Population and the Steady State Economy

Published by Anonymous (not verified) on Fri, 26/10/2018 - 7:03am in

(Image credit: Sérgio Valle Duarte, Wikimedia Commons)

By Max Kummerow

Sir David Attenborough remarked in a 2011 presidential lecture to the Royal Society that “every environmental and social problem is made more difficult and ultimately impossible to solve with ever more people.” Wherever women’s status has improved and societies modernized, he said, birth rates have fallen. He begged his audience to “talk about population.”

We often hear politicians call for “more jobs.” Growing populations require a bigger economy to prevent unemployment. So if you assume population growth is good and/or unavoidable, you probably favor economic growth to prevent unemployment. And even if there was a steady-state population, the world desires (and some of it needs) higher incomes, more consumption, and more wealth.

Many regard growth as a moral imperative to alleviate extreme poverty. Two billion people still live on two dollars a day. How can their lives improve without economic growth? Attention is focused almost exclusively on economic growth as the path to supporting more people at higher living standards. But there is another path.

A conventional measure of economic well-being is Y/P, or output divided by population (that is, per capita income). Y in this equation represents GDP (gross domestic product). We can acknowledge that a growing GDP per capita may increase wellbeing, but only when GDP is not beyond the optimum level. A growing GDP causes environmental, economic, and social problems. Various measures of well-being (such as the Genuine Progress Indicator, the Happiness Index, and the Human Development Index) help us determine when GDP is beyond optimum. Indeed, numerous analysts inside and out of the CASSE network believe that is now the case – that GDP is beyond the optimum – and perhaps has been so since the mid-late 20th century.

(Graph created from UN World Population Prospects 2017 data.)


In a crowded world facing physical limits to growth, then, why not think more about reducing the denominator? If population falls, we can get by with fewer jobs. There will be more land per family for poor subsistence farmers. Wages will tend to rise and the prices of commodities—housing, fuel, food, etc.—will tend to fall.

To examine the problem if we do not reduce population, let us consider a simple equation comparing the Earth’s carrying capacity—or its ability to provide all that we need from it—with our use of the supply. When we exceed carrying capacity, we also reduce it. Carrying capacity is the Earth interest generated by Earth principal (natural capital, in other words). When we use more in a year than the Earth interest generated that year, we use up some Earth principal, so next year less interest can be generated. Many ecological economists and sustainability scholars have described in theoretical and empirical terms how we are currently over long-run carrying capacity, and we are using up Earth principal (biodiversity, for example). So every year there is less interest and less long-term capacity.

Before family planning, most women bore many children, and infant and maternal mortality rates were extremely high. In The Wealth of Nations Adam Smith wrote, “It is not uncommon… in the Highlands of Scotland, I have been frequently told, for a mother who has borne twenty children not to have two alive” (Book 1, Chapter 8).

In 1970, global fertility still averaged five children per woman. Now the global average fertility rate has fallen to 2.4 children per woman. In about 90 countries, women currently average less than 2.1 children each, which is the replacement fertility rate (two children reaching adulthood for every couple equals replacement). When fertility falls, it takes about 50 years for “demographic momentum” to play out so that growth stops. Young populations have to grow up, have children and age before death rates exceed birth rates. That has finally happened in a handful of countries. Germany and Japan, with declining populations, are doing much better than high fertility countries. Scarcity caused by growth is not alleviated by more growth. Growth is the problem, not the solution.

Country average fertility rates currently range from about 1.1 (Singapore, now one of the richest per capita) to 7 (Niger, one of the poorest). Europe’s fertility averages about 1.7. Sub-Saharan Africa’s fertility rate of 5 children/woman is falling slowly. But death rates by country are falling faster, so natural increase (births minus deaths) is higher now than in 1960 (the current rate is about 2.7% population growth per year).

Globally, annual population growth fell from 2% in 1970 to 1.1% in 2010. Meanwhile, world population doubled from 3.5 billion to 7 billion. World population is therefore growing as fast as ever (2% x 3.5 =1% x 7) and increasing by about one billion every 12 years, which means it is headed from 3 billion in 1960 to 10 billion by 2050.

(Graph created from UN 2017 population prospects data.)

Completing the fertility transition in places with corrupt governments and poor people will be difficult. Fundamentalists in all religions have more children. But modernization helps fertility rates fall, especially education and improving the status of women. Low fertility rates in Cuba, Iran, Brazil, Botswana, Thailand, and about 85 other countries shows that fertility transitions are possible anywhere. There are trade-offs, but countries with small families are usually better off economically and their children tend to be better educated.

