You mean you\’ve only just noticed?

Sir Simon Jenkins:

But converting micro-economics into macro has always been a dangerous game.

Quite. Y\’all will have noted that while I write quite a lot about economics around here I do very little macro stufff. Interest rates, currencies, growth forecasts: it\’s not just that I don\’t know much about these things (which I don\’t, not having the math to follow most of the arguments) it\’s that I\’m profoundly unpersuaded of the value of them all, the accuracy of any of the models or forecasts.

Micro, yes, I\’m interested in: as the man said, the proper study of man is mankind, and micro is an attempt (however incomplete) to work out what it is that people do given the constraints and incentives they face. We do indeed find out useful things this way.

The scaling of that up to say that if we just increase interest rates by 0.25% then we\’ll get the economy to steer this way: well, I\’ve always rather thought that this is more in hope than upon any really convincing evidence. It works a lot of the time but not all the time.

16 thoughts on “You mean you\’ve only just noticed?”

  1. I always had the impression that free market liberals were interested in micro economics and Statists were interested in macro economics.

    Macro economics is IMHO complete and utter bumkum.

    Like this crap recently about the ‘low savings ratio’, the optimum savings ratio for each individual is basically NIL (taken over a lifetime) so if you lump together 60 million people at different stages in their lives, on the whole you’ll tend to see a overall savings rate of NIL.

  2. Macroeconomics only exists because it provides what governments want to hear and are willing to pay lashings of money to hear it.
    Imagine if all the macro economists turned round to government and said “Those big levers you like pulling are useless and cause more harm than good. So leave them alone.”

  3. Might I respectfully suggest that Macreconomics exists because people are, quite reasonably, interested in questions like: what causes inflation? Why do recessions happen? What are the effects on international capital flows? How do the various policies at our disposal work? Oh, and you know, the small matters of growth and trade. You might think many of the answers aren’t that satisfactory, but I get the feeling you don’t really have a great deal of familiarity with them.

    Oh, and Kit, where do you suggest we position those ‘levers’ before we leave them alone? How soon do you think it would be before even you, in your sagacity, would want to move them again?

  4. Pushing on a piece of string, perhaps?

    I’ve always thought with interest rates it’s more the message which has the impact on the ‘man on the clapham omnibus’ and the actual change perhaps only on hot money and the such.

  5. “Oh, and Kit, where do you suggest we position those ‘levers’ before we leave them alone?”

    After picking up their redundancy cheques I would let the macro economists take the ‘levers’ home as a memento 😉

  6. Luis:

    what causes inflation? = gummint printing money and/or over-easy credit terms.

    Why do recessions happen? = Credit and asset price bubbles bursting (or natural disasters)

    What are the effects on international capital flows? = None

    How do the various policies at our disposal work? = very badly. Those levers would make ideal going home presents.

    Oh, and you know, the small matters of growth and trade.= the sum total of what all the investors, businesses, employees and consumers achieve (those three being ultimately the same people) interesting to observe (like a physicist observing atoms and molecules) but impossible to inflence (unless you believe in alchemy)

    All this from the “Van Halen Three Minute University” (TM David Lee Roth ca 1980).

  7. If Mark W is right, I’m confused as to why a collapse in credit availability, combined with no increase in the government printing money, has led to the highest rates of inflation for 10 years…

  8. Mark, that’s an impressive rate of wrongness per word. I’m particularly loving growth and trade being “impossible to influence”.

  9. In my view macroeconomics is a legitimate and worthy subject of study. I agree with Tim though that much of what modern macroeconomists say is suspect. Particularly their constant emphasis on the short-run.

    If you want to see an approach to the subject that works read the books by the Austrian economists F.A.Hayek and Ludwig von Mises. Their theories predict crises exactly like that we are experiencing now.

  10. The former Governor of the New Zealand Central Bank once said that trying to control the economy with interest rates is “like trying to clean your teeth by shoving a toothbrush up your arse – it’s painful, time-consuming, difficult and it’ll leave a nasty taste in your mouth”

  11. John B, it all depends on how you measure inflation – with or without house prices, for a start. With house prices, inflation has probably dropped. A lot of economists reckon we are going to experience DEflation.

    Luis, yes of course gummints can influence ‘growth and trade’ but only in a negative way. Gummints can only stifle growth and reduce trade. Or boost it by massive subsidies, the cost of which always outweighs benefits.

  12. “with or without house prices, for a start”

    Measuring inflation with house prices is nonsense, as they’re asset appreciation – it’d be like adding share prices.

    Measuring housing costs (ie RPI) still shows significant inflation, as mortgages are more expensive than they were and rents are rising because buy-to-letters are no longer covering their costs through asset appreciation.

  13. JohnB – inflation occurs not just when the growth in the money supply is high and the growth in productivity is low, but also when money supply growth is low and productivity growth is less than low.

  14. John B, Rory, Mark

    This is how it works. Some money is created, either by a bank or central bank. This money is loaned out.

    When it is loaned out there are then more people bidding for whatever capital that loan is for. If, for example, I borrow £200K from a bank then the fact I have that money available to me bids up whatever I’m buying. Houses for example.

    This sort of “inflation” is unfortunately indistingushable from appreciation of assets for other reasons. Once I have purchased whatever I buy the money is in the hands of others who also have more to spend than they would have done otherwise.

    The result of this is the inflation slowly moves through the economy. This is what we are seeing now. Money supply increases several years ago caused a rise in house prices. That rise has now finished, but the effects of the money supply increase are still working their way through other sectors of the economy, which is why we have RPI prices increasing now.

    This is the problem with RPI/CPI targetting. The index only measures the very last effects of actions begun long before. The authors I mentioned earlier explain this.

Leave a Reply

Your email address will not be published. Required fields are marked *