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The economics-politics divide



Duncan Weldon made a good point recently when he tweeted that the “disconnect between British political discourse and opinion of mainstream economic opinion feels extreme.”

Whilst political discourse talks of balancing the government’s books, most economists (outside the IFS) point to negative borrowing costs and think it more important to look after the economy. Instead, whether left or right, we have other priorities: how might monetary policy better support the economy? How can we end the long stagnation in productivity? Why are house prices so high and what can we do about them? How can we best fight climate change? How might tax or planning policy better promote longer-term growth? How strong is the case for a national wealth fund, basic income or jobs guarantee? How should banks be regulated? Does inequality reduce growth and if so what can be done about it? Etc, etc.

These questions, though, are not reflected in Westminster politics. It’s as if economics doesn’t matter.

From one perspective, this is weird. Historically, politics has been dominated by economic issues: free trade vs protectionism in the early 20th century; whether to be on the gold standard or not; how to achieve full employment; whether to nationalize or privatize; how much planning; how to control inflation; what to do about productivity; and so on. The low salience of serious economics is unusual in a historic context therefore.

What’s more, twelve years of flatlining real wages should have pushed economics up the agenda. We can afford to ignore the economy when it’s working well, but not when it isn’t.

Which poses the question. Why is there the disconnect Duncan notes? Here are some (non-exclusive possibilities):

 - The transmission mechanism from academic economics to policy is broken. This is partly a supply-side problem. Academics are more concerned with bureaucracy and writing unreadable, unread and unreplicable journal articles than they are with communicating good ideas to the public. And even if they were interested, they’d be ignored by the media.

 - The rise of retail politics. Politicians – with a few exceptions – aren’t much interested in ideas. They need salesmen, not economists (or sociologists or philosophers for that matter). Who needs intellectuals when you have focus groups?

 - Interests. Economic ideas gain political prominence if they promote, or at least don’t retard, the interests of powerful groups. Post-war full employment was feasible in part because Fordist capital needed mass markets of affluent workers. When, however, those affluent workers squeezed profits in the 70s, union-bashing became acceptable. So too did freer markets and lower taxes. Today, though, good economic ideas attack powerful interests. Landlords don’t want a land value tax. Bankers (or at least their bosses if not shareholders) don’t want higher capital requirements. And so on. It’s hard to imagine sensible economic policies which do not attack the interests of landlords or bankers. Sure, there’s still a section of capital whose interests are consonant with growth-promoting policies. But the message of Brexit is that this section is politically weak.

 - Realignment. There’s a widespread view, shared by the Labour party, Matthew Goodwin and Stephen Davies in his book, The Politics and Economics of Brexit, that we’ve seen a realignment of politics. The great divide is no longer about economics but culture: “somewhere” vs nowhere”, cosmopolitans vs nationalists”. Brexit might be the start of this new alignment not the end. If so, economics matters less for politics than it used to.

Which brings me to my beef. Isn’t it remarkable that, of all the times this realignment might have happened, it just happens to have come after years of capitalist stagnation?

Well, not so remarkable. It corroborates the finding made by Ben Friedman in 2006, that hard economic times breed nationalism and intolerance. Many of those who remark upon the new realignment are guilty of a gross incuriosity: the fail to ask: might political preferences be endogenous, the result of socio-economic trends?

Herein lies a massive difference between now and the 70s. Back then, the Tories reacted to economic crisis by developing a new economic agenda. Thatcher could plausibly tell a lot of people: “vote Tory and you’ll get richer”. Enough, anyway, to win general elections. Her epigones, however, cannot do this. They have no ideas for economic regeneration – though whether this is because of their own intellectual shortcomings or economic reality is an open question. Instead, all they have is the fanning of the flames of nationalism. There’s more than one way to achieve hegemony.

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The GDP Collapse: It Is What It Is



Jim discussed elements of the 2020Q2 advance release on Thursday. Here, I amplify some aspects that he mentioned.

Confirmation: A Catastrophe in the Making

First, the Trump recession is truly catastrophic in scale; the pace of GDP decline is much greater than that in 2008. This is shown in Figure 1.

Figure 1: GDP in logs, normalized to 0 at 2019Q4 (NBER peak) (blue), and GDP normalized to 2008Q2 (red). NBER defined recession shaded gray, assuming trough at 2020Q2. Source: BEA, 2020Q2 advance release, CBO An Update to the Economic Outlook (July), NBER, author’s calculations.


A “No Confidence” Vote in Administration Policy and Investment

Second, investment has crashed — for both structures and equipment investment. That’significant insofar as capital investment is forward looking.

