The NIESR blog is a forum for Institute research staff to provide an informed, independent view on current economic issues and recent NIESR research. The views expressed here are those of the authors, and are not necessarily those of the Institute.
A long shadow has been cast over the British economy by the banking crisis of 2007-8. The economy slumped by about five per cent in 2009 and has been slow to recover. Economic growth, for example, was three per cent per year on average in the ten years before 2007 but has been little more than one per cent in the decade since. How does the aftermath of this banking crisis compare with those from Britain’s past? Is this time different?
GDP increases over time for two reasons. First, the economy produces more output because we use more labour and more capital. Second, the economy produces more output because we use better techniques over time. Traveling from London to Glasgow on a high-speed train is much faster than travelling there in a horse-drawn carriage. An increase in GDP for this second reason is called productivity growth.
Economic forecasting is not a single activity. Official forecasting and forecasting for financial market participants, for example, are different exercises. No-one knows what is going to happen but an official forecast is not supposed to indulge in flights of fancy. It represents an informed consensus about prospects, given what is already known for sure - tendencies that are in the data or the foreseeable consequences of recent events that have not yet had an impact on the data. A good model is necessary and sometimes sufficient for this type of forecasting.
When the Industrial Strategy was up for consultation earlier in the year, my colleagues in the Centre for Vocational Education Research (CVER) and I emphasised the importance of well-targeted Active Labour Market Policies (ALMP) to help with the re-training and upskilling in an economy increasingly affected by structural changes.
Much has been written about the impact that Brexit might have on the national economy. We know far less about how that impact might vary across the UK. In a recent paper published in the National Institute Economic Review , myself and colleagues at the Centre for Economic Performance (Swati Dhingra and Steve Machin) provide some preliminary answers.
UK productivity has been woefully poor since the onset of the Global Financial Crisis and has surprised forecasters to the downside. At the same time, employment has surprised to the upside and the employment rate has now reached record highs. In this blog we show that there is a long-established negative association between employment and productivity growth in the UK data, which signals a potential trade-off with far-reaching implications for public finances, Brexit and overall welfare.
In advance of Wednesday’s budget, our Research Director Roger Farmer’s blog which was first posted on 21 November 2016 is still timely and relevant. The article lists three facts about debt and deficits which are just as relevant today as they were this time last year.
The Chancellor of the Exchequer, Philip Hammond, will present his Autumn Statement to Parliament on Wednesday. In the heated debate over austerity, this piece offers three facts about debt and deficits which, I hope, will help shed light on the issues he will face.
There are two coincident problems facing the UK economy. The first is well-known and part of the standard economic narrative and the second is almost not really paid much attention to at all. In the first case I am talking about the productivity puzzle and in the second the long sequence of primary deficits (before interest payments on public debt) on public expenditure, that have been a feature of economic life in the UK, remarkably enough, since 2002-3.
As we approach the budget, there has been a lot of discussion about what the right path for fiscal policy is. One question is whether the Chancellor will throw off the shackles of trying to achieve budget balance over the coming years. I addressed this focus on budget balance in an article I wrote for the August NIESR Review, “Sound Finances”: Strategy or soundbite? , and it is worth exploring some of the pertinent issues that come out of that.
Given the upcoming autumn budget, I have a proposal for the Chancellor to consider. Replace taxes on dividends, capital gains and inheritance with a tax on wealth. Currently these three taxes combined raise £41b in revenue. A 1.2% wealth tax on those with net wealth greater than £700,000 would raise approximately this amount with £2b to spare to help pay down the deficit. A 2% wealth tax would raise £72b and give the Chancellor breathing room to lower taxes on wage income or to provide much needed additional resources for our nurses, firefighters and police men and women.
The French 5-year budget plan currently under review in the French Parliament deserves careful attention because it is the first one under President Macron and a unique opportunity to address some of the structural weaknesses of the Eurozone’s second largest economy: a high level of taxes and public spending, a competitiveness problem and high unemployment.
Writing in 1999 in a widely cited paper “The Science of Monetary Policy”, three leading economists, Richard Clarida, Jordi Galí and Mark Gertler, CGG, make the case that monetary policy is a science. Although there is some truth to that claim, CGG could equally well have titled their paper; “Macroeconomics: Religion or Science?”.
This week the Institute published its November Review and much of the focus was rightly on our projections of an increasing divergence in growth between the UK and other advanced economies. But what we also did was to look under the bonnet of these aggregate effects and try to understand what globalisation has meant for the different sectors, regions and households that add up to the averages. In this blog I shall illustrate by examining, the composition of post-tax income growth, why so many sections of the household income distribution are dis-satisfied with economic progress since the financial crisis.
As the United Kingdom is preparing to leave the European Union, Government policy is to seek a deep and comprehensive free trade agreement with the EU. But Brexit talks have not moved onto the trade issues yet and even if the future trade relationship is taken up in December, this gives little time and offers no guarantee that an agreement will be reached and ratified before 29 March 2019, the Brexit date. The Government has recently recognised the possibility that talks might break down and started to outline a ‘no deal’ vision of the UK-EU trade.
I recently came across this video link to a session held at the 2017 ASSA meetings on the ‘Curse of the Top Five’. The session was organised by Jim Heckman and involves a panel discussion with participation by Heckman, George Akerlof, Angus Deaton, Drew Fudenberg and Lars Hansen. I’m going to concentrate here on the presentations by Heckman and Akerlof.
The events in the financial markets of 2007 and 2008 represented a huge economic and financial shock and the correct response was to run public deficits and to loosen monetary policy rapidly and for an extended period to facilitate as orderly an adjustment to these shocks as possible. These initial responses were intended to be temporary, as indeed are all monetary interventions. But ten years after these events, we are still running fiscal deficits and monetary policy seems ultra-accommodative.
On Thursday, 26 October, market participants expect the European Central Bank to set out its plans for the future of its asset purchase programme. After its last Governing Council meeting, President Draghi said that the ‘bulk of decisions’ concerning quantitative easing is likely to be taken in October. What many observers wonder is: will lifting unconventional monetary policy measures lead to a renewed divergence of euro area government bond yields?
Cloud Yip is running a series of interviews under the title of “Where is the General Theory of the 21st Century” and I was privileged to be included in that series. Last week I put up my first post about the interview. This week’s post is the second in a series where I expand on my answers to Cloud. Here, I discuss my views on rational expectations and I talk about a new version of search theory, Keynesian Search Theory, that underpins my joint papers with Giovanni Nicolò on “Keynesian Economics without the Phillips Curve” and with Konstantin Platonov, “Animal Spirits in a Monetary Model”.
A couple of months ago, I had the pleasure of speaking with Cloud Yip. Cloud is running a series of interviews under the title of “Where is the General Theory of the 21st Century” and I was privileged to be included in that series.
Recently, the FT showed that contrary to popular belief the most troubling issue for SMEs in Europe is not access to finance but access to skills – with the level of concern and the gap between the issues getting larger.