So from your figures, we can expect to see up to around 26,000 extra extensions built over the next year.

Like you say, this isn’t going to rescue the economy on its own, but when combined with:

- Extra £280m to help first-time buyers with a deposit
- £10bn in guarantees to underwrite construction of new homes
- £40bn in guarantees to underwrite large infrastructure projects
- Extra £300m to build 15,000 affordable homes

it’s a reasonably good package as a whole. It sounds like those in the government are finally starting to listen to Vince Cable like everyone has been urging them to for the past year.

This is plan B in all but name.

The relaxation of planning controls means I can finally erect a wicker man in my garden. Human sacrifice will be just as effective in revitalising the economy as Cameron’s policies though its going to be bloody difficult to find a virgin round here

Relaxing planning permission? That’s a short-term fix with very long-term effects.

We were forewarned. Try this from the FT dated 2 January 2012:

The coming year will rival 2009 for economic weakness as output is hit by the continuing debt crisis in the eurozone, according to a large majority of economists polled by the Financial Times.
http://www.ft.com/cms/s/0/45dbd476-352b-11e1-84b9-00144feabdc0.html#axzz25mQO1aa1

In its Interim Economic Assessment, the OECD said UK GDP would shrink by 0.7pc this year – a sharp revision from its most recent forecast of 0.5pc growth. [Telegraph 6 September 2012]

I wonder if the surge of extensions will have the opposite effect that the Government intends?

Many people will have previously considered moving house in order to get that extra space they need. However, by making it easier to build an extension, they may decide to stay put.

Taking more potential buyers OUT of the Housing market.

Which means less houses built.

ffhfhffh

Nope – utterly wrong.

The 26,000 turned down are turned down for a wide range of reasons – such as for being in a conservation zone (which make up a big part of rejections) and for blocking out light from neighbouring properties.

These will still be turned down.

There are very few cases of one story extensions being turned down for being too long.

These will be the “extra ones” – and one wonders how bad such proposals must be to have been turned down.

So maybe a few hundred dodgy extentions will be buit that would not otherwise have been. But that’s about it.

Much like the other programmes you list – it sounds great and ammounts to little work on the ground.

The government has indulged in serial propaganda to promote a popular belief that the current low rate of housebuilding, at levels of the early 1920s, is due to failings in the town planning system applied by local government.

“The Local Government Association says it is a ‘myth’ that the planning system was stopping house-building. It released figures which show a backlog of 400,000 prospective homes which have planning permission but have not yet been built. It says these ‘conclusively prove’ the planning system is not holding back development.”
http://www.bbc.co.uk/news/uk-politics-19496204

More credible explanations for the current low rate of housebuilding are that developers are not building houses because they doubt that they will be able to sell the new houses at prices which will be sufficient recover development costs, including financing costs:

- Potential buyers are expecting house prices in most places to keep on falling for a while yet and are therefore holding back until they think the market has bottomed out.

- Purchasers are holding back on buying decisions until they feel more secure about personal and family employment prospects.

- Problems in raising mortgage finance from the banks on affordable terms.

Did nobody listen to the annual statements from Bovis, etc. recently? They stated that they had more than enough land, with planning permission, for the next few years – at current demand levels.

Whatever else, Adolf had one accurate insight:

The great masses of people will more easily fall victims to a big lie than to a small one.

You have to wonder if the Tories know anything about capitalism. The builders are only going to build where they can maximise their profit – they would sooner sit on their land banks and hope for prices and demand to rise rather than build at a lower profit. Reducing the requirement for “affordable” homes will just end up bolstering these profit levels and will make a marginal difference at best.

My own neighbour built two massive extensions, about two years apart (effectively doubling the size of his house).
He didn’t apply for Planning or Building Permission for either.
When he was asked to apply for retrospective permission, the local District Council simply ignored any objections, took his money and nodded approval through.
Why would making Planning Approval easier suddenly ignite the economy?
It didn’t affect my neighbour.

GG: “You have to wonder if the Tories know anything about capitalism.”

Some Tories understand the situation in the housing market very clearly – or get professionally competent advice to that effect. Their next step is to envisage a plausible narrative which deflects the blame for a malfunctioning market or the onus for corrective policies onto someone else.

In this case, blaming planning practices by local government accords with the “deregulation” mantra they kept repeating before the financial crisis – recall that John Redwood was the minister for Deregulation. That runs well with the Conservative ideological commitment to a fundamental notion that free-market capitalism works. Mainstream Conservatism doesn’t recognise the subversive concept of “market failure”.

Dig a little inro the history of British governments and you’ll discover that Conservatives are often very ambivalent about competition policy and therefore do little about it when ministers in government, inhibited by the prospect of offending social friends.

The counter story, which is true, is that Ted Heath, as a minister in the Eden and Macmillan governments in the mid 1950s, pushed through the Restrictive Trade Practices Act of 1956, which made Resale Price Maintenance illegal except for certain specific exemptions.

This was unpopular among many small shopkeepers because it gave scope to the then relatively small supermarket chains to engage in promotional price discounting thereby displacing small shops which couldn’t withstand the competition.

A knock-on effect was that a significant element in the Conservative Party and among supporters claimed the Conservatives narrowly lost the 1964 election because of the abolition of resale price maintenance. Heath was blamed.

“Mainstream Conservatism doesn’t recognise the subversive concept of “market failure”.”

That’s somewhat problematic, as market failure is a common characteristic of capitalism.

In 1938, Harold Macmillan produced a book: The Third Way, in an attempt to convert Conservative colleagues to approving keynesian fiscal prescriptions for tackling mass unemployment resulting from deficient aggregate demand.

I remember Redwood arguing about the public sector “crowding out” the private sector while private investment was falling through the floor. The man wouldn’t recognise evidence if it hit him in the face.

” The Treasury, nevertheless hopes, that indications that the economy is once again growing will improve confidence and remove the current perception that George Osborne, the chancellor, is incompetent and stumbling from one crisis or U-turn to another. ”

When serious publications who do not indulge in hyperbolic rhetoric such as the FT write those paragraphs a chancellor really is in trouble. If a chancellor has to ” remove the current perception ” that he is incompetent it kinda suggests that he is in fact incompetent.