Figure 2: Fixed investment in structures (blue, left log scale), and in equipment (red, right log scale), in billions Chained 2012$, SAAR.  NBER defined recession shaded gray, assuming trough at 2020Q2. Source: BEA, 2020Q2 advance release, NBER, author’s calculations.

This decline is even more rapid than in 2008Q4; 31.5% now vs. 24% then.

Figure 3: Nonresidential fixed investment in logs, normalized to 0 in 2019Q4 (blue), and normalized to 0 in 2008Q2 (red).  NBER defined recession shaded gray, assuming trough at 2020Q2. Source: BEA, 2020Q2 advance release, NBER, author’s calculations.

Certainly, some of the crash is due to the crash in aggregate demand — as in the 2007 recession — but some is due to uncertainty, including policy uncertainty. Policy uncertainty levels currently dwarf those of the Great Recession.

Figure 4: Nonresidential fixed investment in billions Chained 2012$ SAAR (blue, left log scale), Economic Policy Uncertainty index (tan, right scale).  NBER defined recession shaded gray, assuming trough at 2020Q2. Source: BEA, 2020Q2 advance release, NBER, via FRED, and author’s calculations.


No Recovery Without Recovery in Services Demand

Third, this is a different kind of recession, in many ways, but importantly in the sectoral origin. As Jim Hamilton noted, the decline in services consumption was 43.5% on an annualized basis, while durable goods consumption was relatively flat.

Figure 5: Services consumption (blue, left log scale), and durable goods consumption (red, right log scale), all in billions Chained 2012$ SAAR. NBER defined recession shaded gray, assuming trough at 2020Q2. Source: BEA, 2020Q2 advance release, NBER, and author’s calculations.

Of the 9.8 percentage point decline in GDP (not annualized), 5.9 percentage points were accounted for (in a mechanical sense) by services consumption decline. Jim provides a breakdown of the services consumption decline in his post.

Services consumption will not fully recover until such time as the Covid-19 infection rates are at manageable levels that do not deter such consumption activities. The Administration’s current policy stance is unlikely to encourage that development; one could argue that it — in toto — is impeding that outcome.


State and Local Government Spending Collapses

Fourth, the biggest threat to the economy may be avoidable. One of the lessons of the Great Recession is that constraints on state and local government spending — exacerbated by ill-advised state income tax cuts — was one of the reasons for the torpid pace of recovery. So far, we have not replicated completely that experience, but with Republican opposition to further Federal transfers to the state, we are in danger of repeating that error.

Figure 6: State and local government spending, billions Chained 2012$ SAAR (blue, left log scale), and state and local employment, 000’s, s.a. (teal, right log scale). Source: BEA 2020Q2 advance release, BLS employment situation June release.

This is why it is critical, as many economists have argued, for the next recovery package to include substantial aid to the states and localities.


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Bonus Quotation of the Day…



… is from pages 314-315 of George Will’s great 2019 book, The Conservative Sensibility:

America’s poverty problem is not one of material scarcities but of abundant bad behavior. Data demonstrate that there are three simple behavioral rules for avoiding poverty: finish high school, produce no child before marrying or before age twenty. Only 8 percent of families who conform to all three rules are poor; 79 percent of those who do not conform are poor. And recent social learning includes this: The trajectory of a child’s life is largely determined in the early years.

DBx: I don’t wish to come across as self-flattering, but as I’ve written before, I cannot help but draw some lessons from my own personal experience. I was born in 1958 into a thoroughly working-class American family. My mother, Carolyn, graduated from high-school. (I, the oldest of her four children, was born when she was 20.) My father, Buddy, dropped out of school in 6th grade. When I was born he, at the age of 23, was driving a bus for New Orleans Public Service (“NOPSI” as it was called). He soon afterward got a job as a pipe fitter at Avondale Shipyards, where he worked until he retired in January 2001. On more than one occasion dad was laid off from his job before being called back.

While growing up I didn’t think of us as being poor, although I was well aware that we were far from rich. And when my parents died - mom in March 2008 and dad in April 2009 - sure enough the monetary inheritance was meager.

But my family was loving and stable. Dad was always with his family when he wasn’t at work. He and mom drank very little and took no illicit drugs. My siblings and I were disciplined in the manner of the day - which means that sometimes we got physically spanked. Yet there was never a doubt in my mind - or in the minds of any of my three siblings - that we were loved.

