Saturday, 6 July 2013

John Quiggin's keynote address

Economists wrestling in the mud with other economists isn't the most appealing of spectator sports, so you might want to pass over this post and come back another day. But if you're still here, I want to talk about yesterday's keynote speech at the NZAE conference, 'Economics after the Global Financial Crisis', by Prof John Quiggin from the University of Queensland.

I've spoken to a lot of attendees at this year's NZAE conference about it. And there were some systematic responses.

First the good news.

A lot of people thought it was worthwhile to have a speaker who would shake the bushes and generate debate, and that's surely how it played out. Prof Quiggin was allotted an hour and a half, spoke for just shy of an hour, and we had over half an hour of questions and challenge before the chair dropped the gavel on what had become a rather acrimonious session.

And it's true that a lot of people saw a lot of merit in many of his points.

Macroeconomics wasn't prepared for the GFC? Agreed. It doesn't have an answer for what to do next? Not so clear, but not a silly thing to say. The institutional powers in the economics academy reward intellectual rigour over realism or practicability? It's not original, but it's still true. As a linked point, economists had been building theoretically coherent models of the economy (he singled out Dynamic Stochastic General Equilibrium ones, DSGE for short) that were damn all use in the trenches? Sure. Previously accepted theories of finance (like 'the efficient markets hypothesis') exposed as flawed? Financial deregulation and subsequent financial excesses a catastrophe for the world economy? Absolutely. Crises like the GFC affect the more vulnerable in society? No question.

But things got more debatable in other areas. As I give some examples, I'm relying on what I heard on the day, and I don't yet have the formal presentation to hand (come on, NZAE, put the papers on the website!), and I'll be happy to correct any misrepresentation of his views if I've got them wrong*.

I believe he argued that there was no correlation between the countries that had done the most micro-economic reform (the likes of what we call 'Rogernomics'), and those that had best weathered the GFC. This, I believe, is outright wrong. As the most obvious example, the countries that have most liberalised their labour markets have had hugely lower rates of youth unemployment than those who didn't. There was a lovely graph in the recent Economist survey of Germany, for example, which showed that Germany (which with its 'Hartz' reforms in 2005 had made it easier for lower-skilled and part timers to be employed ) has had much lower unemployment than France, for example, which made no comparable change.

He argued that fiscal policy leading up to the GFC was 'missing in action', with a fiscal orthodoxy that was more concerned about medium-term fiscal balance than helping troubled economies in the here and now. Personally I'm not sure that's right: there were many examples of active discretionary fiscal policy pre the crisis, and in any case I'm not sure that the orthodoxy was wrong. Countries like Ireland and Greece would have been better served to have had some medium-term fiscal anchors. As things have played out, the issue has become somewhat more moot as fiscal policy has been deployed more actively,with the US (for example) been running ginormous fiscal deficits, and when even our own fiscally conservative government has let the deficit rip, post-GFC, to support the economy.

He was also no fan of inflation targetting, and argued that all the central banks in developed economies had in practical de facto terms become inflation targetters from the early 1990s. This got some pushback. As one commenter from the floor pointed out, countries like New Zealand, Australia, Canada and Sweden (explicit inflation targetters all) have survived the GFC relatively well, and Japan has just moved to an inflation  targetting regime as part of their efforts to get Japan moving again.

He probably shouldn't have wandered into NZ-specific comments. I didn't mind that he got our original inflation target wrong - anyone can forget details, God knows I have, and sometime not just the details - and he was happy to stand corrected. But in his effort to rubbish Rogernomics and all its little wizards, he tried to make the case that New Zealand's progressive slide in income relative to Australia, and the higher incidence of recession in New Zealand, were down to these mistaken macroeconomic and microeconomic policies. It rather spoils his story that the slide started long before Rogernomics. It even predates Muldoon (not that he helped).

*Post was updated July 10 to reflect Prof Quiggin's feedback

6 comments:

  1. Donal,

    We don't have formal papers that we can link to for the keynote addresses, but for the first time this year, we fully recorded them with both capture of the data presentations and video of the speakers. As soon as the AV people provide us with the recordings we will put them up on the NZAE website.

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  2. "He argued that fiscal policy in response to the GFC was 'missing in action', more concerned about medium-term fiscal balance than helping troubled economies in the here and now."

    This is a misreading of a point I made in discussion. I was referring to the pre-GFC orthodoxy on the role of fiscal policy, which was to aim for medium-term balance.

    Also, as I said quite a few times, I find no value in the distinction between central banks that have an announced formal inflation target, and those (eg the Fed until recently) that regularly refer to a range with with which they are comfortable. In practical terms, all central banks in developed countries pursued inflation targets from the early 1990s.

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  3. I did supply my presentation, and Seamus is welcome to post that

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  4. A final point. I said in my response to a question, and in my paper with Tim Hazledine, that no single explanation is sufficient to explain NZ's decline relative to Australia. The gap is too large to be explained by either of bad luck (terms of trade shocks, slightly more isolated location) or bad management (bad micro and macro policy), taken alone.

    My point was that, if recessions have long-lasting effects, a significant part of the gap (but not all) can be explained by the fact that NZ had a string of recessions when Australia did not, as well as by bad micro policies

    I haven't seen anyone give a quantitatively convincing terms-of-trade or other 'bad luck' explanation of the decline, but feel free to point me in the right direction.

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  5. Thanks for this. I agree with you that there doesn't seem to be any single predominant explanation of the gap that widened between NZ and Australia, and people are still beavering away at a cluster of possibilities. You might be interested in the papers presented at the recent Productivity Symposium (July 2) in Wellington, which had another look at the spectrum of possible reasons. I summarised them at http://economicsnz.blogspot.co.nz/2013/07/todays-symposium-on-unpicking-new.html.
    The papers themselves are at http://www.productivity.govt.nz/event/unpicking-new-zealand%E2%80%99s-productivity-paradox-symposium

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