Tom Barry

With the biggest shopping day of the year almost here, Tom Barry and Patrick Thomas imagine Black Friday without the benefits of free trade…

 

Worst Buys

Tom Barry

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This is a guest post from Peter Matheson, Economic Counsellor at the British Embassy.

Last night I had the pleasure of appearing on the panel to launch Matthias Matthij's new book, "Ideas and Economic Crises in Britain from Attlee to Blair (1945-2005)". I would highly recommend this work to anyone with an interest in the UK economy; it does a wonderful job of covering 60 years of theory and economic policymaking, synthesising the political and the economic dimensions of our history effortlessly.
 
It was fascinating listening and discussing over 60 years of UK economic policy, both from the perspective of the ideas that underpinned policy development and the conduct and performance of macroeconomic policy.
 
Matthias' book takes us right up to the financial turmoil of 2008 and 2009. Since coming to office in May, the UK's coalition Government has embarked on the next chapter of UK macroeconomic policy making which involves urgently tackling the UK's budget deficit. The Government inherited the largest peacetime deficit in UK history. The state is borrowing one pound in every four that it spends, and just paying the interest on the nation’s debt costs around £120 million a day. Given that healthy public finances are a necessity for sustainable growth, urgent action to tackle the record budget deficit is unavoidable. That is why the Government has taken the tough choices it has, in both the Emergency Budget and the Spending Review, to eliminate the UK's structural deficit by 2014-15 and to start getting our debt down.
 
These policies will be an issue that no doubt future anthologies of the UK's economic history will cover in depth. 

Tom Barry

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In 1981, 364 leading economists wrote to the London Times taking issue with the Budget of Margaret (now Baroness) Thatcher's Chancellor Geoffrey (now Lord) Howe. In it, the government proposed substantial fiscal consolidation even though the economy appeared to be mired in the deepest recession since the 1930s. The economists thought this was a mistake. But, in the eyes of many commentators since, the 1981 Budget set the scene for renewed economic growth; the economy did not sink into a deeper recession but began what became its longest sustained expansion since the Second World War to that point. Though, as with all policy, there remain differing views of the actual impact of that consolidation.
 
I was reminded of this debate over the last week as the British government outlined its spending plans for the next four years, which will cut around 9 percentage points of GDP from the annual deficit by the end of the period. A Washington Post editorial this week argued that  "Reasonable economists can differ about whether the United Kingdom's austerity plan is too austere, too soon." But the British Government’s view is that we can’t put this off: the consequences of not acting now run the risk of higher interest rates, business failures, rising unemployment, and even, potentially, the end of the recovery. This strategy has been endorsed in recent weeks by organisations like the IMF.
 
Although there are inevitably a range of opinions around the detail of restoring fiscal sustainability, there is something close to consensus about the necessity of fiscal consolidation in the UK. Put simply, the government cannot run 10% deficits - borrowing one pound for every four it spends - indefinitely. So, although the cuts will be painful in many ways, we need to put the nation's finances back on a more sustainable path.


Tom Barry

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I'm in the famously-windy-but-not-particularly-windy-today city of Chicago. The main aim of my visit is to learn about the effect of new financial regulations on the markets here.

The Chicago financial market is important but different in type from the market you find in New York. It is based on commodities, futures and options, and will be disproportionately affected by the overhaul of financial regulation which was recently passed in Washington and by similar measures under consideration in the European institutions in Brussels. The UK is contributing actively to the debate in Europe, and we are keen to ensure that the two parallel processes of regulation on each side of the Atlantic mesh together.

The Chicago Mercantile Exchange kindly allowed me to tour the open outcry trading pits, which were full of traders shouting orders to each other. This peculiar market is of fundamental importance in allowing farmers, airline companies and other end users to hedge the risk of their business.It will affected by the policy decision to mandate that many related products will be traded on exchanges.

On the one hand, this move should increase the robustness of the market to the failure of an individual firm and increase transparency. But on the other, it may lead to increased costs. These things are, to some extent, in tension with each other. The challenge for regulators and governments around the world is to balance these competing objectives. We must allow financial markets to fill their vital function of allowing the transfer of risk around the system, while avoiding the disproportionate risk taking of recent years.

