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Paul Ormerod: July 2010

Friday, 23 July 2010

one swallow...

Of course one swallow doesn't make a summer, but the second quarter 2010 UK GDP figures released today show output growing at an annual rate of over 4 per cent, much higher than the consensus.

I wrote a piece for the Financial Times last summer arguing that 'The historical evidence reveals a typical pattern of recession and recovery which suggests that, just as economic forecasters were far too optimistic about prospects for 2009 even as late as the autumn of 2008, they now seem too pessimistic about recovery profiles. Very few recessions last longer than two years. And most recoveries, once they do start, are strong.'

Focusing on recessions since the Second World War, analysis shows that for recessions with only short duration, the typical recovery pattern is rapid. The average growth rate in the year after the recession was 3.5 per cent, and in the subsequent year 3.8 per cent.

So in general once recovery starts it is strong. This is compatible with the view that short recessions are essentially inventory cycles. Once inventories are reduced to satisfactory levels, normal production levels resume, and fixed capital investment expenditures postponed during the recession are carried out.

Even in the 1930s once the recovery began – in different calendar years in different countries – the average rate of growth was strong. GDP growth in the first year after the Great Depression averaged 4.7 per cent, followed by 4.6 per cent in both the second and third years.

The caveat to all this is that the current circumstances are unusual. But so was the Great Depression. There is some evidence to suggest that, beyond a critical duration or cumulative size of recession, exit from the recession becomes harder and more sluggish. Keynes’ animal spirits become depressed. But it takes an awful lot to depress them for more than a couple of years. Capitalism seems a pretty resilient beast.

Friday, 16 July 2010

Limits to taxation? The UK General Election 2010

The May 2010 election saw a substantial swing against the incumbent Labour government, though the Conservatives were denied an outright victory. In a fair number of marginal seats which they would have expected to win on the national trend, the swing to the Conservatives away from Labour was distinctly low.
There are obviously many possible reasons for this. But there is good evidence to confirm a widespread view that the constituencies which receive a net public subsidy stayed Labour, and those which pay for the subsidy through a net export of their taxes voted Conservative.

A readily available proxy for this is the percentage of the population of working age which is in employment . Ideally, income per head should also be taken into account, but this is only available at local authority level and not by constituency. However, it is very plausible that such data would strongly reinforce the message of the employment data. Income per head in, say, Beaconsfield is distinctly higher than in Bootle. Further, the proportion employed in the public sector is also relevant. But as a first pass, the employment data itself is revealing.

On average, the percentage of the working age population in employment was six percentage points higher in Conservative seats than in Labour ones (for the record, the Lib Dem position was in between the two, though somewhat more similar to Conservative seats than to Labour). Six percentage points may not seem a lot, but across the country as a whole it amounts to more than 2 million people.

So, in almost three-quarters of Conservative seats more than 80 per cent of the working age population were in employment. But in more than three-quarters of Labour seats, less than 80 per cent of the working age population were working.

A potential counter to the general point is that the votes simply reflect regional preferences, with for example the North of England and Scotland showing a definite preference for Labour and the South for the Conservatives.

However, the employment differences are reflected within the regions. Not all regions can be looked at in this way because of the dominance of one or other of the parties, but here is the data for the more ‘mixed’ regions.

Average percentage of working population in employment
Region Conservative Labour Difference
North West 80 75 5
Yorkshire 82 77 5
East Midlands 83 75 8
West Midlands 82 73 9
London 78 74 4

As noted above, the analysis should ideally take into account income per head and the percentage employed in the public sector, and a further refinement would be to allow for the proportion of pensioner households. But as an initial broad sweep through the results, the employment data does suggest that the areas which, through their high employment rates, pay more tax than they receive in subsidies decided that Gordon Brown’s government had gone too far in extracting money from them.

Saturday, 10 July 2010

extreme events, hill running and financial markets

I am currently in the Scottish Highlands for ten days or so, and my outings on the hills have made me reflect on extreme events. The fact that they lie so much outside the perceptions which people have about the world makes it very hard to appreciate that they occur at all. I’ve just finished reading Gillian Tett’s account of the financial crisis, Fool’s Gold.

As I plod up and down the soggy hillsides – it has rained almost all week – I have reflected on the similarities of extreme events in financial markets and extraordinary feats of hill running. These almost literally defy belief.

For example, on the Isle of Skye lies the most rugged set of peaks in Britain, the Cullins. The Cullin Ridge is probably the single most demanding outing in the British hills. It is only 10 miles or so in length. It involves 10,000 (ten thousand) feet of ascent and descent. But the most demanding aspect of it is that there are several rock climbs up to Very Difficult/Severe standard, prolonged bouts of exposed scrambling, and hardly any flat terrain at all. Over much of the length of the Ridge, a slip could prove fatal. Now, on firm, broad tracks which involved simply putting one foot in front of the other, a strong walker would be pleased to cover such a route in 8 hours. Most casual hill walkers could not even contemplate an outing of this kind.

Yet, incredibly, the record time for the Cullin Ridge is 3 hours 29 minutes, with no climbing aids used at all. One of the peaks involved symbolises the difficulties. The Inaccessible Pinnacle is a bizarre fin of rock attached to the ridge. A rock climb is needed to gain its sloping ridge, which is for the most part about six inches wide. As you climb, you are faced with exposure such that, in a popular description, there is a vertical drop on one side and an overhanging and infinite drop on the other! Certain death awaits anyone who falls unroped. At the summit, there is a Difficult 75 foot down-climb required to get off the peak. Elite Ridge runners go up and down this peak in under four minutes – four minutes!

There are ultra-marathon hill challenges such as the Bob Graham Round in the English Lake District, for example. This is 72 miles long with 26,000 – twenty six thousand – feet of ascent and descent. Seventy two miles is almost a triple marathon. The record time is 13 hours 54 minutes.

Now, without knowledge of these feats, someone familiar with the terrain involved would find it almost impossible to imagine that such times could be achieved. They are so far outside ‘normal’ perceptions.

Humans seem to find it hard to imagine extreme events in general. With much more dramatic consequences for us all, the same inability to contemplate the existence of extreme events occurred in financial markets, traders, senior bank management, regulators, central banks. We were very well equipped to withstand a ‘normal’ shock. But not the extreme event which actually took place.

Thursday, 1 July 2010

was there a double dip in the 1930s?

There is a lot of comment at the moment about the risks of a 'double-dip' recession, citing evidence from America in the 1930s. Well, here is the annual growth rate of real GDP in the United States in the 1930s:
1930 -8.9
1931 -7.7
1932 -13.2
1933 -2.11
1934 +7.6
1935 +7.7
1936 +14.2
1937 +4.3
1938 -4.0
1939 +8.0

So: there was a gap of 5 years between the recessions, and betwene these the economy grew by nearly 40 per cent. Not exactly a double-dip!

This is not forming a view on the current situation, just putting forward some simple evidence on what actually happened in the 1930s