Most importantly, my parents instilled in us a deep belief that the world owes us nothing and that we are responsible for our lives. Excuses for bad grades or bad behavior were simply not tolerated. Ever. There was, further, no tolerance for feeling sorry for ourselves. The notion of envying other people - and we encountered many - who were materially more prosperous than us was out of the question.

My parents were loving, not harsh. They were judgmental only about deviance from acting in accordance with basic life skills and fundamental values - skills and values such as being polite, being punctual, being honest, never being boastful, working hard, and, again, avoiding envy and self-pity as if these sentiments are genuinely dangerous plagues (which these sentiments in fact are).

All four of my parents’ children today lead productive lives. None is poor by American standards. Each has raised their own productive and responsible children.

Among the absolute worst curses that can afflict a person is to grow up slathered with the belief that the world owes something positive to him or her, and not be firmly discouraged from blaming one’s current condition in life on others or on the fates.

The post Bonus Quotation of the Day… appeared first on Cafe Hayek.

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Overall and Core CPI Both Rise 0.6 Percent in July as Price Reversals Continue



Rental inflation appears to be slowing, especially in high-priced cities.

The overall Consumer Price Index (CPI) rose 0.6 percent in July, the same as the rate in June. The core CPI rose 0.6 percent in July after rising 0.2 percent in June. Over the last year the indexes are up 1.0 percent and 1.6 percent, respectively.

The inflation of the last two months is overwhelmingly a story of bounce-back with sharp price increases in these months reversing large price declines in the period of shutdown. To a lesser extent, higher prices in some areas likely reflect efforts to pass on pandemic-related costs (e.g., reduced capacity in restaurants or airplanes). These costs will largely disappear if the pandemic is brought under control.

Gas prices are probably the clearest example of this pattern. They rose 5.6 percent in July after rising 12.3 percent in June. This follows a cumulative price decline of 33.8 percent from January to May. Over the last year gas prices are still down by 20.3 percent.

In the core index, apparel prices are up 1.1 percent in July after rising 1.7 percent in June. They had fallen 8.8 percent from February to May. They are now down by 6.4percent over the last year. Airfares rose by 2.6 percent and 5.4 percent in June and July, respectively. This followed a price decline of 29.5 percent in the prior three months.

Auto insurance prices rose 9.3 percent in July following a 5.1 percent rise in June. This is after falling 14.9 percent from February to May. The index is down 1.9 percent over the last year.

The CPI auto insurance index (unlike the one used in the personal consumption expenditure deflator) is a gross spending index. It captures what people pay out for their insurance, without netting out claims. Not surprisingly, this gross index fell sharply in the shutdown period as insurers gave rebates due to the fact that people were driving much less and therefore having fewer accidents. The rise in the last two months is the ending of these rebates. The insurance index accounts for almost 1.9 percent of the core CPI.  

Restaurant prices rose 0.5 percent in July after rising 0.4 percent and 0.5 percent in the prior two months. Before the pandemic, restaurant prices had been rising 1.0–1.5 percent more rapidly than the price of food at home, reflecting rising wages in the sector. This was reversed during the shutdown period. In March, restaurant prices rose 0.2 percent, while at-home food prices rose 0.5 percent. In April the respective increases were 0.1 percent and 2.6 percent, and in May 0.4 percent and 1.0 percent. The story was sharply reversed in July, as the 0.5 percent rise in restaurant prices went along with a drop of 1.1 percent in the price of food at home. Going forward, restaurant prices are likely to again outpace food prices.


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There appears to be some slowing in the rate of rental inflation, with owners’ equivalent rent rising at an annual rate of 2.4 percent, comparing the average of the last three months (May, June, July) with the prior three months (February, March, April). That is down from a rate of 2.8 percent over the last year. For the rent proper index, the increases are 2.6 percent compared to 3.1 percent.

This slowdown is most visible in areas where rents had been rising rapidly. In Los Angeles the rent proper index was rising at an annual rate of 2.5 percent over the last three months, down from 3.6 percent over the last year. In San Francisco the index has fallen at an annual rate of 3.3 percent over the last three months compared to a rise of 2.6 percent over the last year. 

The high inflation of June and July is not a surprise and should not be a basis for concern about ongoing problems with inflation. It is overwhelmingly attributable to reversals of sharp price declines during the shutdown period. In addition, there are sectors that are experiencing one-time and temporary cost pressures as a result of adjustments necessary to cope with the pandemic. We may see another month or two of high inflation, but there is little reason to believe that this is the start of an upward spiral.

The post Overall and Core CPI Both Rise 0.6 Percent in July as Price Reversals Continue appeared first on Center for Economic and Policy Research.

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