Of course building a few thousand extensions will only make a marginal difference to output. However, that is beside the point. Removing jobsworths from people’s lives is good under any circumstances.

I do not see bank lending for an existing mortgagor to build an extension being a particular problem. Presumably the extension will raise the value of the underlying asset by at least the loan, so there is limited downside risk for the lender. Such borrowers by definition will not be first time buyers and that is where the real problems lie.

Quoting aggregate land banks is classic meaningless statistic territory. We have no way of knowing from using aggregate land held in land banks with planning permission whether the land is in the same place as people want to live. Moreover, using aggregates does not tell us whether the granted planning permission is for brownfield sites only suitable for flats, when the demand is for family homes with a garden. It is almost as silly as aggregating all the empty homes in the country and deducing from the aggregate that we do not have housing problems.

It is said that a camel is a horse built by committee. The mess of our planning system is what happens when one has rule by the quangocracy, vested interest and the obsessed. Every vested interest wants to impose their tuppence worth and the planning system whole ends up looking like a camel.

One should never forget that it was the post-WW2 planners who gave us the ugliest brutalist architectural monstrosities ever built in the history of universe. https://en.wikipedia.org/wiki/Brutalist_architecture

The ugly sink estates that blight the lives of so many were built in the planning era. Their record of actually doing any worthwhile planning is abysmal. A planning free for all could scarcely come up with anything remotely worse than the planning departments have achieved by design. We need to have planning removed entirely from local government control and given to regional cooperatives. The cooperatives could be self-funding from building fees and any surplus redistributed to the people who live in that region. Onwards to a better future as they say.

gastro george

The illuminating insight is that the notion of public spending necessarily “crowding out” equivalent private spending – which is certainly not peculiar to Redwood – is taken over from the debates in the 1930s over government policy to tackle mass unemployment in the depression.

The “crowding out” notion was then persistently invoked by HM Treasury to put down Keynes’s proposals at the time for a public works programme to create jobs – as in a pamphlet he co-authored for the Liberal Party for the 1929 general election: Can Lloyd George do it? The Treasury criticism was obviously fragile: why would public spending crowd out private spending when there were unemployed people and slack or closed factories?

Try this by John Kay writing in the FT, April 2010:

The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.
http://www.johnkay.com/2010/04/14/economics-may-be-dismal-but-it-is-not-a-science

“Mainstream Conservatism doesn’t recognise the subversive concept of “market failure”.”

Funny how often I find myself pointing that out to idiotic right wingers who hold “supply and demand” and “the market” up with a zeal akin to a newly ex-smoker criticing friends who still puff away – but who never really bother to actually learn anything about particular markets or indeed about basic economic theory, which incorporates even at GCSE level, the concept of market failure.

It is a shame to imagine the tory leadership are just as dumb.

Richard

What is it you think is wrong with our planning system?

I ask because I’m genuinely interested to know. I’m sure there are plenty of aspects and particular rules that ammount to no real value – but no one ever seems to offer a real example of one. They make generic bland statements about the mess of our planning system – but never seem to offer an example of a planning rule that would be better lost than retained.

As some one making such generic bland statements, I’d love some real and specific examples.

An insight into how “localism” is obstructing the building of houses.

At the general election, both the local LibDem and Conservative candidates in the London Borough of Sutton came out as utterley oppopsed to “Garden Grabbing”. This is the deplored practice where a houseowner – or houseowners with adjoining gardens – have sold off unwanted garden space to a developer to build infill houses. Post election, the LibDem controlled Council declares:

“Gardens are safer in Sutton as the borough’s green policies have blocked garden grabbing for development faster than anywhere else in London. Gardens are safer in Sutton.”

This is all very curious. No one is compelling the houseowners to sell their unwanted garden space for the building of infill housing. Presumably, the houseowners have no ojection or they wouldn’t be selling their garden space knowing that it would be used for infill house building. The developers are presumably content as they wouldn’t be buying the garden space and building the houses unless they expected to be able to sell the houses.

One the face of it, this is an efficient use of urban land which has outlived its current use. The new housing is only an incremental addition to existing urban development in a locality and therefore makes small extra demands on existing infrastructure of utility services, schooling and so on. Garden Grabbing makes for more efficient use of urban land and eases the pressures to develop Green Belt land. What’s wrong with Garden Grabbing?

@ 16 Richard

“If a chancellor has to ” remove the current perception ” that he is incompetent it kinda suggests that he is in fact incompetent.”

Heh, that put a grin on my face.

@ 20 Bob B

“What’s wrong with Garden Grabbing?”

Potentially, it’s a quality-of-life hit for the neighbours. You buy a small detached house with a patio that backs onto someone’s quiet garden, giving you nice views and plenty of space between you and other people’s noisy parties. Then someone builds a house on said garden and suddenly you’re looking out of your window straight into someone else’s home, overhearing their conversations, and feeling walled in between your house and theirs when you want to sit in your patio. And all your sunlight is gone.

I’m not saying that’s the be-all and end-all. People have a certain amount of right to do what they want with their own land (I can hear Pagar charging towards this page to object to “certain amount); we could use more housing; NIMBY attitudes tend to make people act in a kneejerk, unreasonable way (as shown in the leading phrase “garden grabbing”, which sounds like you’re nicking someone else’s cabbage patch). But it’s not surprising that people would complain about this practice in some cases, just as I might complain if the outlet below my flat was turned into an all-hours nightclub, and depending on the scenario my sympathies might lie with those objecting.

@ 18 M4E

“but who never really bother to actually learn anything about particular markets or indeed about basic economic theory, which incorporates even at GCSE level, the concept of market failure”

“A mon-what-poly?”

My question about this, is simple. Would this deregulation allow a developer to throw up seriously shoddy work. That is a convenient, and obvious way of cutting the costs of developing!

A roof that keeps the rain out, a floor that can support the weight of furniture, proper insulation to keep heat in, mortar at a ratio of 3-1, bricks that don’t shatter with the first frosts etc.