Lower fertility rates have numerous benefits for individuals, families and societies. It is possible to stabilize world population and to reduce population back down toward global carrying capacity. Education can help change family size norms to reflect the reality that we live on a small planet that doesn’t get bigger when we add more people.

With declining population, the strongest arguments for economic growth disappear, and a steady state economy with universal prosperity becomes both physically and politically more feasible.

Max Kummerow is a retired Real Estate professor. He has presented a dozen papers at the Ecological Society and Population Association and other meetings advocating completing the global demographic transition.



The post Population and the Steady State Economy appeared first on Center for the Advancement of the Steady State Economy.

The business behind the trade balance : Why trade deficits decrease in recessions and increase in booms

Published by Anonymous (not verified) on Fri, 26/10/2018 - 12:00am in


Uncategorized, GDP

How does the trade balance relate to economic activity? The graph above shows the U.S. trade balance for goods and services as a percentage of GDP. Obviously, there was a surplus initially and now there’s a persistent deficit. Beyond that, it looks like every time there’s a recession, the trade deficit tends to decrease. (Or, if we go farther back in the past, the trade surplus tends to increase.) Obviously, many things affect the trade balance, but let’s see what FRED can show us about this relationship.

A good way to reveal how series may be correlated is to look at scatter plots. Instead of relating economic data to dates, scatter plots relate two data series to each other, one on each axis. The graph above does this with changes to the trade balance ratio on one axis and percent changes to real GDP on the other axis. What may look like a random assortment of dots actually has some information. Imagine the graph is divided into four quadrants and then consider where the dots are located. The upper right and lower left quadrants have fewer data points than the other two, highlighting that there is indeed a negative correlation: That is, when real GDP tends to increase, the trade balance tends to decline—that is, trade surpluses decrease or trade deficits increase.

Why is that? First, consider that the trade balance is net exports—that is, exports minus imports. Imports are highly correlated with GDP, while exports are less so. We see this in the graph above, which plots imports. This time, the upper left and lower right quadrants are the most populated. This highlights the positive correlation: That is, when real GDP tends to increase, imports do as well. Thus, over the business cycle, it is really imports that drive the trade balance: When the economy is doing well, producers need more intermediate goods, and imports are mostly intermediate goods. Also households consume more, and a share of those consumption goods are imports. If you graph exports, the correlation is much harder to see. Exports depend much more on what happens abroad, which isn’t that well correlated with domestic activity.

How these graphs were created: First graph: Search for “net exports” and select the quarterly series. From the “Edit Graph” panle, add GDP and apply formula a/b*100. Second graph: Use the first graph and change the sample period to start in 1954. From the “Edit Graph” panel, change the units to “Change.” Add a line by searching for “real GDP,” change its units to “Percent change,” open the “Format” tab, and switch the type to “Scatter.” Third graph: Use the second graph but with real imports in percent change.

Suggested by Christian Zimmermann.

The Poison Beer of GDP

Published by Anonymous (not verified) on Thu, 04/10/2018 - 7:51am in


By Herman Daly, CASSE Economist Emeritus – October 3, 2018

Disaggregating reported GDP growth to reveal the differences in growth by income class, as per the Schumer-Heinrich Bill, is a good idea. After all, telling us, say, that average income grew by 4% is not nearly as informative as telling us that the richest ten percent received the entire growth increment while the bottom ten percent suffered a decline in income. Average income and growth rates are like the famous recipe for “50% rabbit stew”—one rabbit, one horse. We already know the extreme inequality in the distribution of wealth, of income, and of the growth increment, even without the Schumer-Heinrich Bill. However, if that information is incorporated every time new GDP figures are reported it will be much harder to ignore. Of course, that is exactly why the bill will be opposed by those who want us to believe that we are all getting 4% better off every year or that “a rising tide lifts all boats”, when in fact a rising tide in one place means an ebbing tide somewhere else.

Once we correct GDP for ignoring distribution, then perhaps we can go on to correct other defects, such as the fact that it adds defensive expenditures made to protect ourselves from the unwanted costs of growth (pollution, depletion, congestion, crime, etc.) while failing to subtract as a cost the damages that made the defensive expenditures necessary in the first place. For example, damages caused by an oil spill are not deducted, but expenditures to clean up the spill are added; depletion of soil fertility is not deducted, but expenditure on fertilizer is added, etc.

In addition, the very concept of income in economics is defined as the maximum amount that a community can consume this year and still produce and consume the same amount again next year, and the years after. The income from a fishery is its sustainable catch; the income from a forest is its sustainable cut. Consuming more than that is capital consumption, not income. Yet, as far as GDP is concerned, we can cut the entire forest and catch every fish this year and count it all as income—there is no rule against counting consumption of natural capital as income in GDP accounting.

