There has been much in the news recently about the attempts of governments around the world to tackle two problems: (a) soaring deficits and debt and (b) a slow recovery and a possible slide back into recession. As the previous news item, Over stimulation? Trying to prevent a double dip as Japan’s debt soars, reported, Japan’s approach has been to tackle the second problem first and to give a massive fiscal boost to the economy. Its debt can be tackled later as the economy, hopefully, recovers.
The Irish government, by contrast, in its Budget on 9 December announced sweeping cuts in government expenditure. This included substantial pay cuts for public-sector employees. Getting the public-sector deficit down (projected to be 11.6% of GDP in 2010) was the government’s major priority.
Greece too is under tremendous pressure to cut its public-sector deficit and debt. Forecast to be 125% of GDP in 2010, its public-sector debt is the highest in the eurozone. There are serious worries as to whether Greece will be able to fund the debt.
Meanwhile in the UK, Alistair Darling presented the government’s pre-Budget report. This took a mid-course between the two objectives. He announced modest increases in tax, including a 1% increase in national insurance contributions from 2010, and modest increases in benefits. The overall effect was pretty neutral, leaving the projected public-sector deficit at around 12.6% of GDP in 2010/11, hopefully falling to around 4.4% by 2014/15 as economic growth increases tax revenues. So was this the best compromise: not too tough so as to stifle recovery and not too expansionary so as to cause a soaring of debt and difficulty in funding the necessary borrowing?
So what is the correct balance? Are the situations very different in the four countries or have they merely chosen to prioritise them differently? Should countries make cuts early in order to get their deficits down and avoid a collapse in confidence, but risk falling back into recession? Or should they get growth firmly established before tightening fiscal policy? The following articles look at the issues.
The UK
Key points: The pre-Budget report at-a-glance BBC News (9/12/09)
Alistair Darling to borrow more this year (including video) BBC News (9/12/09)
Walking the line BBC News, Stephanomics, Stephanie Flanders’ blog (10/12/09)
Larry Elliott’s analysis on the pre-budget report (video) Guardian, Larry Elliott and Mustafa Khalili (9/12/09)
Pre-budget report: All boxed in Guardian (10/12/09)
Tax and mend Economist (9/12/09)
Darling defends economic forecasts (including video) Financial Times, Chris Giles and George Parker (9/12/09)
Prevarication and Newspeak will not fix our finances Financial Times, Willem Buiter (9/12/09)
Is UK government debt really that high? BBC News, Richard Anderson (22/12/09)
The measures announced in the pre-Budget report along with a video of the speech, press releases and the full report as a PDF document can be found at the Treasury’s Pre-Budget Report 2009 site.
The Institute for Fiscal Studies has a part of its site dedicated to the pre-Budget report. This contains briefings and analysis. See Pre-Budget Report 2009
Greece
Why Greece Could Be the Next Dubai Time, Adam Smith (9/12/09)
Greece’s debt crisis signals problems for the European Central Bank Guardian, Nils Pratley (8/12/09)
Greek stocks fall 6% on fears over the country’s debt BBC News (8/12/09)
Greek stocks fall 6% on fears over the country’s debt (video) BBC News (8/12/09)
Greece threatens bankruptcy, and the eurozone The Atlantic, Megan McArdle (8/12/09)
Greece Struggles to Stay Afloat as Debts Pile On New York Times, Rachel Donadio and Niki Kitsantonis (11/12/09)
Greece ‘worthy’ of eurozone place BBC News (14/12/09)
Greek PM to unveil steps to allay deficit fears Forbes, Dina Kyriakidou (14/12/09)
Default lines The Economist (3/12/09)
Greeks denying gifts BBC News blogs, Stephanomics, Stephanie Flanders (29/1/10)
Davos 2010: Greece denies a bail-out is needed BBC News (28/1/10)
Ireland
Ireland suffers harshest budget in decades Financial Times, John Murray Brown (9/12/09)
Strong medicine fails to soothe Irish Financial Times, John Murray Brown (9/12/09)
Irish Wince as a Budget Proposal Cuts to the Bone New York Times, Sarah Lyall (9/12/09)
A time to grin and bear it Irish Times (10/12/09)
Germany
German government heads for record debt BBC News (29/12/09)
German minister warns of fiscal crackdown Financial Times, Bertrand Benoit (17/12/09)
Goverment’s draft budget includes record debt levels Deutsche Welle (16/12/09)
General
The banking crisis: Till debt us do part Times Online, David Smith and Jenny Davey (13/12/09)
Sovereign debt burdens keep traders on red alert Fiinancial Times, David Oakley (12/12/09)
Questions
- Are the objectives of tackling recession and getting the public-sector deficit and debt down contradictory aims, or is it merely a question of sequencing?
