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Home Publications Blogs Beat the Press NYT Gets Almost Everything About UK Austerity Wrong

NYT Gets Almost Everything About UK Austerity Wrong

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Wednesday, 11 December 2013 06:05

People who follow economic data know that quarterly growth numbers are highly erratic. For example, the 3.6 percent growth rate reported for the third quarter in the United States was driven largely by inventory accumulations. As a result, most analysts expect growth to be close to 1.0 percent for the fourth quarter. It would be foolhardy to tout the 3.6 percent growth in the third quarter as evidence of a robust economy, while it would be equally wrongheaded to treat a weak number in the fourth quarter as evidence of a sagging economy.

Unfortunately the NYT seemed unaware of the volatility of quarterly data as it touted a strong third quarter growth number as evidence of the success of austerity in the UK. It contrasted this number to a weak growth figure in Japan, which it implied meant the failure of stimulus there.

Of course this claim is absurd on its face. Japan will almost certainly have far stronger growth over the calendar year than the UK, and even more so on a per capita basis. (Japan's population is shrinking at a 0.1 percent annual rate, while the UK's population is rising at a 0.6 percent annual rate. Therefore we should expect more rapid overall growth in the UK just to sustain the same rate of per capita growth.)

To take a slightly different measure, according to the OECD, Japan's employment to population ratio is rose by 1.1 percentage point from the third quarter of 2012 to the third quarter of 2013. This would be equivalent to an increase in employment of 2.8 million in the United States. By contrast, the employment to population ratio in the UK increased by just 0.2 percentage points from the second quarter of 2012 to the second quarter of 2013 (the most recent data available).

The piece includes numerous other inaccuracies, at one point telling readers:

"With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery."

Actually the UK does have a reserve currency, as hundreds of billions of dollars' worth of pounds are held as reserves by central banks around the world. It also is not clear that this helps the recovery. Insofar as the dollar or pound falls it helps to boost net exports, stimulating growth and generating jobs.

The piece also contains the bizarre statement:

"Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped."

Since every economist knows that quarterly data is erratic it is questionable whether any have "gone quiet" over the recent economic data. It would have been helpful if the piece could have identified an economist whose opinion of the relative merits of austerity and stimulus was changed by the third quarter data.

Comments (8)Add Comment
...
written by foosion, December 11, 2013 5:56
Just looking at recent growth rates is a mistake. Imagine this economic strategy: destroy half of a countries factories and restrain rebuilding. GDP falls. Now allow factories to be rebuilt. Growth soars.

See the increase in growth as a result of this strategy? Do we conclude it's a good idea?

Austerity policies have badly hurt growth. A slight easing does not mean they were a good idea.
Apropos 'Recovery' in the UK
written by Allan Wort, December 11, 2013 7:24
The British economy, slightly tipsy and a little dim, fell down a flight of stairs not long ago. In the last few seconds it managed to lift up onto one elbow and start to assess whether any limbs were broken. That it was not able to make even this small effort a few seconds before means it, in this sense only, can be described as being in 'recovery'.

To describe the messy tangle of limbs at the bottom of the stairs, unaware if any major bones are broken or whether an ambulance needs to be called, in any terms other than damaged and needing help is deeply dishonest.
...
written by dax, December 11, 2013 7:44
This austerity/stimulus dichotomy has to end. The UK has an extremely stimulative monetary policy plus a housing bubble. Its financial "austerity" was backloaded and some has still yet to appear. IMHO if the UK succeeds it's a point for stimulus rather than the contrary. OTOH Japan's increase in VAT is hardly stimulative. If it succeeds no points to stimulus but to debasing your currency.

Sadly we are not likely to have the natural experiment we need; for one thing the world is interconnected.
You neglected to mention ...
written by Squeezed Turnip, December 11, 2013 8:00
Rogoff makes yet another pro-austerity statement he's a doddard and ideologue, by taking the 3rd quarter revision of Japans GDP , still upward, as evidence. Grasping at straws to save his damaged reputation.
...
written by skeptonomist, December 11, 2013 9:03
After WW II Britain's debt/GDP was over 230%. It came down rapidly over the next 20 years while major industries were socialized and super-taxes soaked the rich. If the goal is to reduce debt with good growth wouldn't that period of intense socialization be a good precedent? Or should it be the period after the Napoleonic wars when debt came down from a similar high and economic policies were very different?

There are too many variables for anything resembling an "experiment" - claims that some particular policy or action are responsible for a broad outcome like GDP growth are almost always unjustified. It is remarkable how often supposedly sophisticated economists make claims of this sort, and also how often economic history is ignored.
Rogoff ?
written by aj oliver, December 11, 2013 3:58
wasn't he fired for his (clearly) phony research?
That he was not, and this article, both go to show that ECON is an ideology thinly disguised as a science.
With apologies to the few honest economists out there like Dean.
...
written by vlade, December 12, 2013 3:30
Re GDP data, I was always fascinated how say when Spain comes with 0 GDP growth we're told "the economy is stabilising". Or when it grows by 0.1% we're told "is back to growth".

The only thing that shows to me is that journalists (and some economists, possibly a majority) lack basic numeracy.

a) given that GDP (and especially first numbers, that's what revisions are for.. ) is statistical measure (i.e. take sample, not really measure all of it), it carries an error margin. That's usually not published, but I'd expect it to easily be of 0.1% magnitude.
b) A state that has a population will have a "floor GDP". That is, a GDP that it cannot reasonably fall under (at worst, it's 0). Any GDP trajectory (downwards) thus will be slowing down (both in absolute and relative terms). Put that together with some volatility, and you'll HAVE to have a few positive readings. Ergo a non-negative reading here and there is entirely irrelevant. You can start speaking about growth being back in a few years, not a few quarters.

The author of the piece has a bachelors/masters degree in economics from LSE
written by John Wright, December 12, 2013 9:22
Per the bio linked to in the Times article:

"Before joining The Times company in 2004, Ms. Bennhold .... graduated in 1998 from the London School of Economics with bachelor’s and master’s degrees in economics and was a Nieman fellow at Harvard University in 2012 and 2013."

One might read this bio as indicating someone with the education/training to "do nuance" in reporting economic matters.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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