Phah evidence of bueraucracy interfering with profit!

Slumland housing here we come…

Or even worse, it is more expensive to redevelop brownfield sites. That nice nature reserve in greenbelt, that quaint village ‘unchanged’ for centuries, that field that grows our food, cheaper to trash, so already threatened species and food in our bellies go to the wall (or under it)

@22. Chaise Guevara: “Potentially, it’s a quality-of-life hit for the neighbours. You buy a small detached house with a patio that backs onto someone’s quiet garden, giving you nice views and plenty of space between you and other people’s noisy parties.”

For many years, there was default opposition by council planners to such developments. The principle was that unless builders could construct an access road (something wider than a drive way), the development would be “invasive”. By and large new residential properties have space in front and to the side which defines “public” and “private”; the token garden in front of a modern terraced house may be described as inefficient use but it serves a purpose.

@25 Charlieman

Cheers, that’s interesting info. I have to say, though, that I wouldn’t feel much better to find a new house with its windows peering into my own just because someone said: “look, there’s your bit of garden, just as it was!” Not to mention the noise of the thing being built (I seem to live in the only part of Manchester where this doesn’t happen 24/7).

I’ve posted several times references to discussions of market failure in mainstream economics literature of the most respectable (and high-brow) kind – such as Francis Bator on: The Anatomy of Market Failure, George Akerlof on: The market for lemons, and John Cassidy on: How Markets Fail.

But there is another possibility which is less often recognised except in very advanced texts. This relates to market stability conditions. The usual presumption is that random disturbances of prices or quantities from market equilibriums (OK equilibria) will result in reversions back to equilbrium. In other words, it is assumed that supply and demand curves (functions) intersect in just the correct way to ensure that departures from equilibrium are self-correcting and the effects of expectations generated by the disturbance can be forgotten about.

I suspect this reversion to equilibrium often doesn’t happen for any of several possible reasons:

- because a fall (rise) in prices leads those active in the market to expect further falls (rises) so buyers withhold from purchasing (increase purchasing) in the expecation that prices will fall (rise) further.

- in urban situations, the factors making for change take a long time to work through. Urban cycles of decline and regeneration take decades – eg Detroit. Towns with a declining endowment of skills, for whatever reason, find it challenging to develop or attract new high-skilled industries which leads to falling earning opportunities. Those with skills move away thereby reinforcing decline.

@24. Dissident: “My question about this, is simple. Would this deregulation allow a developer to throw up seriously shoddy work.”

There are no proposals to change building regulations, so the answer is no difference.

The problem is that, unless you live in a conservation area or the like, a neighbour can build an extension (sans planning permission) that is twice as big as previously permitted by automatic exemption. And this tinkering with established planning principles will allegedly release rainy day savings or equity (a few hundred million quid at most) to transform the UK economy.

It’s daft, and as Scepticisle and others suggest, the proposals may be more about saving face than promoting construction. I fail to understand why ministers do not say that Plan A has run its course and it is time for Plan B. Politicians get egg on face whatever they do, so just get on with it.

Bob B@27

One of the things I am curious about is how economic forecasting seems to be way off. Growth forecasts barely two months old are revised from positive to negative. I think there is a reason for this.

As I understand it economics is in essence a 200 year old understanding. It assumes that the economy has a single equilibrium – which is where its predictive power comes from.

Economics uses statics, which as I understand it is a simply a series of snapshots – which is why you see these (inaccurate) descriptions of rationality appearing in economics. Humans – can predict the future, know exactly what they prefer, and do not change their minds.

Now the rest of science of the natural world has begun to understand the world dynamically – chaos theory is probably one of the most exciting theories to emerge to explain natural phenomena in what 200 years? Complex human behaviour does not arise because of rationality, it arises because we follow simple rule sets (heuristics) and react to feedback.

It follows that natural phenomena do not have single equilibria – rather they have multiple equilibria. Each equilibrium is stable – push it a bit and it returns, give it a harder nudge and it can switch to a new stable state.

What I am wondering is have we entered a new equilibrium state?

To return to the old equilibirum is going to require a very large nudge, something I sincerely doubt this Government has the vision to undertake.

@29. Mark Redwood: “One of the things I am curious about is how economic forecasting seems to be way off. Growth forecasts barely two months old are revised from positive to negative. I think there is a reason for this.”

If you have an answer, Mark Redwood, you’ll win a Nobel Prize.

However your proposition did not work for me.

I take it the govts plan to focus on the economy, and growth is an admission of total failure for the first 2 years. Pip Squeak Chancellor scared all the demand and the customers away. He came in spouting clap trap about how we were Greece. He then in his first budget demanded 25% cuts in dept budgets, and asked them to look at 40% cuts in theory.

The customers ran for the hills.

Mark Redwood

Econometric macromodels of the economy to predict output, employment, inflation etc depend on predictable relationships between variables. Because of the financial crisis starting in the autumn of 2007, we have been in new territory in which relationships between the predicting variables in the models have changed.

The best we can do is to compare the forecasts of the most reputed forecasting agencies. HM Treasury produces a regular monthly survey of about two dozen independent forecasts from think-tanks, like the NIESR, and the financial institutions. Because of its remit to stabilise the inflation rate, the BoE produces quarterly forecasts for its Inflation Report. This is the menu for the latest Treasury surveys of forecasts:
http://www.hm-treasury.gov.uk/data_forecasts_index.htm

As for chaos theory, perhaps the most instructive insight comes from the reported remark that the best way to make money from chaos theory is to write a book about it. If econometric models are complete rubbish because of chaos theory, how come central banks have been committed to applying monetary policies to stabilise inflation rates?

One reason for the serial downgrading of GDP growth forecasts is the adjustment of consumers and business to more pessimistic outlooks with consequential impacts on consumer spending and business investment. According to the ONS in August: in the second quarter of 2012, business investment in seasonally adjusted terms fell by £0.5 billion to £30 billion (-1.5 per cent) when compared with the previous quarter but was up by £0.5 billion (1.7 per cent) when compared with the second quarter of 2011.

