UK fiscal rules and the Autumn Statement

The big news out of George Osborne’s Autumn Statement last week was the abandonment of his fiscal rules. But the real story for economists was in the OBR’s forecasts. There were two rules:

  1. The cyclically adjusted budget deficit must be eliminated within five years (a rolling window); and,
  2. Debt must be falling as a percentage of nominal GDP by 2015-16.

What’s notable about both of these rules is that they are about a future balance, so whether they have been met is presently a matter of judgement for the official forecaster. That forecaster is the Office of Budget Responsibility, an independent body that is incredibly transparent about its models, methods, and judgment. In this Autumn Statement its forecasts predicted that the Chancellor will breach his debt target. He is forecast to meet the deficit target, but only by a small margin.

Before getting worked up about Osborne failing to meet his target let’s remember that meeting fiscal targets is not inherently noble. It is a means to and end, and that end is long-term fiscal sustainability. It is ensuring that the country’s debt is manageable in the long run. So the real question is whether Osborne’s targets have much relation to that objective. Read more

Housing politics in the UK vs NZ

Housing is expensive in NZ so the government commissioned a report into why that is. It said the problem was (largely) zoning restrictions constraining supply. The authorities were unimpressed.

Housing is expensive in the UK so the government suggested opening up more land to housing. The papers are unimpressed.

I doubt that the populations of Auckland and the UK are all that different in their views, so what is causing the divergence of political views? I’m sure there’s some inference to be made here about the politicians’ constituencies based on public choice ideas, so let me know in the comments if you can join the dots!

Devious pricing?

Apparently UK supermarkets sometimes advertise deals that charge prices higher than the usual, listed price:

In the worst cases, Which? found that supermarkets doubled the shelf price of an item when they began promoting it as a money-saving multibuy. It found that Asda was selling a Goodfella’s Deep Pan Pepperoni pizza at a standard price of about £1, but when it went on to a multibuy deal, the price jumped to £2.50 for one or £4.50 for two.

What is conspicuously lacking from the report is the percentage of advertised deals that do not involve a saving. Mistakes happen, and there are plenty of ways in which a listed price could dip below the deal’s price if supermarkets regularly adjust prices. If only a few dozen examples of this could be found across the tens of thousands of deals that supermarkets advertise every year then I’d be tempted to chalk it up to errors, rather than devious pricing strategies.

Of course, it could be that supermarkets are systematically taking advantage of our decision heuristics, which would be far more exciting 🙂

Have election turnouts been falling?

After appallingly poor turnouts in recent local elections in the UK The Guardian has a post implying that election turnouts have been falling over time. The key figure is this:

They also have a chart showing that smaller, less nationally important elections get a far lower turnout. Given that their time series data combines all election types, I was curious about how the time series broke down by category.

The first thing to note is that local elections (with lower average turnout) are far more prevalent in recent years, at least in The Guardian’s data. That immediately means that the overall trend will show a decline in turnout, even if turnout within categories hasn’t declined. Read more

TVHE is now international

While Matt was busy lounging around in Colombia I packed my bags and moved to London. With agnitio in Auckland, that leaves Matt as the only remaining Wellington resident still blogging, although he makes up for that by writing 80% of the posts!

To celebrate my move to the UK it seems appropriate to reference football with this quote from the BoE governor, Mervyn King, in which he explains his ‘Maradona theory of interest rates’:

The great Argentine footballer, Diego Maradona, is not usually associated with the theory of monetary policy. But his performance against England in the World Cup in Mexico City in June 1986 when he scored twice is a perfect illustration of my point. Maradona’s first “hand of God” goal was an exercise of the old “mystery and mystique” approach to central banking. His action was unexpected, time-inconsistent and against the rules. He was lucky to get away with it. His second goal, however, was an example of the power of expectations in the modern theory of interest rates. Maradona ran 60 yards from inside his own half beating five players before placing the ball in the English goal. The truly remarkable thing, however, is that, Maradona ran virtually in a straight line. How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on.

Monetary policy works in a similar way. Market interest rates react to what the central bank is expected to do. In recent years the Bank of England and other central banks have experienced periods in which they have been able to influence the path of the economy without making large moves in official interest rates. They headed in a straight line for their goals. How was that possible? Because financial markets did not expect interest rates to remain constant. They expected that rates would move either up or down. Those expectations were sufficient – at times – to stabilise private spending while official interest rates in fact moved very little

That pattern is sometimes described as “the market doing the work for us”. I prefer a different description. It is the framework of monetary policy doing the work for us. Because inflation expectations matter to the behaviour of households and firms, the critical aspect of monetary policy is how the decisions of the central bank influence those expectations. As Michael Woodford has put it, “not only do expectations about policy matter, but, at least under current conditions, very little else matters”. Indeed, one can argue that the real influence of monetary policy is less the effect of any individual monthly decision on interest rates and more the ability of the framework of policy to condition inflation expectations. The precise “rule” which central banks follow is less important than their ability to condition expectations. That is a fundamental point on which my later argument will rest.