Tuesday, 26 June 2012

US petrol

Living here in the US, I find people complaining about the cost of gasoline (currently about $3.40 per US gallon).  How does that compare?  In the UK, costs are about 1.35 UK pounds per litre.  A litre is 0.26 of a US gallon and the exchange rate is about 1.54.  This is about $8 per US gallon.  The BBC helpfully shows that about 60% of the UK costs are tax and duty

Monday, 25 June 2012

Has the Bank of England missed its inflation target?

Martin Weale writes
Over the period since I joined the MPC, the average inflation rate has been just under 4% per annum.
The target is 2%.

What can one say?
1. Martin also sets out the following graph:

As it says, there are numerous exceptional factors here, leaving him to point out:
Had fuel prices risen in line with the rest of the CPI and had VAT not gone up, then the average increase in the CPI index since I joined the MPC would have been, at an annual rate, 2.9% rather than just below 4%, still above target but less of an embarrassment.
Very nicely , he also points out 
But, while I am comfortable leaving out the effects of VAT, it can reasonably be asked whether picking and choosing beyond this gets us very far. The target we have been set is the Consumer Price Index, not the Consumer Price Index excluding this or that. ...had the MPC been able to persuade the public that they should focus their consumption on audio-visual, photographic and data processing equipment the price index would have fallen by 9 per cent at an annual rate. At least this would be true provided that people sat in the cold and did not watch television. The price of electricity has, after all, risen along with that of other domestic fuels
2. what are the Bank's objectives in fact?
When there is an adverse demand shock then inflation and growth go down together.  but with a cost shock, then high inflation comes with slow growth, so there is a trade-off.  What to do?  A statutory institution should look to what Parliament sets it to do.  The Chancellor writes to the Bank every year to set out the objectives.  Here is the 2011 letter: 

"The framework takes into account that any economy at some point can suffer from external events beyond its control....Attempts to keep inflation at the inflation target in these circumstances may cause undesirability in output" 

Monday, 11 June 2012

Globalization and U.S. Wages

Our latest paper in the Journal of Economic Perspectives. 

Globalization and U.S. Wages: Modifying Classic Theory to Explain Recent Facts

Jonathan Haskel, Robert Z. Lawrence, Edward E. Leamer and Matthew J. Slaughter
Article Citation
Haskel, Jonathan, Robert Z. Lawrence, Edward E. Leamer, and Matthew J. Slaughter. 2012. "Globalization and U.S. Wages: Modifying Classic Theory to Explain Recent Facts." Journal of Economic Perspectives, 26(2): 119–40.
This paper seeks to review how globalization might explain the recent trends in real and relative wages in the United States. We begin with an overview of what is new during the last 10-15 years in globalization, productivity, and patterns of U.S. earnings. To preview our results, we then work through four main findings: First, there is only mixed evidence that trade in goods, intermediates, and services has been raising inequality between more- and less-skilled workers. Second, it is more possible, although far from proven, that globalization has been boosting the real and relative earnings of superstars. The usual trade-in-goods mechanisms probably have not done this. But other globalization channels—such as the combination of greater tradability of services and larger market sizes abroad—may be playing an important role. Third, seeing this possible role requires expanding standard Heckscher-Ohlin trade models, partly by adding insights of more recent research with heterogeneous firms and workers. Finally, our expanded trade framework offers new insights on the sobering fact of pervasive real-income declines for the large majority of Americans in the past decade.

Friday, 8 June 2012

How I helped add £3bn to UK GDP this morning

With apologies for shameless self-promotion...

Our Imperial team, working with ONS and the IPO, this morning raised GDP by £3bn.  Have we discovered the elixir of growth? No. We have, I think, discovered a new and improved method of counting investment in "artistic originals", that is the investment that firms make in books, music, TV programs and films (plus other artistic items like dance).  This investment is hard to measure and is typically done by counting spending by companies: coming, in 2009, to around £2bn according to the official data.  But the spending is, for various reasons, typically undercounted; spending on TV and films for example just considered a subset of companies. Our method tries to improve on that and estimates that a better estimate is around £5bn.  If that is all incorporated into the National Accounts, GDP will rise by £3bn.  That's not settled yet but expect at least some of it to be incorporated in the near future.

This is all part of trying to better understand the knowledge/creative/intangible economy and innovation in general.  Great that the IPO and ONS are supporting this line of work.