The situation in the Euzone has deteriorated and that affects export sales. One powerful reason for increasingly pessimistic expectations by consumers and business is the realisation that only 6pc of the public spending cuts have been applied. The question is whether net exports, business investment and consumer spending will rise sufficiently to make up the gap in aggregate deamnd from the public spending cuts yet to come and as to what will happen if there is a gap?

Some economists – for example Krugman – have explicitly recognise the possibility of multiple macroeoconomic equilibria. In the process of economic development, national economies evolve from being low- to high-wage economies. The US economy functions with a lower ratio between general government expenditure and national GDP ( just over 42pc) than do most west European economies (where the ratio is usually at least 50pc and often more).

“Since 1995, the spead in the size of government spending relative to GDP has narrowed in OECD member countries. Whereas government expenditures ranged from about 20% and 65% of GDP in 1995, today [2006] spending comprises between 30% and 55% of GDP in OECD member countries.” [OECD at a glance 2009]

@29. Mark Redwood: “Humans – can predict the future, know exactly what they prefer, and do not change their minds.”

You what?

If you project that argument further, I will split myself with laughter.

@31. Sally: “The customers ran for the hills.”

You are still here.

@33 Charlieman,

Laugh if you want, but that is (in simplified form) how the current economic models understand human behaviour.

It is called rational expectations – it assumes we are master planners, and is the reason why a Keynsian stimulus can’t work. Rational expectations makes an appearance in a paper on why private debt rises during a fiscal consolidation – and it is, and I shit you not – people take on more debt now, in expectation of future tax cuts.

Check out “revealed preference” Apparently if I show two supermarket trolleys with a different selection of goods in them, you can instantaneously compare the goods in each trolley and work out which one you prefer.

Economic models have humans maximising utility too.

We might laugh, but unfortunately the very serious people who make this crap up aren’t.

And it is not as though there is a wealth of empirical evidence which shows that humans do not behave rationally.

Which makes me curious…

Economic activity are the aggregate of human interactions. If humans do not behave the way the model says, how can it accurately predict human aggrefate behaviour?

Bob B @ 32

“As for chaos theory, perhaps the most instructive insight comes from the reported remark that the best way to make money from chaos theory is to write a book about it. If econometric models are complete rubbish because of chaos theory, how come central banks have been committed to applying monetary policies to stabilise inflation rates?”

I believe I can explain that one…

Natural processes seem to be described by a mathematical process, whereby I take a simple term, and then use the output as the input. Mandelbrot, I believe is an X squared plot. What we get are dynamic processes with multiple equilibria. Humans fit thie criteria – that is they use heuristics (simple rules) and react to feedback. Put enough of them together and you will get chaotic effects.

let’s use a real example as a metaphor…

Sand falling out of funnel at a constant rate, will go through periods of forming a cone shape, until this shape becomes unstable and then will start to slide and become flatter with a wider base. The shift from one to another is unpredictable.

Ergo the sand displays two distinct equilibria – piling up, and sliding down. It is a chaotic process, weather is another one.

I think that neoclassical economics has devised a model that describes fairly well how the sand piles up, even though some its assumptions are false.

The moments when the sand starts to slide – it calls those exogenous shocks, and in the past the sand pretty quickly stopped sliding and returned to piling up again.

What has happened now, is that the sand has piled so high, it has reached a new stable state and its new equiilbrium is sliding.

Neoclassical models do not explain the new behaviour. Instead they predict a return to growth, which is not happening – if anything the economic outlook seems to be getting worse.

Charlieman @33, and I also said

“and do not change their minds”

It took me a bit of searching, but I found what i was looking for…

Robert Vienneu in his blog considers the Arrow-Debreu Model, and I quote….

“In the model, markets clear once, at the beginning of time.”

Now this model underpins general equilibrium theory, you know that DSGE model that central banks use to predict what will happen to the economy. This post is nice because Blissex helpfully explains why this assumption is important, and I quote…

“There is no contradiction, because assumptions don’t matter, only reaching the correct conclusion does.”

and the correct conclusion being, and I paraphrase…

that demand must be determined by price and not profitibility, because profitibility involves interest, and if that were true then central tenets held by the rest of economics would turn out to be false.

you can read the blog article for yourself.

http://robertvienneau.blogspot.co.uk/2006/09/contradiction-in-arrow-debreu-model-of.html

Now I may be just an ordinary Joe, but I am sure I can detect just a hint of madness.

Mark Redwood

“Neoclassical models do not explain the new behaviour. Instead they predict a return to growth, which is not happening – if anything the economic outlook seems to be getting worse.”

Probably because, as my earlier posts were saying, the expectations of households and businesses are becoming more pessimistic. Most econometric models surveyed monthly by the Treasury attempt to predict GDP over the next year or so. The (reasonable) assumption in these models is that the economy is demand driven in the short term, not supply driven, as in the neoclassical growth model, which only offers a theoretical explanation for longer-term trends in the economy.

Predicting turning points has always being challenging for predictive modelling but economies do not behave randomly or chaotically – lower (higher) values for GDP are typically followed by other lower (higher) values. Indeed, to show the worth of an econometric model, it is necessary to show that on average it predicts better than crude extrapolation.

Every so often the NIESR does a performance audit of a selection of the most reputed econometric models to assess how good their predictions were. Typically, a model is better at predicting one particular variable than the other models. In these performance audits, the Treasury’s own model along with the NIESR model have come out relatively well so I usually pay special regard to press reports of NIESR forecasts.

A far more serious critical attack on some keynesian-type econometric models predicting demand is that of Roger Farmer (see: How the economy works (OUP)), who is saying household consumption spending – which accounts for about two-thirds of GDP at market prices – is a function not of (disposable) income, as typically in basic keynesian models, but a function of personal wealth. This is a crucial difference because, if so, it fundamentally changes the value of the hahn-keynesian multiplier underpinning keynesian prescriptions for a fiscal stimulus to boost recessed economies.

