Austeritatea da arazoa, ez Brexit

Bill Mitchell-en Austerity is the problem for Britain not Brexit1

(i) Sarrera: Brexit baino lehenagoko egoera, aurkako e-postak eta aurrerakoiak noraezean2

(ii) Mitchell-ek Brexit-ez idatzitakoa3

(iii) Britainia Handiko Altxor Publikoaren txostenak4

(iv) Groupthink delakoaren funtzionamendua

You get to see how Groupthink operates.

(a) Modelo keynestar berriko hasiera5

(b) Modelo hori zabaltzen da

(c) Altxor Publikoaren iragarpena

Anyway, the Treasury produced these forecasts (Table taken from their Report):

The Treasury estimates presented in the Table above were complemented by a host of other estimates from other organisations (investment banks, multilateral institutions, etc) – all telling the same story. Doom from the outset and getting worse.

(v) Cambridge Study delakoaren modelo desberdina7

(vi) Arazoa: eskaria, gastu publikoaren mozketak, austeritatea. Akademiaren porrota8

(vii) Cambridge ikuspuntua eta DTM9

(viii) Brexit eta geroko datuak. Altxor Publikoak ez du asmatu10

(ix) Desakordioak eta ondorio garbia11:

Slow growth of bank credit in a context of already high debt levels, and exacerbated by public sector austerity prevent aggregate demand growing”


(1) Hazkundea gobernuaren austeritatearen eta bankuen portaeraren menpe12

(2) Afera politika fiskalari dagokio, ez beste ezeri13

(3) Brexit kezko hesi bat da. Britainia Handirako onuragarri izango da, baldin eta gobernuak bere ahalmen fiskala erabiltzen badu barneko hazkundean eta enpleguan14

(4) Baina Britainia Handiak sufrituko du, baldin eta austeritatea fiskalak segitzen badu (Brexit-ekin edo Brexit gabe)15

Gogoratu ondoko linkak:

Brexit eta ‘ezkerra’

Brexit-ez haratagoko balediko hondamendiaz hitz bi

Zipriztin ekonomikoak (Brexit)

El brexit ha demostrado que hay vida fuera de la Unión Europea”

Brexit eta geroko Britainia Handiko egoera

Brexit aferaren muinean

Ekonomia: zenbait data (2007-2014), Brexit

2 Ingelesez: “Regular readers will know that I firmly supported the LEAVE vote in the British referendum in June 2016 even though that was somewhat gratuitous given I am neither a British citizen or live there. It was one of those academic exercises where we wax lyrical with little personal at stake. But that aside, if I had have been a British citizen then I would have voted to leave without doubt. The Internet links us more closely these days and in before the Referendum vote I received heaps of antagonist E-mails informing me that I was bereft of all credibility in taking that position. After the vote, when I dared to point out that the official (Bank of England, Treasury, IMF, OECD) and non-official predictions (the investment bankers etc – remember Credit Suisse sending out a Mayday alert of an impending recession which would wipe out 500,000 jobs!) were over the top to say the least (given the post-vote data), I was called delusional and worse. And these personal attacks came mostly from those who claim to be on the progressive side of the debate. Spare the thought! Subsequent data has indeed pointed out that none of the predictions of doom have so far turned out to be true. I know there might be longer term issues when they get onto working out the detail but I stand by my view – Brexit – if handled correctly by the British government will be a net benefit to the nation and its democracy. If not it could offer no real gains. But in this smokescreen of misinformation, a serious study from Cambridge University researchers – The macro-economic impact of Brexit – has concluded, that while there might be some short-run losses in GDP per capita, they soon recover as the British economy adjusts to its break from the dysfunctional European Union. There is no disaster scenario forthcoming!

4 Ingelesez: “Remember this headline from July 14, 2016 – CREDIT SUISSE: ‘Mayday! Mayday!’ — Britain’s impending recession will kill nearly 500,000 jobs.

