Comments on Adam Carr “SCOREBOARD: Decoupling revisited”, 26/05/2009, http://www.businessspectator.com.au/bs.nsf/Article/SCOREBOARD-Decoupling-revisited-pd20090526-SDTAF?OpenDocument&src=sph
In my view, decoupling is happening and will be more pronounced in the coming years. There are a number of reasons for this decoupling. Firstly, the world economy may have come to the point that the capacity of the more advanced economies, especially the US, to continue to absorb the continuous and rapid expansion of the developing economies through imports may have reached a reflection point. The implication is that developing economies, especially the large and rapidly growing ones, will have to find other ways than relying on simply exporting their growing outputs.
Secondly, the current financial and economic crisis has made it clear that the US cannot continue to consume beyond its means, both privately and publicly. They must increase their savings from now on, or at least following the recovery. In so doing, its growth is expected to be slower, so its current account deficits will be reduced. This will add to the need for developing economies to rely more on themselves to maintain rapid growth.
Thirdly, some large developing economies have probably accumulated a critical mass to accelerate the so called South-South trade, that is, collectively act as a group to assist the growth of each other.
As Adam Carr, I don't have Nobel Prize either. But I would not be surprised at all that the more dynamic developing economies will recover much earlier than their more advanced counterparts from this world great recession. Further, I will not be surprised that they will maintain their rapid growth irrespective whether the US will or will not visit Japan’s 1990s experience following its bubble burst.
The rapid industrialisation of many developing economies simultaneously, especially the main large ones, is likely to see a change in the patterns of growth in the world economy. Decoupling will be a natural product out of that process.
Showing posts with label patterns of world growth. Show all posts
Showing posts with label patterns of world growth. Show all posts
2009-05-26
2009-05-23
Treasury as top economic policy agent and Rudd/Swan political spins
Comments on Paul Kelly “Spun out”, 23/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25523687-12250,00.html
Yes, everything can change and it is possible that Rudd/Swan government may be forced into fiscal discipline that will required any government for the next decade to return the budget into surplus and control the government debt into the supposed low levels in the end. However, most Australians will probably have to wonder whether the current government under Rudd/Swan stewardship will be capable of achieving that. So their records have not given the public any confidence.
The public’s memory will not be very short in terms of their too big cash handouts in the face of recession and ballooning federal government budget deficits. It is also yet to see the economic and budgetary wisdoms of their proposed national broadband network at the currently costs to the tune of $43 billion, a number confirmed by the Finance minister was picked up from the air. It is noted that this is at the time of the government turning a projected budget surplus to huge deficits and an optimistically projected government net debt of $188 billion. They may think they are being heroic and with a vision to build the grandiose infrastructure for Australia and may be puzzled why the public do not see that way. For that they will forever be bewildered.
Treasury may have done its best in sketch a path to surplus. Most people understand its difficulties in doing so. And it should be commended for forcing the government make a commitment to budget restraints, although the public doubt the Rudd/Swan Labour can achieve it based its recent records. However, it appears that Treasury has been in great pain to show the public that its best is good enough.
If the Rudd/Swan government’s cash handouts were problematic in terms of their effectiveness in achieving their policy objective, then one has to wonder what role Treasury has played in those two episodes of fiscal policy dramas, given that Treasury is the government’s top economic advisor, especially on fiscal policies and affairs. Was it also so naïve as Rudd/Swan in believing the effectiveness of the cash handouts? Or was it advised against them? What would have been Treasury’s best alternatives in those times? Remember, it was not just once, it was twice in a row and the second was done after it should have been known that the first was ineffective.
In terms of the often criticised medium term optimistic economic forecast, the Treasury could have done better than that. It should have stick with its traditional forecast methodology and used trend growth rate to underlie the budget trajectory and forced Rudd/Swan to make a commitment of more stringent budget constraints, something like only 1 per cent real growth. That would have been more credible and caused the politicians to think and work harder in future budget considerations. That will force them to act more responsibly in spending taxpayers money and make less policy blunders.
To be a little more academic in questioning Treasury’s macroeconomic modelling for this budget, one has to ask whether and how Treasury had considered Lucas’ famous critique of macroeconomic modelling. To put it simply, the Lucas critique was made more than 30 years ago, and called many macroeconomic modelling back then into question. The critique pointed out that most of the key parameters used or estimated in macroeconomic modelling were variable but not structural, as a result, forecast assuming those parameters as structural was not reliable.
Treasury secretary Henry’s public elaboration of the Treasury modelling during his defence this week did not improve public confidence in the Treasury’s recent forecast modelling. He simply fell into the fallacy that Lucas criticised about more than three decades ago. Given the current global great recession and damages that causes, given the long period of de-leveraging process of financial institutions as evidenced by the Japanese case in the wasted 1990s following the burst its asset market bubbles, given the rising government debts in most industrialised countries and the inevitable trim of government spending in the medium term following the recovery, given the imminent international adjustments surrounding US savings and consumptions, there is every possibility that the world will experience a period of slow growth. That is much more likely than the probable Treasury optimistic forecast. Given all those, why was that reasonable to assume above trend growth for so many years for Australia by simply using the same past parameters to underpin that forecast? Where was the consideration regarding Lucas critique of macroeconomic modelling? Why can the public with any intelligence believe that forecast to make the budget position trajectory look better than otherwise?