Heterodox economists have well-established arguments against the assumptions underlying neo-classical and neo-keynsian models. For examples, see http://unlearningeconomics.wordpress.com/, http://www.interfluidity.com/, http://bilbo.economicoutlook.net/blog/, http://www.debtdeflation.com/blogs/, etc.

Bob B @ 38

I feel I am learning stuff – which I like.

You talk about how forecasts are rated, such as the NIESR coming out well. My question however is more specific – are they doing well now. My subjective impression is that the answer is generally no. They are routinely optimistic – however this is less of an issue, than problems of proximity.

The further into the future we forecast, the lower the accuracy. Recently however, forecasts made in Q2, predicting growth this year, have been downgraded predicting contraction. It seems that even near future forecasting is becoming unreliable. Clearly this is a subjective impression – is this impression wrong?

As I understand your point – demand is weak because expectations are poor. What is causing the models to miss this poor expectation?

Also how does poor expectation today, reduce economic growth 3-6 months in the future? Can it reduce growth 1 year from now?

Also (more of an aside really) there are serious problems in assuming that economic agents have rational expectations. There is very strong empirical evidence that what we actually do is to assume that what happened today will happen tomorrow, and will happen 6 months, 1 year, 10 years from now.

For the well-being of all of us, it is crucial to distinguish between good and silly criticisms of economics, the later usually coming from folk who often know little about the subject and understand less. The substantive reason for singling out this special status for economics is because economic policy is the subject of endless bar-room and populist debate. There are numerous classic examples of where a populist consensus has led to disasters – the demand that Germany pay full reparations for WW1; staying with the Gold Standard regardless; the prospective benefits of European monetary union . .

In the news: Amazon to create 2,000 jobs in Britain. . . British Prime Minister David Cameron added that the announcement was “great news” for the economy. “I am delighted that Amazon will create thousands of new jobs. This is great news, not only for those individuals who will find work, but for the UK economy,” Cameron added in the Amazon statement.
http://www.thenews.com.pk/Todays-News-3-130632-Briefs

I buy books and other items from Amazon, often because the items are less expensive than other retail sources, but the implication of those transactions is that I’m not buying those things from other UK retailers. In economics jargon, much, probably most, of the consequences of Amazon’s expansion will be to “displace” business of, and jobs in, other UK retailers. Cameron’s cheers are naive and misplaced.

Mark Redwood

Recent NIESR forecasts have been consistently pessimistic. The latest media report on 3 August: NIESR scales back UK growth predictions. Thinktank says slowdown in all global regions and ill-timed austerity measures have hit UK economy more than expected
http://www.guardian.co.uk/business/2012/aug/03/niesr-uk-growth-predictions

Changes in expectations influenced by unfolding events are hard to model.

Events in the Eurozone impact on Britain’s export sales and hence business expectations. It has only come out in the last few months that 90+ pc of public spending cuts have yet to come.

A British consenus about the policy debate in the Eurozone to rescue the Euro is that: (a) they keep planning to have a plan without ever quite getting there, let alone actually getting to implementing a rescue plan; (b) the European debate shows little understanding of the mainstream economic analysis of monetary unions – the standard course text is Paul De Grauwe: The economics of monetary union (OUP 9th edition 2012). Try googling for: De Grauwe: The Governance of a fragile Eurozone

Prof De Grauwe is now at the LSE. Until recently, he was at the University of Leuven in Belgium.

Hi Bob B,

OK I understand that the NIESR have been more pessimistic and therefore more accurate in their forecasts, that wasn’t my question.

Has the reliability of economic forecasts worsened recently?

In particular what bothers me is that short term i.e. next quarter forecasts seem to be becoming more unreliable.

Now this could be observer bias – they have always been flaky, but I am paying them more attention because of the economic situation. Forecasters could just have been unlucky.

However I am beginning to feel like I am stuck in Groundhog day.

Because what I notice is that for the last two years the pattern is that the short term forecast predicts low growth in the next quarter, with an uptick in growth next year. In the next quarter, growth is lower than forecast, growth for the next quarter is downgraded, and a slightly smaller uptick in growth is predicted for next year. There is always this uptick in growth next year which fails to materialise. I am beginning to conclude that the only certainty about the forecast is that this uptick in growth will fail to materialise – including the NIESR’s 1.3% for next year.

Are you confident that there will be 1.3% growth next year?

Mark Eastwood

“Are you confident that there will be 1.3% growth next year?”

Absolutely not and I doubt that anyone else is. I don’t know what is going to happen in the Eurozone or who is going win the US Presidential election in November or whether the British government’s recently announced intentions to introduce measures to really get the economy moving are going to amount to much or whether the banks in Britain are going to increase lending to households and to small and medium sized businesses.

These are all crucial factors in the growth of the UK economny next year and the econometric modellers can only make guesses about them.

As for macroeconomic policies, readers here may be interested in watching this series of five introductory lectures on YouTube: How the economy works, by Prof Roger Farmer of UCLA. He is chairman of the economics department there and for all that is a Brit.

1 of 5: Roger Farmer: “How the Economy Works”
http://www.youtube.com/watch?v=mXxp4WO4cTw

Note: Farmer is critical of Keynes but says he was right about the possibility of macroeconomic failure.

@44 Bob B

You seem to be unwilling to be drawn on giving an opinion on short term forecasting. I think the pattern of persistent downgrades is unusual. We could just be very unlucky – too many of those exogenous shocks (jubilee/rain/snow/olympics) all pushing the economy in the wrong direction.

I do think you overstate the position that economies are not chaotic or random – after all what constitutes an exogenous shock? Would weather count as a random event? What about the sudden collapse of major bank? Or sudden death of a key figure? A declaration of war?

On the 1.3% my hunch is that even without any further shocks to the economic system, this will prove to be optimistic. The OBR are going for 2.0%. The Government would be ecstatic if they got 1.3% growth.

The NIESR prediction was made before Government announcements was it not? So I assume it does not include the recent Government proposals. I assume that it does include the effect of the benefit cuts planned from april 2013.