If our main goal is to increase GDP rapidly, then we will not want to slow it down for concern about equity of distribution, or by correcting the asymmetric accounting of defensive expenditures, or by correcting the fundamental economic error of counting capital drawdown as income.  Maximizing GDP growth will lead to less concern for distributional equity, more depletion and pollution, and more consumption of natural capital.

I am reminded of a story told by G. K. Chesterton. A pub was serving poison beer and customers were dying. Alert citizens petitioned the local magistrate to close down the offending establishment. The cautious magistrate said, “You have made a convincing case against the pub. But before we  can do something so drastic as closing it down, you must consider the question of what you propose to put in its place…”.  Contrary to the magistrate you don’t need to put anything in the pub’s place. Nor is it really necessary to put anything in the place of the poison beer of GDP. As it happens, however, there are in fact better things to put in its place, such as the Index of Sustainable Economic Welfare, National Welfare Index, and Genuine Progress Indicator.

Herman DalyHerman Daly is an emeritus professor at the University of Maryland School of Public Affairs and a member of the CASSE executive board. He is co-founder and associate editor of the journal Ecological Economics, and he was a senior economist with the World Bank from 1988 to 1994. His interests in economic development, population, resources and environment have resulted in more than 100 articles in professional journals and anthologies, as well as numerous books.

The post The Poison Beer of GDP appeared first on Center for the Advancement of the Steady State Economy.

Book Review: The Infinite Desire for Growth by Daniel Cohen

Published by Anonymous (not verified) on Wed, 03/10/2018 - 8:54pm in

In The Infinite Desire for Growth, Daniel Cohen offers a historical and philosophical account of the adoption of growth as a principle and goal in economic theory from the Enlightenment to the present day. While the essays at times overlook the specific historical and political contexts in which the concept of growth emerged and developed, the collection is thought-provoking and will contribute to contemporary debates around growth, finds Ryan Glauser

The Infinite Desire for Growth. Daniel Cohen (trans. by Jane Marie Todd). Princeton University Press. 2018.

Find this book: amazon-logo

A decade after the 2008 Financial Crisis and ensuing Great Recession, economic growth as a principle and goal in economic theories is being questioned from numerous angles. Instead of accepting rapid, consistent GDP growth as the norm, heterodox economists, including Daniel Cohen, have formulated different goals. While many of these economists propose new theories in a framework highly influenced by economics and the social sciences, Cohen’s new book, The Infinite Desire for Growth, adopts a more historical and philosophical approach. The links between economic growth and institutions, culture, society and international factors have been investigated by economic historians. Cohen, however, grounds himself in the Easterlin Paradox – the disparity between happiness and economic expectations experienced by people – and deterministic economic geography popularised by Jared Diamond.

In The Infinite Desire for Growth, Cohen attempts to synthesize a longue durée analysis of the idea of growth by situating it as an inherent human desire and by tracking this phenomenon from the Enlightenment to the present-day emergence of populism after the Financial Crisis. Using core works from authors like Diamond, Ronald Inglehart and Robert Gordon, economic growth becomes bound by capital, inequality and other economic factors, but also by national cultures, institutions and the natural distribution of resources around the world. Instead of positioning pure GDP growth as the sole finality of economic theories, Cohen argues that ‘we must try to imagine a world in which happiness and satisfaction with one’s life are less dependent on the expectation of constantly earning more’ (6).

Structurally, the book is formulated around three main concepts: growth as an inherent human desire; growth as a goal in economic theories since World War II; and the formulation of a future model of growth. Cohen therefore splits the book into three parts. Firstly, the origins of economic growth are grounded in the emergence of civilisation in the Fertile Crescent – the area surrounding the Euphrates, Tigris and Nile Rivers – as well as through the Scientific Revolution and rapid demographic changes in the eighteenth and nineteenth centuries. Secondly, the paradox of the promised ‘second scientific revolution’ from the development of computers and the stagnant growth of the last three decades in the West is placed alongside the rapid economic and demographic growth of the ‘Third World’ since 1945. Thirdly, a broad and rather undefined model of future growth based on standard of living and happiness is envisioned, which aims to solve the Easterlin Paradox. Although the above sections are separated from one another and are rarely linked together, the book is meant to provoke thought on a possible outcome for economic theories, rather than propose a new and completely fleshed-out model.