Tom Barry

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Aficionados of economic data releases look forward eagerly to GDP revisions. The first release - just four weeks after a quarter ends - covers only forty percent of the activity (pdf) that will be included in later estimates. Statistical agencies have to make an educated guess about the remaining sixty percent. This is a trade-off between accuracy and timeliness. Economic data are often revised for months afterwards. Although the number will only ever be an estimate it will at least become more perfect. But getting an early idea of how the economy is performing is crucial to policymakers.

The second estimate of GDP is often a significant improvement on the first, being based on more information, and the third even better, more accurately reflecting the shape of the economy as it was in the previous quarter. After that third number, attention usually shifts to the first estimate of the next quarter, and the cycle begins again (though statisticians can continue to make revisions to all the data for years to come).

But sometimes the previous monthly estimates see little change. The UK’s independent statistics office has just published its revision for the second quarter of 2010, which ended on 30 June. The estimate for the rate of growth didn't move at all, staying at 1.2% (quarter-on-quarter - which would be reported as 4.8% in the US as the figures are typically multiplied by four to annualise them).

This is encouraging, as it shows the British economy is growing after the recession. It comes a day after the International Monetary Fund published its latest Article IV report, its annual report on the UK economy, with the statement that "the UK economy is on the mend. Economic recovery is underway, employment has stabilized, and financial sector health has improved."


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One of my early memories is sitting at my grandparents' house watching the Chancellor (I can't remember which one - though backing out the dates from Wikipedia indicates it was almost certainly Nigel Lawson) stand outside Number 11 Downing Street, holding up a battered red box containing his Budget speech. In between tutting over the increases in duty on pipe tobacco and whisky (his two principal vices), my grandfather told me that the box was first used by William Gladstone "a long time ago". That's why I was sad to hear that the box (first used in 1860) is being retired this year due to its elderly condition and historic status. It will be replaced by a new one for next year.

 

Chancellor George Osborne hoisted the famous box for a last time yesterday, before making his way to Parliament to deliver the first Budget of Britain's new Coalition government. The Budget within may prove to be one of the most significant the box has carried during its long working life.

The contents were sombre: the deficit in the UK is the largest in its peacetime history. The Chancellor made clear that tackling this problem was the single greatest economic challenge the government faced - and its top priority. Therefore a major programme of deficit reduction was unavoidable.

The Budget laid out the framework for the elimination of the so-called structural deficit over the next five years. The structural deficit is the deficit when you strip out factors that vary over the economic cycle - such as the tendency of taxes to be lower in a recession or higher when growth is high. 77% of the adjustment will come from reduced spending, and the other 23% from increased taxes. The main tax rise is an increase in the UK's rate of Value Added Tax from 17.5% to 20%. On the spending side, the National Health Service and international aid will be ring-fenced from cuts, implying an average real cut of 25% for all other departments over the next four years. These cuts will take a variety of forms such as a freeze on public sector pay for two years. Further details will be announced in a Spending Review of all government departments on 20 October this year.

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The tautologously-named Mansion House is the official residence of the Lord Mayor of London. This ornate Georgian building is smack in the middle of the City of London and has a storied history. Many famous speeches have been given there. The government's economic leaders see it as the ideal venue to talk directly to the leaders of Britain's financial services industry. The speech Wednesday night by the Chancellor of the Exchequer was no exception.

 

In his speech, George Osborne laid out a plan for shaking up the UK's financial regulatory architecture. He argued that the current arrangements - where the Bank of England, Treasury and Financial Services Authority jointly have responsibility for financial stability - are flawed. Instead, he will create a new financial regulator within the independent Bank of England, overseen by a Financial Policy Committee. The Bank will be able to monitor and respond to emerging risks in the entire financial sector - what's called in the jargon "macroprudential regulation". Consumers' interests will be represented by a separate Consumer Protection and Markets Authority.

In addition, he also announced that he would set up an independent Commission on Banking, which will look at the structure and activities of the UK's banking system. This will include both separating retail and investment banking, and also competition issues.

The debate in the UK is similar to that in the US. It looks like the financial reform bill currently being debated by Congress will create an independent consumer protection agency. The so-called Volcker Rule will probably restrict the ability of banks to engage in trading for their own account. And it will create a systemic risk board that will look at macroprudential issues.

