Fiscal multipliers and employment (wonkish)

John Quiggin53 Comments

With two weeks to go in the election campaign, we still haven’t seen anything resembling a budget proposal from Tony Abbott and the LNP. Various people have made estimates of the cost of his promises and the cuts likely to be needed to fund those promises and return to surplus. My main concern is that Abbott has locked himself so thoroughly into the rhetoric of surplus that, in the event of a downturn or recession, he will feel compelled to adopt the kinds of austerity measures that have had a disastrous impact in Europe and prevented any real recovery in the US. To make this point properly, we need some numbers. One way to get such numbers is with a macroeconomic model. That gives you some better precision, but often hides the key assumptions. Instead, I will give a very simple Keynesian analysis, yielding back-of-the-envelope estimates.

For illustration, I’ll assume a public expenditure cut of $10 billion a year – the calculation is linear so it can be scaled up or down as needed. In a recession, the fiscal multiplier is likely to be around 1.5 (that’s the value used by Christina Romer when she pushed for a larger fiscal stimulus in 2009, and consistent with recent estimates by the IMF). So, the impact of the cut, when multipliers are taken into account is $15 billion or around 1 per cent of national income (or GDP if you prefer that measure).

Now we can use Okun’s Law to estimate that the cut will raise the unemployment rate by around 0.5 percentage points. Taking participation rates into account, employment will also fall by around 0.5 per cent (about 50 000 jobs).

A bunch of qualifications and observations over the fold

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Cronyism and the global city again (crosspost from crookedtimber.org)

John Quiggin15 Comments

Alex Pareene at Salon points to a bunch of evidence showing, in essence, that the rich look out for themselves and their kids, and no one else, then to a piece by Andrew Ross Sorkin defending nepotism in the US, and by extension in China. There was a time, not so long ago, when Asia’s reliance on guanxi and similar networking practices was denounced as ‘crony capitalism’, to be contrasted with the pure and hard-edged version to be found in the US. This was supposed to explain the vulnerability of Asian economies to the crisis of 1997, and the stability of the US, then well into the Great Moderation.

A few years later, in the very early days of blogging, I wrote a post pointing out that the eagerness of financial sector workers to congregate in the same physical location, even though their work was supposed to be based on objective evaluation of data transmitted by computer, was pretty good evidence that the “global city” phenomenon, much in vogue at the time, was just guanxi writ large.

I turned that into a magazine article at Next American City (now Next City, whose web site seems to have lost it). Then I wrote a longer and more academic version and submitted it a lot of journals in economic geography, urban geography and so on, none of whom were interested. I think it stands up well in retrospect (much more so than most of the ‘global city’ literature, at any rate), but of course I’m biased.

At any rate, at least now everyone, and not least a defender and beneficiary of the system like Sorkin, is comfortable with the notion that capitalism is a rigged game, in which the ability to fix the next round is part of the prize for winning this one.

Update/clarification I’ve implicitly taken the efficient markets hypothesis as a benchmark, and assumed that features of the financial sector (for example, physical colocation) that can’t be explained by EMH are likely indicators of cronyism. It’s possible to take the view that the financial sector does things that are inconsistent with EMH, but nevertheless socially beneficial. An obvious example is the kind of opaque, over-the-counter derivatives that Dodd-Frank has tried to ban, and that the finance sector is lobbying hard to protect: it seems clear that doing these kinds of deals would benefit from face-to-face contact. So, if such deals are, in aggregate, socially beneficial, my argument fails – the converse also holds.

LOVEINT

John Quiggin19 Comments

The drip feed of revelations about spying by NSA, related agencies and international subsidiaries like ASIO/ASIS, is taking on a familiar pattern. Take some long-held suspicion about what they might be up to, and go through the following steps

1. “You’re being paranoid. That can never happen, thanks to our marvellous checks and balances”
2. “Well, actually it does happen, but hardly ever, so there’s no need to worry about it”
3. “OK, it happens all the time, but you shouldn’t be worried unless you have something to hide”

An example which must have occurred to quite a few of us is whether NSA employees can spy on current or former partners, potential love interests and so on. Until a few days ago, this was at stage 1. Now, it’s been admitted that this not only happens, but it has a name “LOVEINT“. Still, we are told by the great defender of our liberties Dianne Feinstein, this has only happened on a handful of occasions (Stage 2).

All very reassuring, until you read the following

Most of the incidents, officials said, were self-reported. Such admissions can arise, for example, when an employee takes a polygraph tests as part of a renewal of a security clearance.

In other words, while NSA monitors everything you and I do all the time, it relies on witchcraft to detect wrongdoing by its own employees. I guess we’ll just have to hope that NSA staff are too busy snooping on our emails to read any of the 194 000 Google hits on “how to cheat a polygraph”.

The failure of austerity in Europe

John Quiggin30 Comments

The Don Dunstan foundation (with which I have an affiliation) has released a report by Dexter Whitfield, Director of the European Services Strategy Unit, giving chapter and verse on the failure of austerity policies in Europe. It starts with the failure of austerity in terms of its own objectives (reducing debt), and then covers the various consequences, including

The only point I want to make, yet again, is that (with the partial exception of Greece) the debt crisis to which austerity has been the response was not the result of government profligacy. It was caused by the Global Financial Crisis which, in its European dimension, was generated by the policies of financial deregulation, fixed fiscal policy targets and inflation-targeted monetary policy adopted by the European Central Bank and the European Commission – the very institutions that are now imposing austerity.

NBN: we would have been better off without privatisation

John Quiggin42 Comments

I have (over the fold) a piece in The Guardian, making the fairly obvious point that both the need for a publicly-owned NBN and much of the cost are the result of the decision to privatise Telstra, and to rely on “facility-based competition” to drive new investment.

Add in the failure of electricity reform, PPP toll roads and airport privatisation, and there’s not much in the way of success from the infrastructure reforms of the 1990s. Then, of course, there’s the collapse of the much-feted productivity boom.

And yet Australia is exceptionally prosperous. A little bit of that, particularly in Queensland and WA, is due to the mining boom. But most of it is the simple fact that, by a combination of good luck and good management, we’ve gone 20 years without a recession.

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Krugman, Keynes, Kalecki, Konczal

John Quiggin22 Comments

Paul Krugman’s recent columns, responding in various ways to JM Keynes, Michal Kalecki and Mike Konczal have made interesting reading, signalling a marked shift to the left both on economic theory and on issues of political economy.[^1] Among the critical points he has made

* Endorsement of Kalecki’s argument (which he got via Konczal) that “hatred for Keynesian economics has less to do with the notion that unemployment isn’t a proper subject of policy than about the notion of shifting power over the economy’s destiny away from big business and toward elected officials.”

* Rejection of the Hicks-Samuelson synthesis of Keynesian macroeconomics and neoclassical microeconomics and advocacy of (at a minimum) comprehensive financial controls

* Abandonment of the idea that the economics profession is engaged in honest intellectual debate, in favor of the conclusion that the rightwing of the profession, including leading economists, is characterized by denialism and bad faith. As he says, while many economists would like to believe otherwise ” you go to economic debates with the profession you have, not the profession you want.”

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I’m underwhelmed …

John Quiggin43 Comments

… to put it mildly, by Kevin Rudd’s endorsement of the Coalition/IPA proposals for a variety of tax and policy distortions to subsidise economic activity in Northern Australia.

I get that a certain amount of this kind of thing is to be expected in an election campaign, but I hope we don’t see too much more of it.