Image Credit: (Billie Grace Ward CC BY 2.0)

Stemming from his own opinion piece published shortly after the Bureau of Economic Analysis released its initial estimates for 2014 GDP growth in the United States, Cohen’s third section is the most thought-provoking. Instead of doubting the theoretical foundations of economic growth, the anxieties and effects of an unfulfilled promise of steady and proportional increases in the standard of living in relation to GDP growth are briefly examined. These concerns, such as global warming, lack of trust in government institutions and diminishing worker satisfaction, indirectly reinforce one another because national GDPs have continued to slowly grow while the standard of living has steadily declined in the West since the 1970s.

Using the Easterlin Paradox, these anxieties are tied to economic theory through happiness and people’s decision-making based on their relation to their neighbours. Drawing on Prospect Theory, Cohen argues that people account for their happiness and their relative position in their community when making economic decisions. In short: ‘if they attempt to get rich to save themselves from want, the position they acquire quickly becomes a new point of reference, and they must begin all over again’ (133). Typically, mainstream economists would answer by suggesting GDP and wage growth would eventually offset the new wants. On the contrary, Cohen argues that the stagnant growth since the 1970s has destroyed the social contract established between the workers and capitalists during the Enlightenment; thus, the only answer is to reconstruct the ‘real social contract’ and create an economic system that grows and defends standards of living, worker satisfaction and happiness, rather than GDP and wealth.

While the third section coincides with current debates, this part still has many problems that stem from a weak beginning. The Infinite Desire’s most significant issue is a lack of specificity when traversing centuries of time and space without properly contextualising not only the intellectual formation and dissemination of ideas, but also the political, economic and international changes of the world since the seventeenth century. Without this context, economic growth can easily be seen as an ancient phenomenon rather than a newer invention supported by the creation of statistics as a scientific field in the twentieth century.

Besides these contextual issues, the book lacks definitions and descriptions of terms, such as ‘Third World’, the West, culture and modern vs postmodern societies. The most important concept that is not properly defined is economic growth. This causes the book to use economic growth, GDP growth and growth of wealth interchangeably without accounting for their differing meanings within economic theory. This lack of definition allows the book to redefine the terms themselves chapter by chapter and at the author’s whim rather than in relation to changing historical and economic contexts. Beyond the third section, the remainder of the book is plagued by similar ups-and-downs. Due to the three radically different themes, the book, unsurprisingly, feels disjointed and does not always flow from part to part. Instead, the book reads as a series of short essays designed to provoke critical thinking about the necessity and inevitability of economic growth.

The Infinite Desire for Growth is framed as a book that addresses the urgent issues of economics and the present-day world due to an emerging digital economy, driven by the ‘second scientific revolution’. Unfortunately, Cohen’s work falls far short of this promise. His over-ambitious goals cause him to overlook the temporal, spatial and historical contexts in which the idea of growth emerged. Despite this shortfall, Cohen offers a series of essays that are thought-provoking and will start debates on growth as a historical and economic concept in any academic classroom.

Ryan Glauser graduated from the MA Global History programme at Freie Universität Berlin. His MA thesis focused on the West Germany’s Wirtschaftswunder and its Cold War context. He analysed how the emerging Cold War from 1945 to 1953 fundamentally changed the economic structure and thinking of West Germany and its government.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics. 


Shinzo Abe: Un Puissant Antidote Au Populisme

Published by Anonymous (not verified) on Mon, 24/09/2018 - 6:00pm in

Interview on Atlantico 23/9/2018

Shinzo Abe has been re-confirmed as the head of the LDP, a position that could keep him in power until 2021, which would be a record in Japan. After the Japanese deflation of 1990-2012, Abe was elected with a kind of flavour of populism in 2012.  Should we see Japan as a poster boy of populism, or could we see Shinzo Abe a kind of antidote ? 

In my view, very much an antidote. Shinzo Abe is a consummate political insider. As a matter of fact, I met him briefly before he even became a politician, but he was already “in training,” attending a wedding in the place of his father who was Foreign Minister at the time.

Abe’s maternal grandfather, Nobusuke Kishi, was a prime minister. Kishi’s brother, Eisaku Sato was also a prime minister who won the Nobel Peace Prize in 1974. Abe’s paternal grandfather was a parliamentarian of pacifist leanings. So he is a political “blue blood” in Japanese terms.

Shinzo Abe achieved prominence initially because he took up the cause of the abductees, Japanese citizens kidnapped from Japanese soil and in Europe by North Korean agents, in some cases with the involvement of North Korean sleepers in Japan and Japanese radical leftists based in Pyongyang. It was an issue that nobody wanted to touch, to the extent that it was treated as some far-fetched conspiracy theory.

Abe was the only mainstream politician willing to get involved. When Kim Jong Il admitted to the abductions, Abe’s political stock soared and he became the designated successor of then Prime Minister Koizumi.