Ken Jarboe (@intangibleEcon) points me to Jeff Wild at IAM Magazine -- who  posts "Copyright adds £3 billion to the UK's annual accounts.Is that all?"  Mr Wild wonders why the figure is so low, against UK GDP of around 1 trillion.  He compares this to an report for the US IPO, giving a figure of IP intensive industries accouting for $5.06T in GFP, 35% of US GDP.  That latter figure takes all industires whom they clasify as using IP intensively, around 75 out of 313 and adds their value added.  Our figure just takes the investment, that is long-lived spending, on creating artisitic originals by some UK industries.  The UK report on the "creative industries" follows something closer to the US method, but gets some very variable results.

Thursday, 7 June 2012

Innovation measurement : a survey

Bronwyn Hall has a very nice piece that I only just saw as part of an overall high-level EU panel.  She comes out in favor of the growth accounting approach that I have been working on.

Wednesday, 6 June 2012

Economics writing, the master at work

Are there better economics writers than John Kay?  He explains 

Michael Albert, the writer, identified the twin origins of insurance: the mutualisation of risk in a Swiss village, and the pleasure English gentleman drinking in Lloyd’s coffee house derived from speculation on the fate of ships at sea. 
He goes on

Ever since the days of alpine enclaves and wagers on the tides, insurance has been a mix of the socialisation of misfortune and the animal spirits of the professional gambler.
 Sentences with  cadence like that are just pure talent.

Tuesday, 5 June 2012

Greece and taxes, once again

Via the ever-fascinating Tim Taylor, who blogs at Conversable Economist, here's a table on child poverty. It shows the fraction of kids who would be poor before taxes and transfers and the fraction afterwards.  As you can see, in the UK for example, that fraction is massively reduced, since the system so favours families.  As Tim notes in the US its about the same.  What's that country at the bottom? Its the only place where the system makes kids worse off.

Monday, 4 June 2012

A banking union for Europe

Key conditions from the excellent Wolfgang Munchau

The deposit insurance should have no limits. It is probably best to anchor it at the ECB itself – which would be justifiable if and when the bank recapitalisation facility was big enough. Its goal should be to stop the two types of bank run we are seeing right now. The first is sectoral: a run on weak banks, with money routed to strong banks. The second is geographic: a run on banks in weak peripheral countries, with money routed to core countries. In other words, the deposit insurance not only needs to insure deposits, but the euro value of the deposit even if the country leaves. 

Both schemes require deep institutional change. A joint recapitalisation fund needs a central supervisor with the courage and power to walk into a Spanish bank and close it down. Deposit insurance must be accompanied by a deep political union. Otherwise, it might create moral hazard by encouraging countries to leave the eurozone in safe knowledge of this guarantee. Without a commitment to further political union, deposit insurance is either ineffective or ruinous. Recapitalisation, insurance and joint supervision therefore go together.
So, a proper banking union is a very big deal indeed. 

More Eurocrisis readings

The FT has a series of excellent pieces on this.  Here's my summary

1. Gideon Rachman says wind it all up now.  Monetary union needs fiscal union.  Euro leaders will never agree fiscal union.  So end it all now, or more accurately, find those countries willing to agree to fiscal union and have them in the Euro.

2. Martin Wolf says that the consequences of a break up are so horrendous that there will be institutional changes to the Euro to save it.  I think he agrees with Rachman that full fiscal union is a way away.  So he asks, correctly, what steps will save it? He thinks cheap Eurozone bonds are impossible, due to political constraints.  So he calls for
The answer is through a buoyant eurozone economy and higher wage growth and inflation in core economies than in the enfeebled periphery. 
And suggests this can be sustained with expansionary demand.

Update 1
In yet another  excellent post, he makes some more valuable points.The German response.  A senior official at the German finance ministry writes that short-term help from Germany will raise moral hazard and so will not help in the long run. Martin responds by saying that without a short-run fix, we will not even get to the long run.

My view.
1.  Southern Europe cannot go for  Keynesian expansion since noone will lend to them.  End of.
2.  So we need a backdoor bailout: Germany and NEurope have to reflate their economies and perhaps have higher inflation to help Southern Europe.  Will those citizens accept this?
4.  I think they would if they saw S. Europe reform.  But S. Europe wont reform if they are bailed out.  So N. Europe won't bail them out.  Return to point 1.
5. Thus my  prediction is

  1. 45% probability: breakup with N. Europe coutries staying in.
  2. 10% prob: breakup of whole Zone.  Emergence of 1930s type insularism.  Very bad.
  3. 45% probability:  muddle through  with implict subsidy from ECB.  High inflation down the track when ECB finds assests on their balance sheet are worthless.

Update 2

My student Anjalika points me to the New York Times on how a slow motion bank run might undo the Eurozone and how Germany stands to lose via its Target2 payments.