The change to more optimistic, or more practical as the government or Treasury call it, forecast for future may or may not have been Treasury’s preferred initiative. But it obvious agreed to and braced it. That does not increase Treasury’s credibility of competence, and possibly independence, given the fact that Treasury, as most public servant agencies, has to serve the government of the day.
The public is not questioning just the integrity of Treasury, but more importantly also its competency following these so obvious fiscal policy blunders. The public is entitled for that. After all it is the public/taxpayers money that pays for the politicians and top public servants to look after their welfares.
Yes, everything can change and it is possible that Rudd/Swan government may be forced into fiscal discipline that will required any government for the next decade to return the budget into surplus and control the government debt into the supposed low levels in the end. However, most Australians will probably have to wonder whether the current government under Rudd/Swan stewardship will be capable of achieving that. So their records have not given the public any confidence.
The public’s memory will not be very short in terms of their too big cash handouts in the face of recession and ballooning federal government budget deficits. It is also yet to see the economic and budgetary wisdoms of their proposed national broadband network at the currently costs to the tune of $43 billion, a number confirmed by the Finance minister was picked up from the air. It is noted that this is at the time of the government turning a projected budget surplus to huge deficits and an optimistically projected government net debt of $188 billion. They may think they are being heroic and with a vision to build the grandiose infrastructure for Australia and may be puzzled why the public do not see that way. For that they will forever be bewildered.
Treasury may have done its best in sketch a path to surplus. Most people understand its difficulties in doing so. And it should be commended for forcing the government make a commitment to budget restraints, although the public doubt the Rudd/Swan Labour can achieve it based its recent records. However, it appears that Treasury has been in great pain to show the public that its best is good enough.
If the Rudd/Swan government’s cash handouts were problematic in terms of their effectiveness in achieving their policy objective, then one has to wonder what role Treasury has played in those two episodes of fiscal policy dramas, given that Treasury is the government’s top economic advisor, especially on fiscal policies and affairs. Was it also so naïve as Rudd/Swan in believing the effectiveness of the cash handouts? Or was it advised against them? What would have been Treasury’s best alternatives in those times? Remember, it was not just once, it was twice in a row and the second was done after it should have been known that the first was ineffective.
In terms of the often criticised medium term optimistic economic forecast, the Treasury could have done better than that. It should have stick with its traditional forecast methodology and used trend growth rate to underlie the budget trajectory and forced Rudd/Swan to make a commitment of more stringent budget constraints, something like only 1 per cent real growth. That would have been more credible and caused the politicians to think and work harder in future budget considerations. That will force them to act more responsibly in spending taxpayers money and make less policy blunders.
To be a little more academic in questioning Treasury’s macroeconomic modelling for this budget, one has to ask whether and how Treasury had considered Lucas’ famous critique of macroeconomic modelling. To put it simply, the Lucas critique was made more than 30 years ago, and called many macroeconomic modelling back then into question. The critique pointed out that most of the key parameters used or estimated in macroeconomic modelling were variable but not structural, as a result, forecast assuming those parameters as structural was not reliable.
Treasury secretary Henry’s public elaboration of the Treasury modelling during his defence this week did not improve public confidence in the Treasury’s recent forecast modelling. He simply fell into the fallacy that Lucas criticised about more than three decades ago. Given the current global great recession and damages that causes, given the long period of de-leveraging process of financial institutions as evidenced by the Japanese case in the wasted 1990s following the burst its asset market bubbles, given the rising government debts in most industrialised countries and the inevitable trim of government spending in the medium term following the recovery, given the imminent international adjustments surrounding US savings and consumptions, there is every possibility that the world will experience a period of slow growth. That is much more likely than the probable Treasury optimistic forecast. Given all those, why was that reasonable to assume above trend growth for so many years for Australia by simply using the same past parameters to underpin that forecast? Where was the consideration regarding Lucas critique of macroeconomic modelling? Why can the public with any intelligence believe that forecast to make the budget position trajectory look better than otherwise?
The change to more optimistic, or more practical as the government or Treasury call it, forecast for future may or may not have been Treasury’s preferred initiative. But it obvious agreed to and braced it. That does not increase Treasury’s credibility of competence, and possibly independence, given the fact that Treasury, as most public servant agencies, has to serve the government of the day.
The public is not questioning just the integrity of Treasury, but more importantly also its competency following these so obvious fiscal policy blunders. The public is entitled for that. After all it is the public/taxpayers money that pays for the politicians and top public servants to look after their welfares.
2009-05-15
A critique of Treasury economic forecast for the budget
Treasury forecast that the Australian economy will grow above trend at 4.5% for a number of years following this recession. This has been used in the federal 2009 budget documents. It is said that this is based on past experiences, re those ones in the early 1990s and the early 1980s. The media and many commentators said it was optimistic, much more so than both the IMF and RBA forecasts.
