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Time to let loose – Temps de lâcher prise

I think the time has come to come clean and admit it publicly: the time of this blog is over. I have come a long way since this blog started in November 2006.

Some thoughts on the crisis as the G20 prepares to gather

 “any pro-capitalist argument must rest on long-run considerations. In the short run it is profits and inefficiencies that dominate the picture”. Joseph Schumpeter

In this quite dramatic financial and economic crisis, it isn’t easy to be someone not completely swayed by the common exaggerations about its gravity, as if it were the end of the world, nor by all the moralism that has been surrounding it. Those who say “wait a moment and think again” have the disadvantage of coming up with more reasoned approaches in an area where sometimes public ire seems to have taken the lead over reasoned discussion. Not that I believe that they matter to anyone, there are so many qualified authorities around, but I’ve been trying to structure my thoughts on the crisis and so share them modestly with anyone who’s interested.

Should and can the United States fast-track Russian accession to the WTO?

If you’re interested in this issue, look here.

Germany and Japan – can they offer good alternative economic models? [Ed.]

Germany and Japan, among the world’s most important economies, have held elections this week-end. Japan overthrew the long-ruling LDP and the coalition party members in Germany suffered severe blows in regional elections, not boding well for them in the forthcoming general elections. The economic crisis and its management so far has a lot to do with this. Both Germany and Japan suffer strains on their social systems and their economies due to their ageing societies. They also have had an economic model based on exports at any price with concomitant restrictions on domestic consumption. Both models – in particular Germany’s stakoholder capitalism - have often been portrayed in the past as less brutal and unstable than Anglo Saxon “shareholder”, or worse “casino”, (not to say “locust”…) capitalism.

As capitalism is deemed in crisis globally, and in particular, the Anglo-Saxon model, The Peterson Institute’s Adam Posen published on Friday a refreshing comment on these countries’ economic prospects:

End of the business cycle? Revise your classics

As I read my way through the Deepak Lal book* I mentioned yesterday, I find an exposition on “The Classical Theory of the Business Cycle”.

Back to your classics

While many economists are on holiday, the debate rages on over the future of the profession.

In today’s FT, Robert Skidelsky contributes with a classic theme: the aloofness of perfect-equilibrium mathematical economics and all those models it produced.

and please remember on the beach: the world is not at its end, there will be more recessions to come

or so would say Paul Ormerod:

“As late as the autumn of 2008, economic forecasters in general were far too optimistic about 2009. Are these same forecasters now too pessimistic about recovery? The historical evidence reveals a typical pattern of recession and recovery that suggests this may be so. Very few recessions last longer than two years. And most recoveries, once they start, are strong.

Since the late 19th century, there have been 255 recessions in western economies. Of these, 164 have lasted just one year and only 32 have lasted for more than two years. In other words, two-thirds of recessions last a single year, and only one in eight lasts more than two years. If we strip out the peculiar circumstances at the end of the two world wars, 70 per cent of all recessions last just one year.

The pattern of duration is virtually identical regardless of the size of the initial shock. Even when the initial fall in output has been more than 6 per cent, 70 per cent of recessions have lasted just one year. Even in the 11 examples where the initial fall in GDP was more than 8 per cent in a year, eight recessions only lasted that single year. This does not of course guarantee that the current recessions in western economies will be short-lived, but, equally, the speed of the fall does not imply they will be long.

An analysis of recessions since the second world war shows that those lasting one year or less typically end more abruptly. The average growth rate in the year after such a recession was 3.5 per cent, and in the subsequent year 3.8 per cent. This is compatible with the view that short recessions are essentially inventory cycles. Once inventories are reduced to satisfactory levels, normal production levels resume, and fixed capital investment expenditures postponed during the recession are carried out.

The 4.8 per cent GDP growth rate projected by the UK government from 2009 to 2011 has been criticised as too optimistic. It is in fact rather modest in this wider context.

