When a Recession Ends

The recession is over. It's official. Even the BBC and the FT say so.

But, does one quarter of positive growth really mean that the recession is finished? I posed this question some time ago, before the end of the first dip. Then I argued for three alternative ways of judging the end of a recession:

• the level of at GDP rather then the rate of change
• when the annual growth rate turns positive
• quarterly growth to return to (or exceed) the trend rate (0.6% a quarter)

How are we doing on those criteria?

The level of GDP is still more than 3% below the peak reached before the recession. If anyone tells you that the recession has finished, tell them that the depression goes on. According to the ONS the annual growth rate is zero, "GDP in volume terms was estimated to have been flat in Q3 2012, when compared with Q3 2011". Only the third criterion is met, the quarterly rate is above trend. 

So on two out of three of my criteria, it is still too early to call the end of the recession.

Simple Keynesian Political Economy

The real question behind the prime minister's fibs at his party conference, just like last year's fibs by the chancellor of the exchequer, is this: why does the Labour Party let the Tories define the narrative?

Last year Mr Osborne's fibs were in the service of creating a version of history in which the crisis was caused by too much debt. (Respectable Keynesians might agree that the explosion of debt was a cause but it was mainly household and businesses who were running up the debt.)

In Mr Osborne's version the borrowers were the British government, European governments and (bizarrely) the banks. This was and is nonsense. Before the crisis the government's net debt ratio was 36.4% of GDP. European countries which are now highly indebted include Spain and Ireland who, before the crisis were paying down their national debt, which was already very low. The banks were culprits not because they borrowed too much, but because they lent too much.

Mr Cameron returns to the theme by painting Labour as inveterate borrowers.

This alternative history needs to be countered. The opposition must create a different narrative, and one which is more honest. Against the Tory story of a debt crisis which must be cured by austerity we need a narrative to explain that the problem is a financial collapse and the solution is  investment.

Simple Keynesian analysis reminds us that the stimulus the economy needs is investment rather than general government spending or tax cuts. The investment may be in the public sector or the private sector or done by the public sector because the private sector is unwilling.

Investment should raise the potential of the economy and so provide more jobs and output in future and reduces the structural deficit. Investment should provide future income streams and so it is usual to fund investment by borrowing.

This is not the time to be slashing government investment in half, as Jonathan Portes of NIESR argues.

Source: Jonathan Portes blog, Not the Treasury View

To boost private sector investment a future Labour government will need to fix the still broken financial sector to provide the economy with the kind of banks which supply credit to small and medium sized businesses. New lenders will be needed, such as regional enterprise banks, and barriers to entry for new retail banks should be removed.

These then should be the themes of a new narrative to explain the crisis and its resolution. They are easily understandable. People remember that the crisis began as a financial crisis, but perhaps need to be reminded of collateralised debt obligations, shadow banking, securitisation, special investment vehicles, sub-prime lending and all the other instruments of financial destruction. Investment too is an attractive concept which points to a brighter future.

A narrative is not yet a policy, but as I will argue, the policy should point in this direction.

Update: link added

Mr Cameron's Fibs

This is what the prime minister said to his party in Birmingham on Wednesday.

I honestly think Labour haven't learned a single thing. When they were in office, their answer was always: Borrow more money. ...Whatever the day, whatever the question, whatever the weather it's: borrow more money. Borrow, borrow, borrow.

Did Labour always borrow? Here is a chart of deficits during the last Labour government.

Source: Eurostat, click to open a larger view.

As you can see the deficit was under control up to the financial crisis hit in 2008. In fact, the average deficit to GDP ratio  from 1997 - 2010 inclusive was 2.2%. The equivalent figure for the Tory years, 1979 - 1997 inclusive is 3.5 %.

Source: Eurostat, click to open a larger view.

Mr Cameron's claim was always, whatever the day, whatever the weather. Well, I can see three years when Labour wasn't borrowing anything at all and another when the deficit was half a percent of GDP.

I have two conclusions:

It was the banking crisis and subsequent depression which blew up the deficit.
Mr Cameron tells fibs.

Seeking Friendship

I often wish political commentators would stay away from economic policy. Take Philip Stevens in today's FT for example. In a column arguing that Mr Cameron should kiss and make up with Mrs Merkel he makes the claim that:

 On the big economic issues – the single market, competitiveness and budget discipline – it (Germany) holds positions quite close to those of Britain.

Which is true except that on the single market, Britain is openly questioning one of its four pillars, the free movement of people. (The other pillars are the free movement of goods, services and capital.) A point recognised elsewhere in the article. On competitiveness, Germany takes a mercantilist view while Britain take a free-trade liberal view. If those positions seem  quite close then I would direct you to a book Adam Smith wrote setting out the differences. As to budget discipline, Germany has adopted a balanced budget amendment to its constitution and is pushing the policy on other eurozone states. Britain's stated policy is to abolish the structural deficit; a balanced budget law is a lunacy too far for Britain's government.

He ignores the biggest economic issues of the day, reform of finance and the consequences of monetary union. On these there is no meeting of minds.

Reading Rude Books

I've noticed that in some of the economics blogs there is a tendency to rudeness. I've started reading a book that manages to stay barely the right side of politeness as it demolishes the entire edifice of neo-classical economics. Steve Keen's Debunking Economics is my current bedside reading.

I've greatly enjoyed his wrecking ball swinging away at the pillars of microeconomics. I'm going  bit slower through the dismantling of macro. If I have a complaint so far it is that he avoids the maths and that does not always help. I have followed up on his references in order to find the mathematical explanation of some of his points. I will post again when I've finished, but so far this is a book I would recommend.

Atlas Shrugged

Samuel Brittan had a good line in his FT column last week:

When voices in Paris or Berlin say the answer to any problem is “more Europe”, by which they mean more centralised power to EU institutions, we should turn a deaf ear. And when some leaders say that “without the euro there is no Europe” we should shrug our shoulders and look at an atlas to reassure ourselves.

I like the last bit.