This headline was typical of the hysteria that surrounded the Referendum vote. In the context of the current storm about whether Russia hacked American computers (of course they did, probably at the same time America hacked Russian computers)

The British Treasury released two reports in 2016 covering its estimates of the impact of a Leave vote:

1. HM Treasury analysis: the long-term economic impact of EU membership and the alternatives (released April 18, 2016).

2. HM Treasury analysis: the immediate economic impact of leaving the EU (released May 23, 2016).

The problem was that the estimates in the HM Treasury analysis were ideologically-biased and lacked any real basis. Anyone with an understanding of the way monetary systems work would have been able to see through their analysis.

Some couldn’t obviously. Others, seemingly, ignored the spin – perhaps without really knowing whether it was sound or not. Other things mattered to those voters.

The HM Treasury disclose in its long-run analysis that its results are derived from applying its own projections to the NiGEM model:

All the elements of the analysis are brought together and combined in a global macroeconomic model maintained by the National Institute of Economic and Social Research and used by the IMF, OECD, Bank of England and others. The model is used to assess the overall macroeconomic impact on the UK (and the EU) under the different alternatives in the long term.

In the ‘immediate impact’ analysis, they also use NiGEM (the NIESR General Equilibrium model), which is used “by over 40 organisations including the IMF, the OECD, the Bank of England and the European Central Bank” … and HM Treasury!

5 Ingelesez: “1. The NIESR start off with a New Keynesian style, Dynamic Stochastic General Equilibrium (DSGE) model, which as I wrote last week in this blog – Mainstream macroeconomics in a state of ‘intellectual regress’ (with links to earlier discussions about DSGE) is a framework that is incapable of saying anything really meaningful about the real world.

NiGEM “has many of the characteristics of a … DSGE model” (Source) including the use of rational expectations (model consistent). Translation: This just means they have to conform to a long-run solution that is supply-determined. But you need to understand the ‘supply-determined’ bit is just imposed by their ideological view that money doesn’t matter in a long-run general equilibrium. The standard nonsense, that is.

They impose various restrictions on the parameters in the model “to ensure that the model delivers a unique NAIRU … This is consistent with the finding by … Mankiw … and others”. Translation: they claim the model is data-consistent but really they just make it that way with various fudges so that they can then claim the data is consistent with the NAIRU fairy story and long-run monetary neutrality.

Firms are profit-maximisers and set employment according to the marginal product of labour. Translation: standard neo-classical nonsense that fails to grasp the interdependence of the supply and demand sides. Wages are an income (demand) and cost (supply). Cutting real wages in their model increases labour demand. In the real world, if such a cut can be engineered, it will probably reduce labour demand because sales fall with lower incomes.

The NIESR say that “In all policy analyses we use a tax rule to ensure that Governments remain solvent in the long run”. Translation: They impose arbitrary ‘solvency’ restrictions on government fiscal deficits such that tax rates are always increased if the deficit increases beyond some arbitrary solvency threshold (“the target is exogenous by default, so solvency is in place”). (Source).

I could go on. These ‘models’ are fictions (as all models are) but with little linkages to the real world, which makes them unreliable as a guide to what would happen in that world if something changed. All we can say is that in the stylised world of NiGEM a recession or some other calamity will occur. And we can all say to that: Who gives a toss!

6 Ingelesez: “2. Moreover, all the usual suspects then use this model – HM Treasury, IMF, OECD, Bank of England and others (over 40 organisations in total).

So, they all gather around the same Kool-aid feeding trough and produce an array of reports that make it seem as though all these different organisations are coming up with the same result on their own – ergo, the conclusions must be correct.

If you believe that you will believe anything really. These exercises are in the same ball park as ‘fake news’.

Same Kool-aid, same poison!

Groupthink is characterised by this inward, self-referential behaviour.

While there ‘long-run’ analysis is meant to apply out to 15 years (after the exit is formalised), the immediate analysis is over the next year or so (“peak impact over two years”).

HM Treasury produced these estimates of the Brexit impact under its Shock Scenario and its Severe Shock Scenario, which are differentiated by how “cautious” HM Treasury is about its imposed assumptions.

So think about hitting your head with a normal hammer (it will hurt) and hitting it with a sledge hammer (it will hurt more). And while you are doing that don’t question why you would be hitting yourself on the head with any form of hammer in the first place.