The fractional reserve banking bit I understood. Although banks do it in reverse – they make loans, then seek the necessary reserves later. Keen has an issue with neoclassical economics – mostly because they abstract money out of the model. Bernhard Lietaer in one of his talks attributes Krugman with asking him wasn’t he told not to touch the money system. That he risked academic obscurity if he did so.

Had an interesting experience with you tube…

the title said roger Farmer 1 of 5, the video was of a guy going on about banks…

Have now watched him, he explains economics in terms that are easy to understand.

There are a lot of theories out there. How do you know (demand is determined by wealth) is the correct one?

Bye the bye, the right wards shift in the phillips curve can also be explained by multiple equilibria, rather than Keynsianism being wrong.

Mark Redwood

“You seem to be unwilling to be drawn on giving an opinion on short term forecasting.”

We are going through unprecedented times for the period since WW2. In 44, I’ve listed a series of factors which will impact on both UK growth and prevailing expectations next year where forecasters can only insert guesses into their models.

“I do think you overstate the position that economies are not chaotic or random – after all what constitutes an exogenous shock? Would weather count as a random event? What about the sudden collapse of major bank? Or sudden death of a key figure? A declaration of war?”

Those events would impact on GDP but GDP does not typically move randomly or chaotically. Economies may fall into a depression and stay depressed for several years running but economies seldom collapse and economies seldom zig-zag from year to year between positive and negative growth for long periods.

“There are a lot of theories out there. How do you know (demand is determined by wealth) is the correct one?”

We can only try out models to see whether household spending on consumption is better explained by consumer income or consumer wealth.

Bob B, Interesting debate by the way.

I understand your point about uncertainty in longer term forecasting – i.e. next year,

I was more interested in near forecasting – even forecasting GDP in the next quarter seems unreliable. Even NIESR are downgrading forecasts that they made just 3 months ago.

Your position is that there are a lot of uncertain events which mean forecasting is pretty much guessing at the moment. And although you don’t say, I assume you would also apply this to next quarter forecasts as well.

I am womdering whether I am experiencing observer bias, or whether I am seeing a trend in forecasting failure. That is without the uncertainties you describe the forecasts would be overly optimistic. I don’t believe we are likely to agree on this.

On chaotic and random systems.

I think you and I understand this differently.

If I look at a GDP graph, over say 20 years it will show a pattern of rises and falls. If I look at it in more detail I will see fluctuations in the quarter to quarter data. From a distance the graph looks smoothish, close up it’s spikey.

Lately I have noticed that when there is a fall or lower than expected GDP, a rise is expected in the next quarter – aka “bounce back”. There is mind you another phenomenon that explains this behaviour – regression to the mean.

GDP does that does it not? It shows a trend with random fluctuations around the trend.

Chaotic systems do not necessarily zig zag. Rather what they display is multiple equilibria. Within each equilibrium they are fairly stable. Push them they bounce back. Push them a bit harder and they will shift to a new equilibrium. What makes them chaotic is that the tipping point is very hard to predict.

Spin a coin on it’s edge. For a while it will continue to spin on it’s edge, but as it slows it will start to spin around the rim. The transition from one kind of spinning to another is unpredictable – sometimes the coin will start spinning around the rim, and then move back to spinning on it’s edge for a moment. Even if you span the coin in the same place, at the same speed, and on a completely smooth surface it would vary each time. The coins behaviour is well defined, it’s just very hard to predict when it will shift from one equilibrium to another. Does this sound familiar?

What has got natural scientists so excited about chaotic systems, is that organic patterns emerge from them. The shape of coral, the foraging patterns of ants, migration behaviour of birds to name but a few. That was what was so exciting about Mandelbrot, how the contours looked natural. I would be very surprised if economic systems proved to be the odd one out.

Mark Easton

“I was more interested in near forecasting – even forecasting GDP in the next quarter seems unreliable. Even NIESR are downgrading forecasts that they made just 3 months ago. ”

As I keep posting, these are unusual times. There are many potent factors currently at play, which will impact on GDP growth in the next and following years, where forecasters can only make guesses. The extent of current uncertainty in GDP forecasting is unusually great. The IMF has just come out with this warning:

“US tax increases and spending cuts set to take effect by the beginning of next year pose one of the biggest risks to the global economy, International Monetary Fund Managing Director Christine Lagarde said today.”
http://www.businessweek.com/news/2012-09-09/u-dot-s-dot-fiscal-cliff-endangers-world-economy-lagarde-tells-apec

“If I look at a GDP graph, over say 20 years it will show a pattern of rises and falls.”

The usual pattern, with only a few breaks in the period since WW2, is for real GDP in any quarter/year to be greater than it was in the quarter/year before. As a fact, GDP does not move randomly/chaotically from quarter/year to quarter/year.

Booms are likely to continue just as a state of depression, with relatively low or negative GDP growth along with relatively high unemployment, is likely to continue. The last is what prompted Keynes to develop his General Theory: “..it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” [General Theory p.249]

“What has got natural scientists so excited about chaotic systems, is that organic patterns emerge from them. ”

The notion of “chaos” developed out of weather modelling but the meteorologists are still pouring out weather forecasts several times a day and the short term forecasts have become more dependable while subject to error margins – eg the precise course of a hurricane or whether and where a tornado will strike. The long-term weather forecasts are not taken very seriously.

Bob B,

Are you seriously claiming that there is no randomness of any kind in economics?

I could look at the GDP data of any country in the world, and the fluctuations in real GDP from quarter to quarter are pure signal, there is not the tiniest bit of noise.

Because if so that would be an amazing claim, and that is all I am claiming – that economics is subject to noise.

Firstly chaos theory has been applied to much more than weather. The point about chaotic systems is that they are very sensitive to initial conditions, and are unpredictable. If forecasters could predict the weather a year in advance, then weather would not be a chaotic system.

I did some reading of paper looking at the application of chaos theory to economics. There are a few possible instances of chaotic behaviour in economics, however proving chaotic processes empirically is very difficult. For a low-order chaotic process you need at least 100,000 observations, rarely are more than 20,000 available. Most chaotic processes (if they exist) will appear simply as noise.