- To what extent are the situations in the UK, Japan and Ireland similar? Should they be following similar macroeconomic policies?
- Why does it matter if a country has a rising public-sector debt as a proportion of GDP?
- Distinguish between a cyclical deficit and a structural deficit. Why has the UK’s structural deficit got worse? Will it fall as the economy recovers, or will it be only the cyclical deficit that falls?
- Why does Greece’s debt crisis signal problems for the European Central Bank?
- What determines a country’s sovereign credit rating?
Latest figures suggest that Japan could be entering a ‘double-dip’ or ‘W-shaped’ recession. In the second quarter of 2009, Japan managed to achieve a modest 0.9% growth after four quarters of contraction. Growth then accelerated to 1.2% in the third quarter. It now seems likely, however, that the fourth quarter could see a contraction of the economy again – or at best a slow-down in growth. Prices are falling as demand remains stagnant, and this deflation could encourage people to hold back from spending as they wait for prices to fall further.
As the British government announces planned spending cuts to tackle the rapidly mounting public-sector deficit and debt, so Japan has just announced a massive further fiscal stimulus of ¥7.2 trillion (£50 billion) or 1.5% of GDP. Although Japan’s public-sector deficit is no longer the highest of the G7 countries – 7.4% of GDP, compared with 12.6% for the UK, 11.4% for the USA and 8.2% for France (see OECD Economic Outlook November 2009, summary of projections – its debt, currently at 190% of GDP, is by far the highest of the G7 countries (this compares with 115% for Italy, 76% for France, 73% for Germany, 69% for the UK and 65% for the USA).
More than half of the fiscal stimulus will go on increases in government expenditure, especially on public works. However, much of the spending is in the form of a transfer to regional governments, which would otherwise be forced to make spending cuts because of falling tax revenues. So is the stimulus too much, too little, or of little relevance? Read the linked articles below, which consider the issues.
Japan growth estimate slashed Sydney Morning Herald (9/12/09)
Double dip could be taking shape for Japanese economy Market Watch, Lisa Twaronite (9/12/09)
Japan to boost recovery with giant stimulus plan Sydney Morning Herald, Kyoko Hasegawa (8/12/09)
Japan steps up stimulus spending Sydney Morning Herald (8/12/09)
Japan public debt to hit record this fiscal year AsiaOne News (Singapore) (8/12/09)
Japan govt unveils $81 bln economic stimulus Economic Times of India (8/12/09)
Japan’s economic growth figure lowered BBC News (9/12/09)
Japan agrees $81bn stimulus package BBC News (8/12/09)
Japan unveils $80bn of direct spending in $274bn stimulus package Telegraph (8/12/09)
It is Japan we should be worrying about, not America Telegraph (1/11/09)
Japan keeps pouring money into its ailing economy Times Online, Leo Lewis (9/12/09)
Japan’s Leader Promotes $81 Billion Stimulus Plan New York Times, Hiroko Tabuchi (8/12/09)
Japan sets out $81bn stimulus plan Financial Times, Mure Dickie (8/12/09)
Fiscal challenges ahead The Asahi Shimbun (Japan) (8/12/09)
Bond jitters as Japan launches yet another stimulus plan Telegraph, Ambrose Evans-Pritchard (8/12/09)
New Stimulus Won’t Save Japan From Deflation, Soaring Deficit Money Morning, Jason Simpkins (8/12/09)
Questions
- Use the threshold concepts of stocks and flows to explain the difference between public-sector deficits and public-sector debt.
