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Did Gordon Brown & the BoE Bitchslap Greenspan?

by Drew J Jones Thu Nov 10th, 2005 at 05:59:04 PM EST

Chancellor of the Exchequor Gordon Brown, that son of a bitch, is going to leave me picking my intellectual teeth up off the ground.  I just know it.  I've criticized his deficit spending in recent months, citing it as unnecessary, since the Bank of England (BoE) is plenty capable of dealing with stimulus through monetary policy.

(All charts on the UK economy can be found at the BBC's site, here.)

But, right under our noses, Labour and the Bank of England may have pulled off what we in America failed to do:  Stop the housing bubble by raising interest rates, without killing the economy.

More below.


In February of 2003, housing prices in Britain were rising at a rate of 26% per year.  So, being good little inflation-targeters, the newly-independent BoE began raising interest rates to stop it.  Prices are now rising at less than 10% per year, and, when you consider the inflation rate and the strong rise in wages every year (thanks, in part, to very low unemployment), this is actually very mild.

Interest rates in Britain are now at 4.75% -- pretty high by American standards.  But the Treasury is projecting growth to pick up to 3.5% for 2005 and roughly 3% for 2006 (see charts), which are okay numbers for America and very strong for Britain.  (Some of that difference in performance is due to the fact that Britain's population growth rate is about one percentage point slower than ours, I think.)  How the hell are they pulling this off?

Here's what I think may be happening:  Since the BoE stopped the bubble by boosting rates, Brown recognized that this could shock the economy, a la the Volcker Contraction in a less-severe form.  (Remember, the Brits were recovering from the dot-dom bubble, too, though they weathered it much easier, as the unemployment and GDP growth charts above show.  The unemployment rate never exceeded 5.3%.)  Had rates stayed low, the increased money supply would've simply gone into the housing bubble.  That's what happened here in the US, as bonddad, from Daily Kos, has pointed out consistently, along with, I believe, some diaries by Jerome.  So, when the BoE began raising rates, Brown began running deficits by starting programs to boost output and keep unemployment low.  And it looks to me like it worked, and, as the economy picks up, with housing prices under control, the deficit will gradually be reduced.  The BBC points out that job vacancies are increasing dramatically, and unemployment claims are at 30-year lows.

In other words, Brown shifted the money-supply increases around, and away from, the housing bubble.

We'll see if he was right.  And, if that is indeed what is happening, Gordon Brown is brilliant, and Alan Greenspan needs to give his PhD back.

Update: I should probably add the important fact that Brown did have to downgrade his forecasts for growth this year to 2.0-2.5%. (Still not horrible.) But I don't buy The Ernst & Young Item Club's pessimistic projections for years to come.

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Though we've had some discussion here about reported unemployment figures in the UK (and US for that matter) as being a good bit lower than reality, your argument is interesting. (I leave most of the serious economic analysis to the site experts; I just dabble in it.)

So this is back to good old Keynesian economics? And I thought that they were out of style. :)

by gradinski chai on Fri Nov 11th, 2005 at 12:54:02 AM EST
I've read some arguments on unemployment.  I think the US's figure is incredibly misleading, because of the high number of people dropping out of the labor force.

The UK picture looks stronger, because there is also wage growth, which is an important indicator of whether you truly are approaching the "full employment" mark.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 09:08:58 AM EST
[ Parent ]
I think we had issues about how the UK is keeping up employment - Jérôme holds it's mainly public sector employment that is keeping numbers up - but we haven't had any serious picking at the UK numbers that I remember.
by Colman (colman at eurotrib.com) on Fri Nov 11th, 2005 at 10:15:48 AM EST
[ Parent ]
I think Jerome is, at least to some extent, right.  But that was also partly my point.  The key difference between the US and the UK is how they're spending the money.  Bush spent it on tax cuts, which led, to no one's surprise, to a temporary increase in the savings rate.  But, as wages have not kept pace with inflation, the savings rate has fallen to roughly zero.

I think Bush and his economic advisors -- N. Gregory Mankiw (excellent), Glenn Hubbard (horrible), and Ben Bernanke (also excellent) -- missed the point, though Mankiw and Bernanke clearly haven't had much influence.  Bush would've move forward on these particular cuts, with or without them.