That is the game they play. They assume an array of bad things – plug them into the stupidly-ignorant NiGEM model then compare them with the results of assuming even badder things.

So, of course, “a vote to leave would result in a recession, a spike in inflation and a rise in unemployment” and the rest of it.

GIGO – Garbage In, Garbage Out!

7 Ingelesez: “The Cambridge Study uses a different modelling approach (the CBR macro-economic model) (Working Paper 472), which was developed post-GFC to address the fact that the existing DSGE and variant models:

failed to forecast this unprecedented failure of the economy … the failure of forecasters to warn that a collapse was even likely given the huge previous build-up of debt in the household sector and more particularly within banks … Moreover, almost all UK models then over-predicted the post-2009 recovery. They also under-predicted inflation, which rose to over 5% in the midst of recession, and failed to foresee the rise in employment as the economy stagnated after 2009.

A comprehensive failure you might say.

The Cambridge researchers (Graham Gudgin, Ken Coutts and Neil Gibson) from the Centre for Business Research conclude from this that:

This catalogue of failure suggests that something is badly wrong with the state of forecasting models.

And like all those trapped in Groupthink:

The modellers themselves appear to have shrugged off these failures …

So business as usual – move on.


The forecasting failures however have a cause in an emphasis within conventional models on supply-side factors, in face of what has proved to be a large failure of demand.

These failed models all impose ‘long-run’ restrictions – which mean they make up a solution that eventually has to be reached (irrespective) which satisfies their theoretical biases. In this case, they assume away long-run demand effects and conclude that eventually general equilibrium is restored.

They then impose ‘adjustment restrictions’ or ‘policy rules’ that force the adjustment path (short-run dynamics) of the economy to be consistent with where they have forced the model to go when all adjustment is over and the ‘solution’ settles down (after all the effects of the change are exhausted.

As the Cambridge researchers state:

The Government’s OBR model, for example, starts by projecting a trend path for potential output and then assumes that monetary policy will guide the economy toward that path. Any off-path point due to shocks leads to a return to trend within 3 to 4 years. Other forecasters, including the OECD, IMF, and several commercial forecasters, use an approach based on similar principles.

Feeding from the same trough!

8 Ingelesez: “The problem is that these models cannot cope with real world events, especially when major demand (spending) shocks occur.

The Cambridge researchers say:

Failures in forecasting of this magnitude exhibited since 2008 suggest that some modesty may be required in guiding future macro-economic policy in the UK. In practice, policy advice has continued as if little has happened. The Government asserts that reducing the size of the government debt must be a key priority if the UK economy is to return to economic health, and that major public spending cuts are required to reduce the debt. There has been relatively little modelling work to investigate whether such a strategy is either necessary or practicable. Indeed the nature of the OBR model (and similar OECD and IMF models) means that they cannot be directly used to investigate such questions.

So they are just asserted and ad hoc model manipulations are then used to reinforce these assertions.

They also note that:

The academic economics profession is equally unworldly. The mainstream approach is now to use so-called DSGE (dynamic stochastic general equilibrium) models … assuming that market forces will bring the economy back to its full capacity operation subject to certain frictions caused among other things by government regulations. We agree with Keynes’s view that neo-classical ideas are of little relevance to the macro- economic behaviour of real economies in major recessions … Most Central Bank forecasters, including the Bank of England, use a direct DSGE approach with, in the BoE’s case, generally poor results.

So the Cambridge approach is very different and emphasises:

the level of output in an economy will be determined by effective demand for its goods and services. There is, in this view, no exogenous long term trend in capacity. Instead capital stock and labour supply (including skills) are endogenous.

In other words, that where the economy goes over time is a reflection of where it has been. A large demand shock can push the economy of its current trajectory onto some other trajectory, which changes things forever.

There is less imposition of desired outcomes (in the long-run) on their model’s behaviour – “there is no explicit NAIRU” (a forced state that all adjustment has to conform to – as in DSGE models).