Probably what is more fruitful is to talk about non-linear dynamic processes, and seeing as you are a fan of Keynes – wasn’t his macroeconomic models non-linear?

On randomness,

I was having quick read about DSGE, and had this nagging feeling…

I understood about the neoclassical idea of exogenous shocks pushing a system from equilibrium, and I thought I’d better look up the meaning of stochastic.

So are you absolutely sure that…

“As a fact, GDP does not move randomly/chaotically from quarter/year to quarter/year.”

Interesting debate about ecenomics. Have any of you read The Black Swan: the impact of the highly improbable, by Nassim Nicholas Taleb? he worked as a trader in the stock exchange, and learned how false classic ecenomic theory really is…

Mark Eastwood

“Are you seriously claiming that there is no randomness of any kind in economics?”

I have not said anything remotely like that. Of course, the spending streams that generates GDP are subject to random shocks. I’ve kept saying that there are many uncertain factors in play at present which are likely to impact on GDP but where the forecasters can only guess about the outcomes.

What I have said is that GDP does not behave randomly or chaotically. Post WW2, recessions are unusual. In most years/quarters, GDP is higher than in the year/quarter before. That is not random or chaotic behaviour. But there are times – as in the depression years of the 1930s – when the value of GDP may stay below, perhaps substantially below, its previous peak value for a series of consecutive years. The UK’s GDP is currently running some 4 pc lower than its previous peak in 2008.

One important reason why GDP does not behave randomly or chaotically is because of several intentional automatic fiscal mechanisms which dampen erratic movements in GDP – so-called “fiscal automatic stabilisers”, such as social security benefits which increase/decrease during downturns/upturns and mild progression in the tax system so an increasing share of rising incomes is taken in tax revenues. Regional and urban regeneration policies of various kinds are intended to reduce disparities arising from location.

“Probably what is more fruitful is to talk about non-linear dynamic processes, and seeing as you are a fan of Keynes – wasn’t his macroeconomic models non-linear?”

Keynes’s General Theory model is non-linear. There is a continuing debate among academics about the nature of Keynes’s model and as to how it could yield a continuing outcome of persistently high unemployment. This paper by John Hicks: Mr Keynes and the Classics (Econometrica 1937) – which Keynes endorsed in a letter to Hicks – was hugely influential in textbook presentations of keynesian economics in the 1960s and 1970s.
http://web.econ.unito.it/bagliano/macro3/hicks_econ37.pdf

The current consensus has moved away from Hicks’ LM-IS scissors diagram as can be seen from mainstream texts such as Olivier Blanchard: Macroeoconomics – A European Perspective (Financial Times 2010). Hicks has admitted to misgivings. Blanchard is currently the chief economist at the IMF and the text is prominently endorsed by Charles Bean, deputy governor of the BoE, previously the chief economist. The text is therefore about as mainstream as can be.

Dissident

While I’ve not read Taleb’s Black Swan, I’m familiar enough with the thesis from reviews.

The essential and credible point is that random shocks to (or the estimation errors in) the spending streams that generate GDP are not “normally” distributed – meaning that the tails of the distributions reflecting unusually high or low values are greater than predicted in “normal” distributions.

In other words, extreme events are rather more likely than predicted in normal distributions. This insight has become increasingfly important in the mathematical modelling of financial markets used by the hedge funds. Underestimate the likelihood of extreme events and the fund can go bust if an extreme event occurs.

Keynes was saying more than this. In essentials, he was saying that in the short run the economy is demand driven and that, for several possible reasons, aggregate demand may not be sufficient to maintain a high level of employment or to keep factories working.

The standard policy response of his predecessors was to say that this is a temporary aberration and a general cut in money wages will restore employment. Not necessarily so, say keynesians, because a general cut in money wages will reduce aggregate monetary demand and competition between producers will tend to drive down market prices as wages fall leaving real wages much as before.

@52. Dissident: “Interesting debate about ecenomics. Have any of you read The Black Swan: the impact of the highly improbable, by Nassim Nicholas Taleb? he worked as a trader in the stock exchange, and learned how false classic ecenomic theory really is…”

It is an interesting narrative, one that makes us think about behavioural economics. It has some weight to it; unlike Gladwell and other anecdote tellers, Taleb challenges a concept: the Bell curve.

In previous comments, I was unnecessarily rude to Mark Redwood for which I apologise. I’m a sceptic about behavioural analysis — I’ve worked for a market research agency, and have strong opinions about valid research. I’ve knocked on doors as a political activist and learned how to ask indirect questions that might give an answer.

My scepticism about behavioural economics — and also Bob B’s formal version — is that you need two good academics in order to answer the simplest question.

yes behavioural ecenomics. both the ‘herding instinct’ he described, and incidentally neurological level stuff. It can turn into a perfect storm, leading to either boom or bust, depending on initial conditions, peoples far from complete understanding, and the motivations of current ‘winners’

Which is why Adam Smith doctrine cannot be trusted (or Karl Marx, who built his own thesis upon Adam Smith, with his own spin)

“Which is why Adam Smith doctrine cannot be trusted”

As I’ve kept mentioning, Adam Smith was aware of “market failures”, although not to the extent of recent contributions by economists. His seminal contribution was in showing how the profit motive and markets could motivate an economy without state intervention. This was in sharp contrast to the prevailing protectionist and dirigiste prescriptions of the prevailing Mercantilist doctrines.

In the event, British governments, mainly Pitt until 1806, found his analysis persuasive. The pioneering industrial revolution in Britain progressed with successive governments more or less committed to laissez-faire. However, a succession of factory acts, starting in 1802, showed that Parliament considered intervention necessary to prevent unacceptable social consequences of employment in factories and mines. State intervention in markets to achieve social objectives is not a new idea.

@bob b

Thanks, i think i was talking more about the ideology of Adam Smith than what he said, even though what he said was way before newer knowledge, which is a modifier of initial premises. That is the problem really.

Hi Bob B,

I think our disagreement, is more a disagreement over terminology, than a disagreement over substance.

I understand the statement GDP does not behave randomly to mean that there is no random component to GDP values.