His first stint in power, in 2006/7 ended in failure because he had nothing to say on economics. At that time, he was a standard, backward-looking conservative who talked a lot about traditional family values, patriotism and so forth. Meanwhile Japan was stuck in the mire of deflationary stagnation.

The political success of Abe.2 derives from the failure of Abe.1 When he made his comeback in 2012, reflation was the key element in his platform. He also dialled down the conservatism, pushing “womenomics”, corporate governance reform and the market opening measures associated with the TPP – which were unpopular with key LDP supporters such as farmers. He also loosened entry requirements for Chinese tourists despite the sometimes rocky relations between the two countries.

Abe brought in his own economic policy team, which was absolutely unprecedented and perhaps the biggest change of all. Normally economic policy was made by the Ministry of Finance and the Bank of Japan, which were controlled by lifetime career staff. They had repeatedly failed to handle the challenges of Japan’s so-called lost decades so it was definitely time for a change.

I wouldn’t call this populism – the most influential advisor was a Professor Emeritus at Yale University – but it was a move against the dominance (and group-think) of the bureaucracy. The willingness to try heterodox ideas was, in the circumstances, an expression of pragmatism.

How did he build his electoral success during these years? What was the trigger for this Japan’s revival? 

Abe has won five national elections by comfortable majorities and also has just been re-elected as leader of his party with twice the number of votes of his rival. His advisors are very smart. Abe himself is not particularly charismatic or eloquent, but those are qualities which are not held in high regard in Japan. He works extraordinarily hard – he has visited 80 different countries in the past six years – despite uncertain health.

Anti-Abe people say he is not that popular, but in fact his support rates are high compared with nearly all his predecessors, going back many decades. In my view, this is at least three quarters due to the much better economic conditions. Job growth has been extraordinary and deflation of asset prices has come to an end. Even the debt to GDP ratio has started to fall –  all because GDP is rising.

What are the lessons that western leaders could learn from Shinzo Abe? What are the lessons for Europe? 

Countries in the Eurozone have policy constraints that Japan does not. But the basic economic message is as follows –

A)   You have to grow your way out of a slump

B)   There is no sure-fire solution, but a pragmatic, trial-and-error approach using  all available policy levers, has the best chance of success.

C)   There will be no “debt crisis” for countries or areas that are net creditors / have current account surpluses. In such cases, a yawning government deficit is merely the other side of the ledger of a bulging private sector surplus – which is inevitable in an era of deleveraging.

D)  The more growth, the more tax revenues, the less public debt issuance. Japanese tax revenues have soared since Abe took over.

On politics and populism, I would say – borrowing this formulation from Professor Cas Mudde of the University  of Georgia – that Japan is less liberal, but more democratic than the majority of Western countries and the EU itself. By more democratic, I mean that the elite is closer to the demos in values, interests and culture. That in itself is powerful inoculation against populism.

Historically, you only get populism when liberalism has failed. That primarily means failure in economic terms, but there are cultural and social fissures that matter too.


‘The world turned upside down’: How the global economy was hit by the crisis

Published by Anonymous (not verified) on Thu, 20/09/2018 - 6:00pm in

David Young

For the global economy, it was the best of times, and then it was the worst of times.  Buoyed by very strong growth in emerging markets, the global economy boomed in the mid-2000s.  On average, annualised world GDP growth exceeded 5% for the four years leading up to 2007 – a pace of growth that hadn’t been sustained since the early 1970s.  But it wasn’t to last.  In this post, I illustrate how the failure of Lehman Brothers in September 2008 coincided with the deepest, most synchronised global downturn since World War II.  And I describe how after having seen the fallout of the Lehman collapse, macroeconomic forecasters were nevertheless surprised by the magnitude of the ensuing global recession.

How severe was the Global Financial Crisis?

The Global Financial Crisis (GFC) caused the worst peacetime contraction in world economic activity since the Great Depression.  Using Maddison Historical Statistics, we can estimate annual world GDP growth rates over the entire 20th century (and even earlier), as shown in Chart 1.

Chart 1: World GDP

Sources: Maddison Historical Statistics, Thomson Reuters DataStream, IMF WEO and author calculations.  Maddison data used to calculate growth rates from 1901 until 1982.

The Great Depression and both World Wars caused steeper falls in global GDP – but the GFC was by far the deepest global downturn that has occurred in the post-war period.  Indeed, so far, 2009 has been the only year since World War II in which world activity contracted relative to the previous year.  Of course, there have been other downturns – the most severe occurred in the mid-1970s, the early 1980s, and the early 1990s.  But annual global growth never fell below 1% in any year of the post-war period – until the GFC.