- Why might an economy go into a ‘double-dip’ or ‘W-shaped’ recession?
- For what reasons might this latest stimulus package be regarded as (a) too large and (b) too small to tackle Japan’s macroeconomic problems?
- Discuss the proposed policy of banning firms from hiring temporary workers.
- Why does deflation (in the sense of falling prices) create a problem for governments?
- What are the implications for the market for Japanese government bonds of the latest stimulus package?
In the run-up to the United Nations climate Change conference in Copenhagen from 7 to 18 December, many countries have been setting out their preliminary positions. The conference aims to set the terms for the agreement that will succeed the Kyoto Protocol in 2012.
Senior scientists, economists and politicians have been warning about the dire necessity of reaching a comprehensive agreement. One such economist is Sir Nicholas Stern. He argues that the EU should impose a unilateral cut in greenhouse gas emissions of 30% from 1990 levels by 2020, irrespective of the any agreement in Copenhagen. The EU has pledged to increase its targeted cut from 20% to 30% only if substantive progress is made at the talks.
Other countries have set out their preliminary positions. China has offered to reduce its carbon intensity by 40% (i.e. the proportion of carbon emissions to GDP); the USA has offered to reduce emissions by 17% by 2020 compared with 2005 levels; and India has offered to reduce its carbon intensity by 24% over the same period.
However, as the Washington Post article below states, “During a weekend meeting, India, along with China, Brazil, South Africa and Sudan, decided it would not agree to legally binding emission cuts, international verification of reductions without foreign funding and technology, and imposition of trade barriers in the name of climate change.”
Meanwhile the news from Australia has come as a blow to those seeking to extend tradable permit schemes around the world. The Australian senate has rejected a bill to set up an Emissions Trading Scheme (ETS), designed to cut Australia’s carbon emissions by up to 25% below 2000 levels by 2020.
Copenhagen climate talks: Main issues Independent (30/11/09)
Factfile on UNFCCC, Kyoto Protocol, Copenhagen talks Independent (30/11/09)
Copenhagen summit: Is there any real chance of averting the climate crisis? Observer, James Hansen (29/11/09)
A heated debate Economist (26/11/09)
Getting warmer Economist (3/12/09)
Is it worth it? Economist (3/12/09)
Good policy, and bad Economist (3/12/09)
The Carbon Economy Economist (3/12/09)
Copenhagen climate summit: 50/50 chance of stopping catastrophe, Lord Stern says Telegraph (1/12/09)
UK Economist: Climate Skeptics are Confused U.S.News, Meera Selva (1/12/09)
Growing Scientific Consensus on Climate Change Ahead of Copenhagen Conference Voice of America, Michael Bowman (1/12/09)
EU ‘should cut emissions by 30%’ BBC News, Roger Harrabin (1/12/09)
Stern says Copenhagen could still save world Environmental Data Interactive Exchange (1/12/09)
Moves by U.S., China induce India to do its bit on climate Washington Post, Rama Lakshmi (2/12/09)
Why do climate deniers hold sway in Australia? Guardian, Fred Pearce (1/12/09)
Australian Senate defeats carbon trading bill Guardian, Toni O’Loughlin (2/12/09)
Failed CPRS ‘may lead to better plan’ Sydney Morning Herald (2/12/09)
Australia carbon laws fail, election possible Reuters, Rob Taylor (2/12/09)
Australian Senate rejects Kevin Rudd’s climate plan BBC News (2/12/09)
The following is the official conference site:
United Nations Climate Change Conference Dec 7–Dec 18 2009
Questions
- Why cannot tackling global warming be left totally to the market?
- To what extent can the market provide part of the solution to global warming?
- How can a cap-and-trade system (i.e. tradable permits) be used to achieve (a) emissions reductions; (b) an efficient way of achieving such reductions?
- Why could the atmosphere be described as a ‘global commons’? Does it have either or both of the features of non-excludability and non-rivalry (which are both features of a public good)?
- To what extent are climate change talks a prisoner’s dilemma game? How may the Nash equilibrium of no deal, or an unenforceable deal, be avoided?
