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Productivity and Employment: A Cautionary Tale

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Ah, productivity. Who knew that our whole prosperity was totally dependent on a concept as nebulous as this?

To be sure, it doesn't sound nebulous. It is output per worker per hour. What is so difficult about that?

The problem is how you define "output". Usually, we take this to mean GDP (gross domestic product), though we might use GNP (gross national product) or GVA (gross value added). In this post, I shall use GDP.

As Diane Coyle has engagingly written, GDP is a deeply flawed measure. Yet we are obsessed with it. The Eurozone uses government debt-to-GDP and deficit-to-GDP ratios to justify harsh spending cuts and tax rises. In the UK, "WE MUST PAY DOWN THE DEBT!" roar the headlines, entirely missing the point that debt-to-GDP is a ratio, so even if we never borrowed another penny, it would rise if GDP fell. Even if GDP growth remained positive, but slowed down - say to 1.5% per annum instead of the predicted 2% -  debt-to-GDP would take longer to reduce fo…

The Amazing Conversion of Sir James Dyson

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“Will you tell me how long you have loved him?” asks Jane Bennet, on receiving the astonishing news that her sister Elizabeth is to marry Darcy, the rich aristocrat she used to hate.

“It has been coming on so gradually, that I hardly know when it began,” replies Elizabeth. “But I believe I must date it from my first seeing his beautiful grounds at Pemberley.”

This is from the end of Jane Austen’s Pride and Prejudice. Austen is lampooning the British 19th century marriage market, in which women (and men) pretended to “fall in love” when in fact they were marrying for money. But for cynics like me, such a remarkable conversion has echoes in the 21st century. When someone suddenly becomes an ardent supporter of an ideology they had previously - equally ardently - opposed, always follow the money.

So, to Sir James Dyson, inventor of cyclone-technology vacuum cleaners and ardent Brexiteer. Sir James is frequently heard expounding his hardline Brexit views on the BBC, which is struggling t…

More on productivity

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The ONS's latest flash productivity estimate is rather good. Productivity in Quarter 3 2017 was up by 0.9% on the previous quarter. Here's what ONS has to say about it:
Output per hour growth in Quarter 3 2017 was the result of a 0.4% increase in gross value added (GVA) (using the preliminary gross domestic product (GDP) estimate) accompanied by a 0.5% fall in total hours worked (using the latest Labour Force Survey data). This fall in total hours was driven primarily by a 0.5% fall in average hours per worker. Yes, yes, I know - economics jargon. Let me translate. ONS in plain English:
People are working fewer hours, but they are producing more every hour.  Of course, this should be set against the backdrop of persistently low productivity since the 2008 financial crisis. Productivity has taken nearly a decade to return to its pre-crisis level:

The ONS says that productivity has been weak because the labour market has been relatively strong during this time:
Both employment –…

Money creation in a post-crisis world

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As many of you know, I have spent much of the last seven years explaining to anyone who will listen that banks do not "lend out" deposits or reserves. Rather, they create both loan assets and matching deposit liabilities "from nothing" by means of double entry accounting entries. Creating money with a stroke of the pen (or a few taps on a computer keyboard) is what banks do.

But this does not mean that the money that banks create comes from nowhere. It doesn't. It is only created when they lend (or when they purchase assets, which is equivalent to lending). As Pontus Rendahl explains in a comment on my previous blogpost, what banks do is liquidity transformation - exchanging long-term illiquid assets for short-term liquid ones:
How do private banks create money? They create a deposit. A deposit is a Barclays-pound/Bank of America-dollar, or what not, that is traded and accepted as a means of payment at a one-to-one exchange rate with the underlying national c…

Beyond disappointment

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I'm sitting in a coffee shop opposite Haymarket Station in Edinburgh. Just up the road, the Institute for New Economic Thinking (INET) is holding its conference. I'm supposed to be there, as I was yesterday and the day before. But I am not at all sure I want to go. The last two days have left a very bitter taste.

This conference, grandly entitled "Reawakening", is supposed to be a showcase for the "new economic thinking" of INET's name. I hoped to hear new voices and exciting ideas. At the very least, I expected serious discussion of, inter alia, radical reform of the financial system, digital ledger technology and cryptocurrencies, universal basic income (recently cautiously endorsed by the IMF), wealth taxation (also recently endorsed by the IMF), robots and the future of work. And I looked forward to the contributions not only from the speakers, but from the young, intelligent and highly educated attendees.

Not a bit of it. In the last two days we h…

Lehman's Aftershocks

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Peter Praet's speech at the Money, Macro and Finance conference last week was a goldmine. I've already discussed the central bank credibility problem revealed by his final slide. But his presentation went far, far wider than central banks. It raised serious questions about the future of the global economy.

This slide - the first in his presentation - shows that there have been three significant global shocks in the last decade, not one:
The first, obviously, is the deep global recession caused by the failure of Lehman Brothers in September 2008. But what are the other two?

As Toby Nangle's annotations to Peter Praet's second chart show, the second is the Eurozone crisis, and the third is the emerging market crisis triggered by the unwinding of the oil & commodities boom:



Looking at these charts made me think of ripples on a pond. When you drop a pebble into a pond, it initially creates a deep hole in the water, with raised sides and splashing. The hole closes quic…

Central banks' credibility problem

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In a speech in London the other day, Peter Praet discussed the ECB's unconventional policy measures. I was there, and I have to say that he deviated considerably - and rather entertainingly - from the version of the speech on the ECB website. But his core message was still the same:
"Rates are expected to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. So, no interest rate hikes for a long time to come.

But that's not what his final chart says:


Market expectations are that interest rates will start to rise any day now. And no, this is not expectations of rate rises due to the end of QE, which the ECB has arguably signalled for early 2018 (or at least it didn't signal that it wouldn't end then). This is the short-term rate, which is not directly affected by QE. Admittedly, future expectations of short-term rates in 2018 and beyond are close to the ECB's own predictions. But is that because mark…