A similar picture emerges when looking at other indicators of global activity, such as world trade. Chart 2 shows a long time series of annual rates of growth in world trade volumes, taken from Federico and Tena-Junguito (2016).  Again, though less severe than during World War I and the Great Depression (the data don’t cover the World War II period), the fall in global trade volumes during the GFC was by far the deepest contraction that has occurred in the post-war period.  Trade volumes fell by around 12% in 2009 – almost 5 percentage points more than during the next-worst contraction in 1975.

Chart 2: Global trade volumes

Sources: Federico and Tena-Junguito (2016) and author calculations.

Moreover, the GFC wasn’t just the deepest downturn of the post-war period – it was also the most synchronised.  This can be illustrated using four-quarter GDP growth rates from the OECD database.   Starting in 1961, these data cover 25 major economies, rising to 44 economies by the time of the GFC.  As shown in Chart 3, GDP contracted in 40% to 60% of countries during the global downturns in the 1970s, 1980s and 1990s – whereas the share of countries experiencing negative four-quarter GDP growth spiked up sharply to almost 90% in 2009.  And the share of countries experiencing slowing GDP growth reached an unprecedented 100% in 2008.

Chart 3: Share of economies in recession or experiencing a slowdown

Sources: OECD database and author calculations.  Economies are classed as experiencing slowing GDP growth in a given quarter if four-quarter GDP growth was lower than in the previous quarter.

“How did things get so bad, so fast?”

World activity deteriorated extraordinarily quickly.  Global growth was exceptionally strong in the years running up to the GFC, supported by buoyant growth in emerging market economies (EMEs), especially in China.  Annual average global growth reached its pinnacle of around 5½% in 2007 – but as shown in Chart 4, the pinnacle immediately preceded a precipice.

Chart 4: Annualised quarterly GDP growth in advanced economies, emerging market economies, and the world

Sources: OECD database, Thomson Reuters DataStream, IMF WEO and author calculations.

Lehman Brothers filed for bankruptcy on 15 September 2008.  By this point, in the face of tightening financial conditions, advanced economies (AEs) had already entered recession – annualised quarterly AE GDP growth was around -2½% in 2008Q3.  But there was much worse to come: AE GDP growth plummeted to -8½% in 2009Q1 before recovering.  Annualised world GDP growth dropped from above 6% in 2007Q4 to -5¼% in 2009Q1 – an 11 percentage point turnaround in just over a year.  And it was a truly global recession, with aggregate EME GDP also contracting in 2008Q4 and 2009Q1.

It was always going to be challenging to accurately forecast the deepest peacetime contraction in global activity for 80 years, especially given how rapidly the outlook deteriorated.  Indeed, it could easily be argued that the GFC – or at least the magnitude of its repercussions – was inherently unpredictable.  Nevertheless, it is interesting to examine the evolution of macroeconomic forecasts in the run up to and in the months following the failure of Lehman Brothers, when the GFC entered its most acute phase.

All major macroeconomic forecasters substantially overpredicted  world GDP growth during the GFC.  This can be seen in Chart 5, which plots one year ahead forecast errors for world GDP growth from the IMF and Consensus Economics, and for total OECD GDP growth from the OECD.  In all cases, GDP growth in 2009 was four to five percentage points lower than projected.  And it’s worth emphasising that these forecasters were far from alone in producing – with hindsight – overly optimistic projections during the GFC.

Chart 5: One year ahead GDP growth forecast errors

Sources: OECD database, Consensus Economics, Thomson Reuters DataStream, IMF April WEOs since 1998, and author calculations.  The IMF and Consensus errors are annual world GDP growth outturns minus IMF forecasts from April the previous year, or minus Consensus Economics forecasts from Q2 the previous year.  The OECD errors are total OECD annual GDP growth outturns minus OECD forecasts from June the previous year.

The evolution of IMF forecasts in the months before and after the failure of Lehman Brothers illustrates the dramatic deterioration of the global outlook.  Chart 6 shows successive IMF forecasts of annual average world GDP growth for the year 2009.  It can be seen that in the April 2008 World Economic Outlook (WEO), the IMF was projecting that annual world GDP growth in 2009 would be 3.8% – well above the outturn of around -½%.  Of course, 3.8% growth would have been a material slowdown relative to 2007; the WEO’s opening line was “The global expansion is losing speed in the face of a major financial crisis.”  With hindsight, it’s also interesting to read that “the IMF staff now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 – equivalent to a global recession.”  For world GDP growth in 2008, at least, 3% turned out to be right on the money.  But 2009 would prompt the IMF to reconsider its definition of a global recession.

Chart 6: Successive IMF forecasts for annual GDP growth in 2009

Sources: IMF WEOs from April 2008 until October 2009, Thomson Reuters DataStream and author calculations.