It's not that increased savings is bad.  Quite the contrary.  Americans need to save more.  But it's the working- and middle-classes that need more opportunity to save, and not through some moronic scheme to privatize Social Security.  That's how we could've pursued a Pareto-improving outcome in the future, by helping people gain access to the tools needed to "create" wealth.  (I wish economists could come up with a different term for this.  "Create" makes it sound like higher standards of living just appear out of nowhere.)

The upper-class in America already saves an enormous chunk of its income -- the kind of rates you typically find in Asian countries.  I suspect it's a similar story in Europe.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 10:35:59 AM EST
[ Parent ]
Pareto-improving? You're so 19th century... Old school. Embrace Kaldor-Hicks! Bush's economic policy has resulted in a Kaldor-Hicks improvement because the wealthy, the corporate welfare queens and Halliburton could in principle make it up to the rest of Americans if they so chose. Aren't economists clever?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2005 at 10:42:24 AM EST
[ Parent ]
Yes, I know.  It's sort of like the Supply-Siders, who failed to "bring back the magic," as Paul Krugman put it, and then claimed that they, in fact, had.  Or, as the Wizard said, "Pay no attention to that man behind the curtain."

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 10:46:15 AM EST
[ Parent ]
Your point that Brown's Keynesian spending could do some good is valid, but it's been awfully timed, coming when spending was already otherwide stimulated by asset appreciation. It would be a lot more effective today, but is now constrained by the unavailability of budgetary room of manoeuver.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 11th, 2005 at 10:53:03 AM EST
[ Parent ]
Well, there was this kinda light-hearted attempt at nitpicking on UK unemployment numbers. Since then, the issue of Incapacity Benefit has gone public in Britain, and the question of what to do about it is one of the government's current hot debates. (Blair and Blunkett were squaring off on this just before Blunkett resigned). So the picking has been entirely validated.

Briefly, a large number (around 3% of the working-age population) of the long-term unemployed in the UK left the labour market for sickness/disability benefit and are no longer counted in the unemployment stats. My beef is against the use of unemployment numbers as weapons in the non-stop "US/UK good, France/Germany bad" propaganda game. ("Just look at our low numbers, theirs are much higher, therefore their economies are failing etc...")

In fact, though, the UK may well have had the tight labour market that, as Drew says, wage growth suggests. But two contributory factors not generally recognized are the number of long-term unemployed taken off the market and supported at public cost, and the large-scale creation of public-sector jobs. I'm not knocking this, or suggesting Brown isn't a capable Chancellor; but under-the-radar Keynesianism it is.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 11th, 2005 at 05:09:07 PM EST
[ Parent ]
I'm not sure the US and UK should be paired against France and Germany.  The UK may have smaller government than France and Germany, but it's larger than the US, I believe, when you take regulations into account.  Not of the comparisons are as clear as they're usually made out to be, and I think people ignore culture too much, because economies do, after all, reflect the cultures they're a part of.

The truth is that there is little difference in government spending as a percentage of GDP in all four countries.  It's one of the reasons for why I can't take American Libertarians seriously when they bitch about "the hand of big gov'mint".  Government really isn't that big, even in Germany and France, which is fine by me, as someone who, I think like most people, only wants government to do what it must do for the sake of society's health and safety.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 05:43:46 PM EST
[ Parent ]
I think you are being overly optimistic. See these diaries:

Bubble bursts for UK
Housing (worldwide): the biggest bubble ever

Consumption has been supported by house equity withdrawals and by Brown's public spending binge. Both are coming to the end of their availability, and consumption is likely to slow down brutally, as has been visible in recent months, with GPD growth correspondingly hit.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 11th, 2005 at 10:50:29 AM EST
Good point.  Leave it to the bean-counters at The Economist to dig up the important numbers.

I haven't gotten into the issue of deficits, and how their effects change as time passes, but you've touched on it here.  Brown is, obviously, not going to be able to continue it much longer, nor do I think he should.  (Then again, I thought Bush's deficits would surely bring about a collapse.)  Deficit spending should always be a very short-term policy.

The outlook, even among those who are most pessimistic about the British economy, does seem to have improved somewhat.  (Even the Item's Club agrees, though cautiously.)

But I do agree that Brown has probably reached a point where beginning a deficit reduction program would do more good than harm.  If the BBC is correct, and job vacancies will open at strong rates next year, then there's really no point in hiring massive numbers of people in government.

I would certainly caution Brown against tax increases.  Any idea what the savings rate is in Britain?


Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 11:10:05 AM EST
[ Parent ]
Gee, looks like Britain goes through a boom-bust housing cycle every 10 years or so, and that the duration and amplitude of the cycles is increasing with each cycle.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2005 at 11:42:57 AM EST
[ Parent ]
I don't think it'san "every ten years" thing.  Don't the booms on the chart correspond fairly well with particular parts of the business cycle?  I also note that the recent bubble, being larger than the others, came at a time when interest rates had been cut to near-record-lows, at least here in America.  I assume a similar story holds in Britain and elsewhere.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 01:22:59 PM EST
[ Parent ]
Well, yes, I would expect the housing cycle to be in sync with the rest of the economy, but the UK curve is stark.

The US housing market appears to be on a similar cycle, with peaks and troughs happening almost at the same time, but the oscillations are shallower.

Maybe in the last business cycle the Fed and the BoE have forced the machine a little bit. Will the next cycle be even longer and deeper?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2005 at 01:36:39 PM EST
[ Parent ]
Perhaps.  I still can't figure out why GDP growth in the US has been so strong, while wage and job growth have been so terrible.  I've heard explanations, but none so far seem to really capture it.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 01:42:29 PM EST
[ Parent ]
How about Hitler-like Keynesian military spending on one hand; and high domestic demand driven by household debt, in particular remortgaging, on the other? Is that not good enough? They have both been on a massive scale.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2005 at 01:51:12 PM EST
[ Parent ]
In which thread did we discuss the keynesian nature of Hitler's armament and civil works plan? I think you should be more explicit in your comment, for those that do not necessarily read all threads, so that it can be understood on its real merit and not as another of these "crazy lefty" insults...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 11th, 2005 at 01:59:05 PM EST
[ Parent ]
Here. We were talking about Armistice Day and the consequences of the Treaty of Versailles.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2005 at 02:03:27 PM EST
[ Parent ]
In my defence I'll say that Drew and I have been locked in a couple of long exchanges today, so it almost felt like a private chat.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2005 at 02:05:06 PM EST
[ Parent ]
I think it's fairly well understood that Hitler's economic advisors were familiar with The General Theory, though they probably would've built up the military, regardless.  (And I'm amazed Rothbard and Rand didn't attempt to blame Keynes for the rise of Hitler.)  That's obviously not to say that we should blow money on the military everytime we have a recession.  The far-Right spends too much on it, already, in America.  I'm honestly not big on fiscal policy as a tool to combat recession.

On some level, spending is spending is spending.  But it's clearly more advisable to spend on, say, infrastructure rather than on massive military buildup.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 11th, 2005 at 02:41:38 PM EST
[ Parent ]
Take a hundred billion currency units and choose between:

  1.  A fully operational aircraft carrier
  2.  A bunch of power plants

Which is going to be the better investment for further wealth creation?

Over the long term, military assest purchase are negative-sum (it costs money each year to keep them in shape) investments while productive assets are positive-sum investments.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Nov 12th, 2005 at 11:37:27 AM EST
[ Parent ]
Right.  It costs enormous sums of money to keep military assets in proper condition, especially for countries with nukes.  On infrastructure, I was referring more so to roads, rail, schools, etc.  But power plants are a good example, too.  However, if we're going to invest in power plants with government money, they ought to be power plants run on renewable energy, in my opinion.

We're currently having a big fight in my hometown, Tallahassee, FL, over a coal plant that's being built in the neighboring county.  Tallahassee in a very Democratic city in a very Republican area of the country, and so, naturally, we're not wild about funding a new power plant based on coal.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Nov 12th, 2005 at 01:17:10 PM EST
[ Parent ]
Just force them to agree to installing carbon-capturing technology as a condition to allow the plant to be biult.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Nov 12th, 2005 at 03:03:18 PM EST
[ Parent ]
What happens if the UK and the Eurozone interest rates start to compare favorably with those in the US?
One of the points being made recently is that money keeps flowing into US treasuries from Europe because the effective yield is still better.

So if the yields become more comparable will this flow stop or reverse? And if it does, what will happen to the relative values of the currencies? Is anyone in any of the central banks concerned?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sat Nov 12th, 2005 at 02:09:27 PM EST
Isn't the interest rate (or bond yields) inversely correlated to the long-term market expectation of the value of the currency?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Nov 12th, 2005 at 03:01:56 PM EST
[ Parent ]


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