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« As seen on Market Street | Main | Happy birthday BOTR »

Apr 26, 2012


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Andrew Brod

Also related: "Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s."


"the simple IS-LM model (the mathematized version of Keynes' theory)
that most economists learned in senior-level undergraduate economics."

Which has nothing to do with present circumstances.

Keynes argued for building surplus during good times.

Didn't happen.
"there's been a public debate about the very issue
of whether austerity is expansionary."

Not really.

How can something contractory be expansionary?

Most are just trying to maintain power
while making nessessary cuts because they can't pay bills.

How high do you want gasoline prices to go
if they keep printing?

Andrew Brod

"Which has nothing to do with present circumstances."

Except that it's predicted everything we've seen on a macroeconomic level for the last few years.

Other than that, you might be right.


There isn't austerity here, so I guess that explains our booming economy.

Andrew Brod

There is indeed austerity here*, just less of it than in Britain. Consequently, compared to them we're booming.

*Since the recession started, government hiring (at all levels) is down, not up. Since the recession started, government spending (at all levels) is growing, but more slowly than it did during the 2001-07 expansion.

Account Deleted

A few questions:

1. A commenter on Andrew's "we're boooming" link says that in the Eurozone CPI includes food and energy. CPI is subtracted from total GDP to arrive at real GDP. So I definitely would be interested to see the impact of food and energy costs subtracted from our GDP.

2. I've noticed several stories this week that say immigration in the US is down. Since we are an 80 percent consumer economy, I also wonder what impact a smaller productive immigrant worker segment with disposable cash to spend on goods and services has on US economic data.

Andrew Brod

Jeff, the commenter is full of beans. First, economists doing international comparisons are always factoring in changes in statistical definitions across countries. Second, even if they didn't do that here, it might affect the way we compare levels, but not changes. It wouldn't affect the obvious fact that UK real GDP flattened out right after the Tory/LibDem government took office and started cutting spending, while US real GDP kept rising.

And third, the commenter appears to be saying that US CPI doesn't include food and energy, and does include housing. The former claim is glaringly wrong; of course we include food and energy in the CPI. The latter claim depends on what's meant. Our CPI doesn't include home prices, for the obvious reason that very few people buy a house every month. For home prices, I use Case-Shiller or the FHFA index. But US CPI does include a component that captures the monthly cost of owning a home.

But again, even if the way we capture housing costs is different than the way they do it in Europe, it won't change the basic fact of the chart.

As for immigration, of course fewer undocumented workers means less spending. Not having a SSN doesn't mean you don't buy groceries, and the national income accounts (which include GDP) are estimated based on actual purchases, not purchases by people who file a tax return. How big this effect is, I'm not sure. I'll bet someone's calculated it.

Andrew Brod

The confusion about food and energy in the CPI may be a reference to "core CPI," which does indeed exclude food and energy. But no one uses core CPI to characterize current inflation, and no one uses it to deflate a nominal indicator like GDP. (Well, no one who knows what he's doing.)

Core CPI is used solely as a policy guide. It's a measure of future inflation tendencies. Food and energy prices are set frequently, and as a result the setters of those price don't need to factor in inflationary expectations. The opposite is true of all other prices, which is why they're more likely to indicate what markets expect to happen next with prices.


Spending has more than doubled since 2000. In fact, we spent 1 trillion dollars more last year than we did in 2006 despite inflation being nearly zero. So I have to ask, at what point did we stop spending enough and turn to austerity ?


The British PM is having a spectacularly bad week, what with all that austerity rather predictably spinning the place back into recession, and the Murdoch's spilling the beans about the tender loving care they got from his cabinet. Gordon Brown couldn't have done it better.

Account Deleted

Since I am generally interested in going beyond the left-right paradigm, I'll offer up this commentary I read this morning. It's a fascinating article, mostly to the historical mind, but the relevant current events portion kicks off here:

As Doug Henwood points out, our recent economic “recovery” is the weakest since they started to keep track of the numbers. The fact that we’ve failed to recover the majority of the jobs lost during the recession is part of a wider historical change: the decline of the dynamism on which capitalism built its reputation.

Which approaches the point I wanted to raise earlier, but hesitated to do so, which was to wonder if and when GDP ever flattens out permanently.

Andrew Brod

"At what point did we stop spending enough and turn to austerity?"

You're comparing now to 2000 and 2006. It's a bad comparison. In 2006 we weren't spending enough; we were spending too much at the federal level relative to revenues. We were in expansion, and running a huge deficit was a bad idea then.

After the recession hit, spending went up but not as much as it should have. We spent too little because given the length, depth, and type of recession we had, spending should have gone much higher. We didn't run a big enough deficit.

That's when.

Andrew Brod

Jeff, you're quite right that the current recovery is a very weak one. But compared to the UK, we're doing pretty well. In particular, we haven't tipped back into recession.

It's safe to say that real GDP won't ever flatten out permanently, if for no other reason than population growth. So, what about per capita real GDP? It's dinner time over here, so we'll have to look up those data later.

Ed Cone

I don't know that we're seeing the decline of capitalist dynamism -- it's just happening in different places at the moment.

Financial crises historically have long legacies, so the slow climb back is not necessarily unusual or representative of a new paradigm.

And while the developed world sucks wind, developing economies have been feeling quite a bit of the old capitalist dynamism.

Account Deleted

Thanks Andrew. I enjoy.

Ed you are quite right about the developing world. Lots of fascinating stuff happening across the globe. I kept waiting for that article I linked to to offer something besides criticism, but alas, I keep waiting.