By October 2008, 3% was the IMF’s central projection for world growth in 2009.  Around the publication of the October 2008 WEO, Olivier Blanchard (then the IMF’s chief economist) said “it is not useful to use the word ‘recession’ when the world is growing at 3%.”  In the end, of course, 2009 proved to be a recession in every sense of the word.  The October WEO also included a fan chart around the IMF world GDP growth projections – this showed that the IMF thought world GDP growth in 2009 would be between 1% and 4%, with 90% probability.

The failure of Lehman Brothers prompted a rapid deterioration in the economic outlook, leading the IMF to publish updated forecasts just one month after the October WEO (the October WEO was published after Lehman Brothers filed for bankruptcy, but before the ramifications could be incorporated in the IMF’s projections)World growth in 2009 was revised down again, to 2.2%.  This was the first IMF forecast in which AE GDP was projected to contract in 2009.

The April 2009 WEO was the first IMF forecast in which global GDP was projected to contract in 2009, and the full magnitude of the crisis was recognised.  The first subsection of the WEO is simply entitled, “How Did Things Get So Bad, So Fast?”  At this point, the IMF had revised down its growth forecasts by 5 percentage points after just one year – an unprecedented revision.


To sum up, the Global Financial Crisis was the deepest, most synchronised global downturn since World War II, and it happened incredibly quickly.  After Lehman Brothers failed, macroeconomic forecasters underestimated the economy-wide impacts of an extraordinary financial shock that resulted in the failure of financial institutions, the evaporation of market liquidity, dramatic falls in assets prices, and a collapse in consumer and business confidence.  It served as a sobering reminder that financial crises have sizeable effects on the real economy.

David Young works in the Bank’s Global Analysis Division

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Patrick Minford's holidays

Published by Anonymous (not verified) on Tue, 28/08/2018 - 9:12pm in


brexit, GDP, trade

Skewering Patrick Minford has become something of an economists' bloodsport. I admit, I have done my fair share of Minford-bashing, though I do try to stay away from trade economics. Others are much better at lampooning Minford's antediluvian approach to trade economics than me.

But when Minford starts pontificating on the effect of currency movements on the balance of trade, I can't resist getting out the shotgun. Minford is appallingly bad on anything that involves foreign exchange. He just doesn't seem to understand how floating exchange rates interact with trade dynamics and capital flows. So it is unsurprising that his latest venture into this complex subject is as disastrous as the last.

Here is Minford, in the Express, talking about Brits and their holidays:

The mood of British consumers is good, reflecting the fact that the economy continues to grow and create record employment.

A staycation is best because of the Brexit devaluation, which makes British holidays unbeatable value and is driving a strong improvement in the UK’s balance of payments.

As a reminder, here is the Brexit depreciation,* charted:

No, you are not seeing things. Most of the real depreciation happened before the Brexit vote. Maybe the FX community priced in Brexit even though they didn't really expect it? Mind you, the pound has never recovered - perhaps Brexit might have something to do with that. Though personally I think it is more likely that what is keeping the pound down is the total shambles that the Government is making of Brexit. Would you invest in sterling assets right now, if you didn't have to?

But even if there were a "Brexit devaluation", the notion that it makes holidays in the U.K. "unbeatable value" for Brits is completely loony. What sterling depreciation has done is make holidays everywhere else more expensive for Brits. Holidays in the U.K. are no cheaper than they were before. They may even be more expensive, if the tourist industry is cashing in on a windfall from Brits forced to forego their customary 10 days on the Algarve. You know, demand rising faster than supply results in higher prices? For some reason, when foreign exchange is involved, Minford's grasp of basic economics seems to desert him. However you look at it, British holidays for Brits are not "unbeatable value". They are a poor substitute for the sun and sand to which Brits have become accustomed. I would also have to say, from my own experience of holidaying in the U.K., that even with sterling depreciation they may not work out much cheaper than a holiday abroad. Entertaining the kids in the British rain can be extremely expensive.

But are holidays in Britain "unbeatable value" for everyone else? This is sterling versus the U.S. dollar:

Hmm. If I were an American, I would be kicking myself if I didn't visit the UK in late 2016 or early 2017. That was "unbeatable value". Now, not so much.

It's also worth noting that the "Brexit devaluation" in the second half of 2016 was short-lived: by the end of 2017 the pound was almost back to where it had been before the vote, though not back to where it was in 2015. Sterling depreciation in 2018 is mainly because of a very strong dollar, driven up by Fed interest rate rises, quantitative tightening and the Trump administration's tax cuts. The pound is far from the only currency that is depreciating versus the dollar.