9 Ingelesez: “While I could go on in more detail about this, suffice to say that I have a lot of sympathy for the Cambridge UKMOD approach. It shares many aspects that are consistent with Modern Monetary Theory (MMT), whereas DSGE models and their variants share zero commonality with MMT.

The other point the Cambridge researchers make in their most recent paper – The Macroeconomic Impact of Brexit (Working Paper No. 483, revised January 2017) – that Brexit will be a special event and so “no normal forecast is possible”.

They thus “construct a series of scenarios based on assumptions about future trading arrangements, migration controls and about the short-term uncertainties which could affect business investment in the run-up to the likely leaving date of 2019”.

10 Ingelesez: “They find that (five months after the referendum):

1. “only one of the Treasury’s expectations has been clearly realised. This is the fall in the value of sterling”, which is of a magnitude consistent with the Treasury’s ‘severe shock’ scenario.

2. While the Treasury forecasts for interest rates, housing prices, household consumption, house construction, real GDP have all been proven to be very wrong, “Our own expectation has been that there would be little direct impact of Brexit” on these things.

3. “the long- term impact of Brexit is expected to be well below Treasury estimates, even if the UK ends up with no free trade agreement or other privileged access to the EU Single Market, our expectation of any transitional losses to investment would be relatively small.”

4. On trade, the Treasury said that if Britain “fell back to WTO rules” (that is, lost privileged access to the EU single market) then there would “a loss of trade with EU of 43%”. Overall, given that the EU accounts for around a half of total British trade, the Treasury estimated that Brexit would lead to “a total loss of trade (to EU and non-EU destinations) of 24%”.

I won’t go into detail here on how they reached that specific result (they use so-called ‘gravity modelling”) but the Treasury claimed that British trade has risen by 76 per cent because it entered the EU and that would disappear with no alternative gains once they leave the EU.

The Cambridge research disputes that assumption and approach.”

11 Ingelesez: “They show that the EU6 share of British exports “peaked at the end of the 1980s at just over 40% and has subsequently fallen back to 30% by 2015”, which makes the 76 per cent loss appear unbelievable or “implausible” to use their word. The Treasury just fudges their result and “provides virtually no information directly about UK trade with the EU”.

They replace the “flawed” Treasury approach with a modelling approach that uses “direct evidence on UK exports to the EU” and conclude that given “average tariffs are so low” to non-EU nations seeking to trade within the EU:

1. “It is not obvious that membership of the EU since 1973 has made any sustained difference” to real GDP per capita. They cite the US experience and its high penetration to the EU despite its non-membership.

2. “The overall impact in the baseline Brexit scenario is that GDP is largely unchanged up to 2020 as the lower exchange and interest rates offset the negative impact of uncertainty.”

3. “per capita GDP … ends up in 2025 at much the same as in the pre-referendum forecast.” In other words, Brexit does not mean (on average) British citizens are poorer.

4. After an initial spike in inflation due to the rising import prices (following depreciation), by 2020, “inflation begins to fall although it does not reach the 2% target by 2025.”

5. “earnings will rise by more than 2% as employment rates reach a peak in 2017 and especially as migration reduces from 2019 … we expect real wages to be broadly flat for the next decade”. A poor outcome but not influenced by Brexit.

6. “Our pre-referendum forecast had unemployment rising back to almost 7% of the labour force by 2025 due to continuing public sector austerity, a downturn in the credit cycle and higher interest rates … Unemployment rises but by much less than previously expected.”

Overall, the Cambridge researchers find that:

The economic outlook is grey rather than black, but this would, in our view, have been the case with or without Brexit. The deeper reality is the continuation of slow growth in output and productivity that have marked the UK and other western economies since the banking crisis. Slow growth of bank credit in a context of already high debt levels, and exacerbated by public sector austerity prevent aggregate demand growing at much more than a snail’s pace.

12 Ingelesez: “That really should be the story – the deliberate undermining of growth by government austerity and the behaviour of the zombie banks.

13 Ingelesez: “The conservatives (including all the misguided neo-liberal ‘progressives) who are obsessed with the damage that Brexit will cause are just diverting the conversation away from the destruction that their fiscal ideology has caused and is continuing to cause.”