Andrew Brod

I read somewhere recently that over the next X years, more people in the developing economies will be entering the middle class than there are people in the developed economies.

Hmmm, that was a bit vague. So feast your eyes on these non-vague data on per capita RGDP.

Ed Cone

A current economic truism is that the financial crisis hastened the shift already underway from developed to developing markets.

Andrew Brod

That's possible. The crisis sure smacked down growth in the developed world, so where's the upside-risk-seeking investor going to look now?


Bubbles are unstable thus bubbles eventually pop; that is what they do. A return to stability is natural.

Do we want that return to normalcy to be of a long or short duration?

If Britain is contracting due to austerity it is no surprise. I would see it as expected. Furthermore, it is good that Britain is contracting again as that is the path toward normalcy, a bottom, and eventually a sound basis for private sector economic growth.

Alternatively we can deny market healing with Keynesian solutions. We can hinder the market's return to sound and healthy post bubble operation by replacing bubble exuberance with government exuberance. The result is endless Japanese style recession or American 30's style depression.

But, hey, under Keynes at least the bureaucrats and educrats can point to positive GDP numbers as we spend government's "free" money.

In the end both paths lead to economic growth, Keynes does so over a long painful period and at high economic cost while the other does so over a shorter period with a trimmed government.

Andrew Brod

Well, that's a new one. Declining GDP is now a good thing.

But I guess if austerity is axiomatically good, then ergo whatever it causes, even if it's widespread pain and economic stagnation, is also good. If austerity causes the Houses of Parliament to explode, that'd be a good thing because Austerity is Good.

Andrew Brod

As for longer vs. shorter recovery, the data comparing 2010s to 1930s UK contradict Frog's claim. The 2010s austerity is lengthening the time it's taken for real GDP to recover, and in the UK this episode is now worse than the Great Depression.

Not that the data generally matter to Frog. I look at the data; he points to the stars.

Billy Jones

Well, one thing for certain, it's only going to get worse before it gets better.


"Not that the data generally matter to Frog. I look at the data; he points to the stars."

No, you misrepresent the data....as always.

Andrew Brod

Okay, you're right: 2 + 2 = 5. I should have seen that.


I am currently in Spain. Austerity is certainly not working here. Spain went into this with almost no national debt and is struggling like crazy. As of today they are at nearly 24% unemployment and climbing.

The beer is certainly good at the cafe I'm currently occupying in Esponza, though. People are genuinely glad we are here.


That was from Hoggard, BTW. Facebook login is weird.


I read earlier today that Spain accounts for one third of the Eurozone's unemployed.

Andrew Brod

And an even higher share of its gazpacho.


"Okay, you're right: 2 + 2 = 5. I should have seen that."

I'm glad you now understand what the true symbolism of your statement is.

Ed Cone

It seems obvious that fiscal discipline is necessary, and also that slamming the brakes on public spending when private spending was/is depressed would have negative consequences.

Those two realities indicate conflicting solutions, so some delicate and dynamic balance should be the goal.

The US, however imperfect our approach, managed this better than Europe.

Billy Jones

"The US, however imperfect our approach, managed this better than Europe."

That remains to be seen. There's still plenty of chances to screw things up some more.


"It seems obvious that fiscal discipline is necessary, and also that slamming the brakes on public spending when private spending was/is depressed would have negative consequences."

Obvious to you and the Tag Team perhaps, but to those of us in the reality community, not so much, particularly in mind of what's contained in the Obananation's debt crisis plan, as
discussed by Jim Pethokoukis here,using the words of master planner Peter Orszag, no less:

"... But in the end more revenue will be needed. And since the administration’s budget probably shows the outer limit of what’s plausible in terms of taxing high-income households, the implication is that middle-income households will have to pay more, too.

And this:

"Although hardly anyone wants to admit it, we’re not going to solve our budget problem over the next decade unless revenue is part of the equation. … One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system."

"Modest" VAT of 5-6 percent, while letting the Bush tax cuts expire, adding on the increased costs associated with the mandated health care, and wrong-headed energy/environmental policies?

It's pretty obvious what's going to cause your "negative consequences", and it's not your latest hysteria-laden mantra of "slamming the brakes on public spending".

Andrew Brod

"Hysteria-laden mantra"? Isn't that an oxymoron?

Billy Jones

But wouldn't the rich have to pay the V.A.T?


"But wouldn't the rich have to pay the V.A.T?"

EVERYONE pays the VAT......poor and middle class included. And spending will INCREASE by design, not decrease, as is clearly needed.

That's point made in the article, and that's the point that needs to be made to the electorate, particularly the 30-35 percent of voters possibly susceptible to being fooled into repeating their 2008 Obama vote mistake this year.

There's no sense appealing to the 15 percent of voters who comprise the hardcore, hard-headed agenda-driven "progressive" fringe. They think the ideas detailed above don't go far enough in the pursuit of "fairness' and "social justice".

It's pretty clear that the hardliner "progressive" politicians and public enablers have no intention of controlling their over the top reckless addiction to perpetual spending increases.

Ed Cone

So, yes, spending choices can be painful either way, which is why some balance is needed.

But the point about austerity alone doing enormous damage without yielding the desired results is the one being demonstrated in Europe now.

Billy Jones

Bubba, are you arguing for or against a V.A.T?


"Bubba, are you arguing for or against a V.A.T?"

As discussed above, the idea of a VAT is proposed in addition to every other tax now in place. I am opposed to a VAT under those circumstances.

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