How about Europeans? Here's sterling versus the Euro:

Holidaying in the U.K. looks pretty good for Europeans right now - as indeed it has for the whole of the last year, largely because of the strength of the Euro due to the Eurozone economic recovery. Yes, you read that right. The persistent weakness of sterling versus the Euro is because the Eurozone is growing more strongly than the U.K. The U.K. may have record low unemployment, but real wages are barely keeping pace with the inflation caused by sterling depreciation and, more recently, oil price rises. Furthermore, U.K. GDP growth has collapsed since the Brexit vote and is now weaker than in either the Eurozone or the U.S., according to the OECD:

.But what about the "mood of consumers"? Is it as buoyant as Minford says? Here is what Deloitte has to say about U.K. consumer confidence right now:

Consumer confidence improved in the second quarter of 2018, according to the latest Deloitte Consumer Tracker. Overall consumer confidence grew by two percentage points to -4% benefitting from the effects of a strong labour market, gradual wage growth and the feel-good factor associated with the start of the summer...

Eh, wait....minus four percent?

...This represents the highest level of consumer confidence since the Tracker started in 2011 and comes after a year of consistent growth from a low point of -10% in Q2 2017. However, there is a note of caution alongside these results as confidence remains in overall negative territory.

Consumer mood, gloomy but improving. Hardly "good", is it, Patrick?

But I have been saving the best till last. Minford says that the "Brexit devaluation" - which remember is now over two years old - is "driving a strong improvement in the balance of payments". Now of course he is quoted in the Express, which is not noted for its strength in the economics department. I'm not sure that the average Express reader would have much idea what the "balance of payments" is. But readers of this blog do, so I've fact-checked Minford's statement. It's complete baloney.

Here is the U.K.'s balance of payments since 2015, from the latest ONS balance of payments release (which unfortunately does not take us beyond March 2018):

Perhaps my eyes aren't what they used to be, but this doesn't look like a "strong improvement" to me. It looks like a stubborn deficit in trade in goods, an equally stubborn surplus in trade in services, and some variation in primary income. The narrowing of the current account deficit since Q4 2015 appears to be almost entirely driven by changes in primary income, and all it has done is restore the balance to where it was in Q1 2015. That's not "improvement", it's stagnation.

But perhaps Minford means the trade balance, not the current account. The trade balance is the balance of exports and imports in both goods and services. Here it is from 2016 to Q2 2018:

Umm, this doesn't look like a "strong improvement" either. What does the ONS itself have to say about the trade balance?

  • The total UK trade deficit widened £4.7 billion to £8.6 billion in the three months to June 2018, due mainly to falling goods exports and rising goods imports.
  • Removing the effect of inflation, the total trade deficit widened £4.1 billion in the three months to June 2018; falling goods export volumes were the main factor as prices generally increased. 
  • The trade in goods deficit widened £2.9 billion with countries outside the EU and £2.6 billion with the EU in the three months to June 2018.

Oops. So much for sterling depreciation causing a "strong improvement in the balance of payments". Currently, the trade deficit is worsening.

The fact is that everything Minford said is wrong. There is no "strong improvement" in the balance of payments, holidays in Britain aren't "unbeatable value" for Brits, consumer mood is not "good", and although the U.K. economy is "continuing to grow", it is much weaker than before the Brexit vote. Brexit uncertainty is undoubtedly weighing on the pound, but the "Brexit devaluation" simply is not generating the benefits that Minford claims.

Of course, if Brits all chose to holiday in Britain instead of flying to the sun, there would be an improvement in the balance of payments. Perhaps that's what Minford wants. After all, his exuberant post-Brexit forecasts (as much as 6.8% boost to GDP) depend upon sterling depreciation strongly boosting the UK's external position. He's got to bring it about somehow. So, Brits, stay at home. Your country needs it.

If I were of a suspicious frame of mind, I would at this point start wondering whether Minford set out to deceive Express readers, who - let's face it - are somewhat gullible when it comes to fictitious data and voodoo economics which support their Brexit faith. But it may be that he was misquoted by Express journalists, who aren't exactly known for factual accuracy. Or perhaps he is just losing it.

Whatever the reason, those two sentences from Minford are no more true than "£350m for the NHS" on the side of a bus. And no more honest.

Related reading:

Tariffs, trade and money illusion
An Alternative Brexit Polemic
The snake oil sellers

* Minford incorrectly uses the term "devaluation" to mean "depreciation". Devaluation is a deliberate act of policy, usually in a fixed or managed exchange rate system - for example, Wilson's devaluation of the pound in 1967. Depreciation is a fall in the market exchange rate.