14 Ingelesez: “Brexit is a smokescreen. It will not be detrimental to Britain in the long-run if the British government takes responsibility and uses its fiscal capacity to focus on domestic growth and employment.”

15 Ingelesez: “But Britain will suffer if the fiscal austerity mindset continues (with or without Brexit) and the disruptions that will, in the short-run, accompany Brexit will be made worse by on-going austerity.”

Iruzkinak (4)

  • joseba

    EU referendum: Why the economic consensus on Brexit is flawed

    A former senior International Monetary Fund economist says the arguments that leaving the EU would cause permanent damage to the UK are not supported by evidence

    Ashoka Mody
    Tuesday 31 May 2016

    “Since 2010, official agencies have repeatedly promised global recovery. The forecasts fail because they all disregard inconvenient evidence. Now, the official consensus on the economic costs of Brexit has crossed the line into groupthink. A numerical illusion is masquerading as a “fact.” And when those in authority distort facts, they also subvert the cause of democracy.”

  • joseba

    Don’t panic. Britain’s economy can survive just fine outside the European Union

    A former senior International Monetary Fund economist examines the deep social and economic forces that drove the Brexit vote – and offers some reassurance for the future

    Ashoka Mody
    Monday 4 July 2016

    “Austerity was the mistake
    Ultimately, the Cameron government’s fundamental failure began much earlier. It lay in the mindless pursuit of fiscal austerity at a time when interest rates were so low and the need for the next generation of education services and infrastructure was so pressing. Brexit has jarringly rung the alarm bells that politicians have chosen to ignore.
    The real tragedy would for Britain would be if—having pulled out of a fading and brittle Europe—new leadership proves even more inept than past leaders at delivering on the true demands of those who voted for Brexit. If the new leaders do not recognize their historical task, the forces of democracy will continue to churn in search of those who can rise to the challenge of these times.”

  • joseba

    The economic consensus was horribly wrong and here are the real reasons Brexit is succeeding

    A former deputy director of the International Monetary Fund’s European and Research Departments, writing exclusively for The Independent, explains why the performance of the UK economy has confounded expectations since last June’s referendum and why an even bigger political prize is on offer

    Ashoka Mody
    5 January 2017

    “It is now six months since the Brexit vote, and the economic news is stunningly good. Not only did these warnings not bear out, the economy has performed much better than the expectations of even those, like me, who believed that Britain would be mildly bruised but would not be battered. (…)

    Many, however, continue to believe that the real damage from the Brexit decision is evident in the sharp fall in value of the British pound, an almost 20 per cent loss against the US dollar. British residents have become poorer because they now need to work harder to buy goods from abroad.
    But even this “self-evident truth” is based on a flawed reading of the data.
    The British pound had become greatly overvalued between 2012 and 2015.
    International speculators, believing that London property was a “safe asset” had poured money into the UK, bidding up property prices and the value of the pound.
    The rise in the pound’s value had made British exports pricier and imports cheaper, which caused imports to increase more rapidly than exports.
    And Britain was borrowing to pay for this indulgence. In effect, the country was living beyond its means and a fall in the pound was inevitable.
    The clue in understanding the reason for the pound’s fall lies in the sharp decline in the stock prices of property-related assets following the Brexit decision. (…)

    Banks are expected to leave for the European continent, taking with them jobs and tax revenues.
    But if banks do leave, that would be another good outcome for the British economy.
    Banks have fuelled the finance-property price nexus and have drawn the best talent to flip financial assets.
    A smaller banking sector will mean a more balanced British economy (…)

    Once details become clearer, businesses will adapt. The fact that six months after the decision, the economy is doing so well is a judgement that Brexit could deliver a net economic dividend. (…)

    Brexit will happen.
    Prime Minister Theresa May’s Government must heed the true message of the Brexit vote.
    The task is to regenerate the communities that have turned into wastelands and spread quality education to prepare ever larger numbers of British citizens for the rigours of a 21st century competitive global economy.
    If the Government succeeds in this greater task, then Britain would not only have done well for itself, it would become a beacon amidst the desolate and depressing decay of Western politics and social norms.”

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