The cross-country consonance shouldn't be surprising. Much of the work of the G20 over the last year has been directed at identifying the regulatory failings that played a part in causing the financial sector crisis that shook the world in the autumn of 2008. Broad principles agreed between countries' leaders and finance ministers are now being translated into real-world changes in the UK, the EU, the US and beyond. If these changes help reduce the probability and severity of future financial crises, then that’s something worth cheering.

Tom Barry

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You can sometimes read a lot into how an organisation sees itself from its website address. A .com indicates you're in it for the money, .org that you have more altruistic purposes, and .tv that you're either a broadcaster or from the Pacific islands of Tuvalu. The UK's Parliament's address is, defiantly, www.parliament.uk. The deliberate omission of .gov demonstrates its independence from the UK's executive branch of government.

For fans of parsing urls, the new British Office for Budget Responsibility's site is a beauty - clear and unambiguous: budgetresponsibility.independent.gov.uk. In the UK, this is known as a Ronseal slogan, after a famous advert which advertised Ronseal Quick Drying Wood Stain as doing here.

Yesterday, the OBR released its forecasts for the UK economy and the Government's budget. This is the first time that they've done this as an independent body, outside the UK's Treasury. They predict that growth in 2011 will be 2.6%, down from the 3% to 3.5% given in the last Budget in March. But it slightly revises down the prediction for the UK's public deficit - to 10.5% of GDP in the 2010-11 fiscal year, from the 11.1% estimated previously. You can get the detail as a pdf here.

One more innovation to note: The OBR has produced fan charts to express uncertainty around their forecasts, a tool also used by the Bank of England. Each band on each side represents 10 percent of the probability distribution. As well as giving you more information, I always find these charts a helpful reminder that economic forecasting at its best recognises there are a range of possible outcomes.

 

 

Tom Barry

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My colleague Patrick Thomas has posted about the new British Government's business policy, which takes shape within the context of a broad economic policy. There are a few key elements to this policy, though it is shaped by the need to tackle large fiscal deficits in a credible and sustained way.

After the longest and deepest recession since the Second World War, Britain needs to build a new economic model founded on the principles of freedom, fairness and responsibility. The most urgent priority is to tackle the record budget deficit to restore confidence in our economy and support the recovery. The challenge is large: the British state is borrowing one pound for every four it spends. If we don't deal with this there will be no growth or recovery. Reducing the deficit will restrain inflationary pressures and allow interest rates to remain lower for longer.

One of the main institutional innovations has been the creation of an independent Office for Budget Responsibility. This Office will provide an independent assessment of the state of the nation’s finances and achieve long-lasting change in the way Budgets are put together. The model for the OBR is similar, but not identical, to those of the Office of Management and Budget and the Congressional Budget Office that evaluate federal budgets in the US system. As the executive and legislature are intimately entwined in the UK, the resulting OBR is something like a hybrid of the two US institutions - hopefully taking something of the best of each.

The Government has already taken some initial steps to tackle the deficit, setting out details of how it will save around $9 billion from spending during the current fiscal year. That $9 billion - representing about 1% of government spending - is a down payment for a Budget on June 22 that will set out a comprehensive and credible plan to eliminate the bulk of the deficit over the course of the Government's five year term. Although the details are to be announced, we expect the main burden of deficit reduction to be borne by reduced spending rather than increased taxes.

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The UK's Office for National Statistics released its preliminary estimate for the UK's GDP for the final quarter of 2009 today. The good news is that the UK returned to growth, bringing the country out of recession*. The country had contracted for six consecutive quarters.

The IMF also upgraded its forecasts for UK growth in 2010 today - up to 1.3% for the year. The UK's Chancellor of the Exchequer Alistair Darling said he was now sure that "we are on a path to recovery. I'm confident but I'll always remain cautious.

* For recession geeks. The UK defines recession as two consecutive quarters of contraction in GDP. In the US, it is called by the Business Cycle Dating Committee of the National Bureau of Economic Research. So although the US has also returned to growth, the NBER has not yet officially announced the end of the recession.

Tom Barry

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With government budgets around the world stretched as never before, then each tax pound or dollar needs to work harder to deliver front line government services. If government can be made more efficient, then cuts in money spending need not translate to cuts in services. Indeed, making better use of innovations such as online services can deliver a double whammy - more convenience at less cost.

 

The practicalities of squeezing more from less are not easy. Compared with the private sector, government can be slow to realise the opportunities of new technology.

