kvd: By 'work' I mean getting people to undertake physical investment, purchase consumer durables etc.

Re commentary on the Fed's policy regarding unemployment levels, I thought Scott Summner made good points here.

Jim Belshaw said...

Thanks for the second link, Winton. kvd, the Economist has a useful summary -

Winton, I'm not quite sure how the inflation expectation thing is actually meant to work. Say I form the view that as a consequence of QE inflation will rise to 3%. That has certain effects. It slightly increases my chances of increasing prices if I produce, it slightly erodes the real value of debts with time affecting investment judgments, but I am not sure that it is going to make me spend. Unless, of course, I expect very high inflation.

The old explanation for the impact of what is now called QE ran a little differently. Say the Fed buys Government debt or mortgage backed securities or other assets back from the private sector. With interest rates very low, part of that money will flow into consumption, part into the purchase of assets that might offer some prospect of return. You can only have so much sitting in the modern equivalent of under the bed. I guess if the scale is big enough, these effects can be cumulative.

I don't know, I accept that this is a weakness, what US interest rates are on things like credit card debt or on loans for working capital or for asset purchases. In Australia, there is now a large divergence between official rates and what we actually still pay. If QE forces those rates down, then at least some purchases or investments will become more attractive.

As you can see, I am confused! Comments on Greece follow.

Jim Belshaw said...

Turning to Greece, I am not sure that Greece has high real wages relative to the rest of the Eurozone. I would have thought that its real wages were low. The problem in Greece lies in large part with Government mismanagement and consequent responses.

Anonymous said...

Thanks to both for the links!


Winton Bates said...

I'm not sure about mechanisms. It may be helpful to think in terms of how policies will effect expectations about future growth in aggregate demand. If people are persuaded that central banks are serious about promoting NGDP growth - even by risking an outbreak of relatively high inflation if necessary - they will be less inclined to put off buying a house (for example) in the expectation that Steve Keen's (and other prophets of doom) are correct in predicting that house prices will fall.

Re real wages in Greece, the issue is their level relative to the level that would enable a substantial reduction in unemployment. My understanding is that prior to the GFC real wages in Greece rose by a lot more than in Germany. The correction that has occurred since then has not been enough to restore the relativities that existed at the turn of the century. (I'm not suggesting that those relativities in 2000 should be set in concrete - that was just the base of the indexes I remember.) I'm sorry I can't remember my data source - perhaps OECD.
I have the impression that the real wage problem in Greece is one of the outcomes of government mis-management e.g. using public sector growth to soak up unemployment.

Jim Belshaw said...

I understand your point, Winton. It's just that I am suspicious about expectation arguments. I need to think about it a bit more. I can see how changing expectations can lead to sharp shifts including asset bubbles or sharpened downturn. But generally I prefer to work on more basis data. It's probably worth a post to tease my ideas out, except that I am too likely to make silly errors!

Greece is interesting. I wasn't surprised at the idea of real wages in Greece rising more than Germany. It happened in a lot of the periphery states. You may be right about the reason why.

Anonymous said...

Problem probably much aggravated by the fact that Greece initially joined the Euro zone at a ridiculous Drachma / Euro parity - as did others such as Italy and East Germany when it exchanged its Ost Marks for Deutsche Marks.

Jim Belshaw said...

That would fit with my memory, too, anon, although the end of the Ost was I thought earlier; same effect?