Clearly this is not what you mean – I believe you mean that there is a clear and consistent pattern to GDP, which can be described by a general equilibrium approach. GDP will also show noise, and regression to the mean effects. The effect of shocks are lessened by fiscal stabilisers, and presumably until very recently monetary policy.

Presumably as argued in a paper I read by Edward Prescott, a series of negatives shocks coming together create a recession, and a series of positive shocks create a boom.

I really don’t like this idea. By placing these shocks outside of the system, neoclassical economics gives up explanatory power. A recession is seen as an unlucky event that occurs due to outside events rather than as one possible behaviour of the system.

And this is where Bob B and me might be about to part company. I am really having trouble with this “unusual times” explanation as to why it seems to be so hard to predict GDP.

What I would like is hard data – how are the events unusual? Are there more of them? Are they larger in magnitude? I am wondering whether it is simply observer bias, which means I am as biased in this respect as anyone else.

However, assuming that the subjective “unusual times” judgement is accurate. There seems to be the assumption that these unusual events are driving the economic situation. Why is there never the reverse explanation? That it is the underlying economic conditions, which is making unusual events more likely.

Charlieman,

I didn’t take offence.

On behavioural economics. I had a quick check of Wiki, they mentioned prospect theory. From what I understand is that prospect theory is very firmly grounded in empirical research. Unlike utility theory which we can categorically empirically prove that people do not maximise utility. Also revealed preference has been empirically falsified.

Neoclassical economics is chock full of these false assumptions about human behaviour. Apparently false assumptions don’t matter as long as the model is internally consistent. This is something I really really do not understand.

Krugman explained it once. Apparently by making false assumptions you could do clever stuff. What he didn’t bother to explain was how do you know that what you get out isn’t just clever horseshit.

Mark Easton

“And this is where Bob B and me might be about to part company. I am really having trouble with this ‘unusual times’ explanation as to why it seems to be so hard to predict GDP.”

It’s not usually hard to make fairly accurate predictions of GDP. Indeed, crude extrapoltion of the recent trend in GDP growth will often come close. Present times are unusual because of the many uncertain issues at play, such as those set out @44, where forecasters can only insert guesses into forecasting models.

There’s a good example in today’s news about uncertainty over the effectiveness of government initiatives to promote growth and employment:

Just 2,400 jobs have been created so far by a £1.4bn scheme that Nick Clegg predicted would lead to hundreds of thousands of new posts in the country’s unemployment blackspots, a damning report by MPs disclosed last night.

Condemning the performance of the Regional Growth Fund as “scandalous”, the Commons Public Accounts Committee (PAC) protested that only £60m had reached businesses, with a further £240m “parked” with councils and banks over which ministers have little control.
http://www.independent.co.uk/news/uk/politics/how-cleggs-growth-fund-makes-jobs–at-200000-a-time-8122411.html

The Regional Growth Fund was established in June 2010. What assumptions should forecasters make about the impact on GDP next year as the results of recent government announcements about measures to promote growth?

I think I prefer Eastwood as a name, has more….more…something…

Well I would say that,

It’s probably too early to tell how effective it will be, as it only seems to have just got off the ground.
Average cost per job is about £25,000 so it is on target to deliver 37,000 jobs, possibly/probably. Although the total 1.4bn is very small change.

I personally think Nick Clegg is a twit. “A snowball that will create hundreds of thousands of jobs” Sounds more like a rather famous deodorant advert than a serious appraisal of a scheme. And besides which the Government can’t have it both ways – they can’t claim that public spending has multipliers significantly below 1.0 and therefore will have little economic impact, while also claiming that a poxy drop in the ocean scheme will have a monstrous unheard of before multiplier.

In answer to your question, ignoring the effects of the scheme would be a valid simplifying assumption.

On a broader note, would this scheme have been more/less or as effective if it had started in 2004, and we were examining it in 2006? If the answer is that this scheme would have been as effective in 2004-2006, then I don’t see how it is relevant to the problems of GDP forecasting.

I think rather than the Growth Fund, I’d be much more concerned about the planned cuts in benefits which are being phased in from April 2013. If ever there was a dim economic idea, it’s weakening your fiscal stabilisers in the midst of a recession.

Mark Redwood

“On a broader note, would this scheme have been more/less or as effective if it had started in 2004, and we were examining it in 2006? If the answer is that this scheme would have been as effective in 2004-2006, then I don’t see how it is relevant to the problems of GDP forecasting. ”

The incoming coalition government quickly acted to abolish the Regional Development Agencies created by the Labour government. The agencies had access to finance to promote regional development. The Regional Growth Fund was supposed to be something of a substitute for these agencies and the fund becomes the more important in the light of reports of London’s economy performing relatively well compared with the regions.

By media reports, about 90 pc of the reported fall in unemployment numbers in the first half of the year was in London and about half of the reported increase in employment. By the latest survey, house prices in London are rising but falling in other regions, including the South East.

“I’d be much more concerned about the planned cuts in benefits which are being phased in from April 2013. If ever there was a dim economic idea, it’s weakening your fiscal stabilisers in the midst of a recession.”

By many media reports, Iain Duncan Smith, the overall benefits minister, is resisting pressure from George Osborne to make bigger savings in the benefits budget.

Btw I came across a stashed copy of the FT for 3 January this year. The headline was: Economics experts foresee a bleak 2012

To pick up an earlier issue, I thought perhaps I should expand on just why (most) economists think that changes in demand is what usually drives the economy in the short term.

Typically although not always, we see higher GDP growth associated with an increase in the inflation rate and lower GDP growth associated with lower inflation or even falling prices if deflation sets it.

This is what we would expect to observe if changes in GDP growth from year-to-year are demand driven. But this doesn’t always happen. Sometimes we find lower GDP growth associated with rising prices. This is what we should expect to see if shocks to the economy come from the supply side, for example from rising prices for an imported product where demand was insensitive to prices, such as the demand for hydocarbon oil or for natural gas. This is what happened in the 1970s. The situation then was dubbed “stagflation” by the OECD.