At a three-day event from 27 to 29 November, people were given the opportunity to barter for works of art on display at the Rag Factory gallery in London. Works by many famous contemporary artists were displayed, although none of the works was signed and the artist’s name was not displayed.
The idea was that people would barter for works on their own merits rather than because of the name of the artist. People could offer anything they chose. They simply wrote the offer on a slip and then the artist would choose which ever offer appealed to them the most. Offers ranged from a lettuce, a curry and even a song, to a Ferrari and a person’s own kidney.
As Stephanie Hirschmiller writes in the third linked article below, “Bartering has long been a mechanism on which the art world spins – from Picasso exchanging sketches for meals and London’s YBAs running tabs at The Ivy in exchange for pieces of their work to adorn the venues walls. Even Manhattan’s Chelsea Hotel, home to a slew of famous residents including Bob Dylan, Allen Ginsberg, Dylan Thomas and William Burroughs would once accept art in lieu of rent from its cash strapped incumbents.”
So is barter a realistic alternative to the market – at least for works of art and some other items? Does it have any advantages? The following articles consider the issues.
Barter for Art (video) BBC Today Programme, Evan Davis (28/11/09)
Pick up an Emin for a song Independent, Annie Deakin (27/11/09)
Barter Economy The Handbook, Stephanie Hirschmiller (24/11/09)
Don’t believe the hype New Statesman, Stephanie Hegarty (27/11/09)
Saving on Art the Old-Fashioned Way New York Times, Alice Pfeiffer (23/11/09)
Questions
- What are the necessary conditions for successful barer to work? Can it ever be an efficient form of exchange?
- What are the advantages of barter over normal market exchange with money and prices?
- For what other products and services might barter be an appropriate form of exchange?
- Do you take part in barter at all? If so, under what circumstances and why?
Should economists have foreseen the credit crunch? A few were warning of an overheated world economy with excessive credit and risk taking. Most economists prior to 2007/8, however, were predicting a continuation of steady economic growth. Inflation targeting, fiscal rules and increasingly flexible markets were the ingredients of this continuing prosperity. And then the crash happened!
So why did so few people see the downturn coming? Were the models used by economists fundamentally flawed, or was it simply a question of poor assumptions or poor data? Do we need a new way of modelling the economy, or is it simply a question of updating theories from the past? Should, for example, models become much more Keynesian? Should we abandon the new classical approach of assuming that markets are essentially good at pricing in risk and that herd behaviour will not be seriously destabilising?
The following podcast looks at these issues. “Aditya Chakrabortty’s joined in the studio by the Guardian’s economics editor Larry Elliott, as well as Roger Bootle, the managing director of Capital Economics, and political economist and John Maynard Keynes biographer Robert Skidelsky. Also in the podcast, we hear from Nobel prize-winning economist, Elinor Ostrom, Freakonomics author Steven Levitt, and UN advisor and developmental economist Daniel Gay.”
The Business: A crisis of economics Guardian podcast (25/11/09)
See also the following news items from the Sloman Economics news site:
Keynes is dead; long live Keynes (3/10/09)
Learning from history (3/10/09)
Macroeconomics – Crisis or what? (6/8/09)
The changing battle grounds of economics (27/7/09)
Repeat of the Great Depression – or learning the lessons from the past? (23/6/09)
Animal spirits (30/4/09)
Keynes – do we need him more than ever? (26/10/08)
Questions
- Why did most economists fail to predict the credit crunch and subsequent recession? Was it a problem with the models that were used or the data that was put into these models, or both?
- What was the Washington consensus? To what extent did this consensus contribute to the current recession?
- What is meant by systemic risk? How does this influence the usefulness of ‘micro’ financial models?
- What particular market failures were responsible for the credit crunch?
- What is meant by ‘rational behaviour’? Is it reasonable to assume that people are rational?
- Is macroeconomics too theoretical or too mathematical (or both)? If you think it is, how can macroeconomics be reformed to improve its explanatory and predictive power?
- Does a ‘really good economist’ need to have a good grounding in a range of social sciences and in economic history?