Recovery was rapid even after the Great Depression. The nature of the economic catastrophe that started in 1929 varied enormously across countries, both in size and duration. The UK escaped relatively lightly with a 6 per cent fall in output spread over two years. In Japan, Denmark and Norway the recession lasted only a single year. But in Germany, Austria, Canada and the US, the cumulative fall in output was between 25 and 30 per cent, with the recession lasting four years in the latter three countries and three in Germany.

However, once the recovery began – in different calendar years in different countries – the average rate of growth was strong. GDP growth in the first year after the Great Depression averaged 4.7 per cent, followed by 4.6 per cent in the second and third years.

The caveat to all this is that the current circumstances are unusual. But so was the Great Depression.”

God save the queen’s humble and obedient servants

I happened to look up the London School of Economic’s website yesterday – pure chance, hadn’t happened in ages. The LSE is headed by one of the greatest advocates of the now much honed “light-touch” approach to financial regulation…. I couldn’t stop my colleagues from wondering yet again if I am really normal by laughing out loud in a silent office at the following annoucement on the home page:

“Wishful thinking and hubris – why the global financial crisis was not foreseen
When The Queen visited LSE last year she asked why no one had spotted the recession. Following a roundtable discussion at the British Academy, leading academics have written to The Queen in response.”

Here is the letter in question. Signed: “Your Majesty’s most humble and obedient servants”, followed by a long list of UK-based economists.

I wondered if I should blog about it, and thought I’d let it pass. But that story was duly picked up by the FT this morning…. with the paper’s usual seriousness/dullness. Oh Britannia…!

I still maintain: economists, take a good holiday!

 

Economists need a holiday

The economic crisis is steep, worsening. Green shoots this spring proved elusive. Except in China, for which a generally pessimistic IMF forecasts 7.5% growth this year, where the stimulus package, tough government intervention, and probably some data massaging provide for more growth than elsewhere. Some at Goldman Sachs believe even that China is going to pull us out of the recession – if one believes the message brought to Brussels last week. I am sceptical, as it appears – read here and here – that the Chinese government tends to persist in its past mistakes: the current mini-boom might well be short-lived. And are the Chinese rich enough yet to pull and the US Americans, and the Europeans, let alone all the others, out of their rut? [EDIT 24 July: Michael Pettis blogs about all these issues! Have a look.]

The press and specialized publications are full of irrational economics-bashing and laudable self-bashing economists (here and here), their status and self-confidence strongly shaken by their inability to stop the crisis from happening. More cool-headed analysis shows that the economics discipline remains as strong and interesting as ever (read here again), although some lessons will have to be learnt. As it turned out, many dangers were actually well known and well publicised, only no one wanted to listen. The boom times being what they were, some economists were also human, all too human,  enjoyed the spectacle of the global economic party of 2003-2007 and became less vigilant. Barry Eichengreen (here again) attributes this among others to the lucrative consultancy fees received by high-flying academics for speeches during luxury conferences hosted by the triumphant global investment banks. It seems of course true however, that economists must learn more about finance and vice-versa, this gap being one of the blind spots in the understanding of the world before the crisis. And the inherent instability of capitalism analysed by oft-disdained Marx and even Schumpeter has not died out, contrary to many recent views about the end of the business cycle. The Economist also had views on this economics issue last week.  

It seems to me that it is not so much the economists that should reassess their profession full on. It’s the financiers I am worried about. Goldman Sachs, primus inter pares among the maverick investment banks of late, is bullish: it has paid the highest bonuses ever to its employees. In the meantime the financial establishment apparently continues to dominate the scene.

This means either two things: the economy is not doing as bad as many say. Or financiers have not yet quite learnt their lesson and continue business as usual, potentially pulling us down even further a few months down the road. In either case, it seems that economists need to go on holiday – to be able to become more discernible again on what is actually really happening in the economy, and to take a well deserved break in these stressful times, since it really is not all their fault.

This morning I received my daily “Eurointelligence” newsletter that updates me on the main macroeconomic issues in Europe. It said: 

“Dear Readers,

The flow of good economic and news and commentary affecting the euro area has reduced to a trickle, so that we have decided to take a holiday. The news briefing will return on Monday, August 17.”

Happy holidays!