While it is not uncommon to use past experiences in economic forecasts, one must realise its inherent danger if used mechanically. The famous Lucas critique should serve as a sobering reminder. Lucas pointed out that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data. This undoubtedly applies to the Treasury forecasts.
My critique of the Treasury forecast is that it has conveniently ignored the most likely implications of the great recession we are still having now. One implication of this recession is that there will be a much greater international effort to address the huge international imbalances in savings, consumption and investment.
A manifesto of the imbalances is the low or negative savings by the US and its huge debts. It is likely that the US has to increase savings to fund its domestic investment and government deficits. The contribution of consumption to the economy is likely to fall significantly to boost savings. This is likely to cause the US economy to grow more slowly than the case in the 1990s or in the early this century. When the world biggest economy does this, the world economy is likely to be dragged to slow somewhat. What this means is that the world economy is likely to experience a period of slower growth.
The financial crisis has caused great damages to the international banking and financing system. It needs to be repaired. Many banks and financial institutions need to deleverage and/or increase own capitals. This means the costs of capital will increase above those prevailing prior to the crisis. Higher capital costs will reduce investment and slow economic growth.
Besides the damages to banks and financial institutions, this great recession has also caused enormous damages to some non-banking companies. Some examples of big ones include GM and Chrysler that are facing a real possibility of bankcruptcy. These sorts of business failures destroy social wealth and reduce productive capacities/capital. They decrease demand through the wealth effects and reduce supply, further compounding the effects of international rebalancing of savings and consumption.
China is expected to continue grow rapidly and that is likely to benefit Australia. But even China will be affected by the expected international rebalancing. A slower US economy will limit China’s exports to the US. As a result, the Chinese economy is also likely to experience growth below its trend growth prior to the crisis.
All these point to a period of slower world growth ahead. It is against this background that I say the Treasury has probably got it wrong in its forecast by assuming above trend growth for Australia after this recession, especially for a lengthy period. It appears that it has not made the plausible assumptions on world economic growth. As a result, it has failed to take into account the changed structure of the world growth and its impact on important parameters such as world growth in its model, a point not too dissimilar to that of the Lucas critique.
It is worth noting that the government and Treasury have recently changed the conventional practice of assuming trend growth for the outer years in government budget documents. It is said that this is to make the forecast more accurately reflect the likely future course. On this account, they have either conveniently ignored the Lucas critique, or made a seriously bad judgement in the modelling process, under the understandably very strong pressure of preparing the budget.
While it is not uncommon to use past experiences in economic forecasts, one must realise its inherent danger if used mechanically. The famous Lucas critique should serve as a sobering reminder. Lucas pointed out that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data. This undoubtedly applies to the Treasury forecasts.
My critique of the Treasury forecast is that it has conveniently ignored the most likely implications of the great recession we are still having now. One implication of this recession is that there will be a much greater international effort to address the huge international imbalances in savings, consumption and investment.
A manifesto of the imbalances is the low or negative savings by the US and its huge debts. It is likely that the US has to increase savings to fund its domestic investment and government deficits. The contribution of consumption to the economy is likely to fall significantly to boost savings. This is likely to cause the US economy to grow more slowly than the case in the 1990s or in the early this century. When the world biggest economy does this, the world economy is likely to be dragged to slow somewhat. What this means is that the world economy is likely to experience a period of slower growth.
The financial crisis has caused great damages to the international banking and financing system. It needs to be repaired. Many banks and financial institutions need to deleverage and/or increase own capitals. This means the costs of capital will increase above those prevailing prior to the crisis. Higher capital costs will reduce investment and slow economic growth.
Besides the damages to banks and financial institutions, this great recession has also caused enormous damages to some non-banking companies. Some examples of big ones include GM and Chrysler that are facing a real possibility of bankcruptcy. These sorts of business failures destroy social wealth and reduce productive capacities/capital. They decrease demand through the wealth effects and reduce supply, further compounding the effects of international rebalancing of savings and consumption.
China is expected to continue grow rapidly and that is likely to benefit Australia. But even China will be affected by the expected international rebalancing. A slower US economy will limit China’s exports to the US. As a result, the Chinese economy is also likely to experience growth below its trend growth prior to the crisis.
All these point to a period of slower world growth ahead. It is against this background that I say the Treasury has probably got it wrong in its forecast by assuming above trend growth for Australia after this recession, especially for a lengthy period. It appears that it has not made the plausible assumptions on world economic growth. As a result, it has failed to take into account the changed structure of the world growth and its impact on important parameters such as world growth in its model, a point not too dissimilar to that of the Lucas critique.
It is worth noting that the government and Treasury have recently changed the conventional practice of assuming trend growth for the outer years in government budget documents. It is said that this is to make the forecast more accurately reflect the likely future course. On this account, they have either conveniently ignored the Lucas critique, or made a seriously bad judgement in the modelling process, under the understandably very strong pressure of preparing the budget.
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