 

The Office and Management and Budget in the White House has been at the cutting edge of American efforts to improve government. Just this week, the OMB's Director Peter Orszag announced the four finalists in the President's SAVE Award for federal employees who "come up with the best idea to save taxpayer dollars and make the government perform more effectively and efficiently". The final four have the head-smacking "why didn't I think of that?" quality of all the best ideas. My favourite is allowing people to make appointments for social security online.

 

In the UK too we are wrestling with similar issues. The UK's work has been informed by thoughtful conversations with senior officials in the OMB, including through a couple of visits which I helped organise earlier in the autumn. This week, the Prime Minister launched an initiative called Putting the Frontline First: Smarter Government. The key idea is that government should be accountable and transparent and - well - better at doing what it should be doing: delivering public services. For example, "Tell Us Once" is a programme for communicating births and deaths to the authorities. It does what it says. In the future, all government services should be available online. Finally - no more forms.

 

And new portals such as (in the US - live!) www.data.gov and (in the UK - coming soon!) www.data.gov.uk will provide a single access point for developers to access government data presented in open formats and present it in new, useful and imaginative ways.

 

All of this will not be simple - finding efficiency savings never is. But, with the political and economic imperatives pointing in the same direction, we have no choice.

Tom Barry

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This weekend, the G20 finance ministers meet in St Andrews in Scotland. This is the final time they will meet this year – after a packed and productive 2009 schedule – and it is the last meeting with the UK in the Chair of the G20. Although St Andrews is the home of golf, delegates would have little time to play even without the programme of meetings: by this time of year the Old Course is down to fewer than nine hours of daylight, getting dark by 4.30pm.

But even as the days draw in and we reach the end of the year, the momentum of the G20 must be maintained. As I’ve written before, international meetings are the culmination of a long process of preparation. And they also provide a powerful deadline for civil servants to get things done. The prospect of your ultimate boss sitting down with other world leaders tends to focus the mind.

Following the successful Summit in Pittsburgh in September, leaders will not again meet until June 2010 in Ontario, Canada. It would be tempting, therefore, to take it easy for a few months. However, the last twelve months have shown the importance of countries working together. To secure economic recovery recovery, we need to ensure a smooth transition from stimulus and to put in place a framework for long-term, sustainable growth.

In St Andrews, we hope that Finance Ministers will agree the details for the Framework for Sustainable Growth. This will provide a more co-operative approach to governing the international economy, recognising that economies are now highly interdependent. This process is based on countries assessing each other’s policies and then agreeing where changes to these plans are needed to achieve balanced growth.

Pittsburgh also confirmed the G20 as the premier forum for international economic discussions. So this relatively new grouping is clearly in for the long haul. Hopefully, amidst the dark of the Scottish winter, the finance ministers can prepare for an economic dawn in 2010 and beyond.

Tom Barry

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The financial crisis has damaged - perhaps irretrievably - many theories that most economists (including me) thought of as cornerstones of our discipline. Among these has been the idea that markets have an innate tendency to be self-equilibrating and rational.

This leaves us with something of a problem: if markets are prone to herding and momentum, what should be done to control their excesses? Yesterday, I heard Lord Turner of the UK's Financial Services Authority offer some ideas. He was speaking at an event in Washington organised by the National Journal and The Economic Club of America. (Full stream of the talk is available here.)

In a provocative talk, Turner discussed the extent to which the financial crisis was not just a crisis of specific institutions but a crisis of economic theory. Specifically, if we accept that deeper and more liquid markets are not always a good thing - because of the volatility they produce, for instance - then we must then answer not only the question of how big they should be, but also how government policy should go about controlling them.

The good news is that economics already has some good explanations for these effects, albeit ones that have been sidelined in recent years.

John Maynard Keynes was talking about investors' "animal spirits" over 70 years ago in his General Theory of Employment, Interest and Money. Although the term featured heavily in my first year undergraduate course in macroeconomics, by the time I reached graduate school, it had been subsumed by neat mathematical models based on representative rational agents.

The term has been resurrected in the last year and is the title of a recent book by Robert Shiller and George Akerlof. The new(ish) field of behavioural economics is also starting to provide the intellectual underpinnings of a new theory of how markets behave. My hope is that it will help governments design better policy too.

Tom Barry

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