Saturday, March 9, 2013

Does the UK Prime Minister Know the Difference Between Shift Along an IS Curve Versus Shift of the IS Curve?

I hear that David Cameron has made another pathetic defense of his fiscal austerity. Lots of good rebuttal including a nice summing up from Paul Krugman:
I was particularly struck by the way Cameron is still claiming that Britain’s low interest rates show that his policy is successful and necessary. This is a bit like the high priest sacrificing a virgin once a month to ensure that the sun keeps rising, then claiming that the fact that the sun has risen proves that the sacrifice was indeed necessary. The obvious test is to compare Britain with other countries; if Britain’s 2.07 percent bond yield validates his policies, does America’s 2.05 percent yield validate Obama’s? Or better yet, does France’s 2.10 percent yield validate Hollande’s? Or is the point, perhaps, that every country that borrows in its own currency (or, in the case of France, finally has a central bank willing to do its job by providing liquidity) can now borrow cheaply?
OK, the ECB, Federal Reserve, and the Bank of England are all doing all they can to reverse their weak economies as the fiscal policy decision makers are doing all they can to screw things up. Cameron’s defense of austerity may be pathetic but we hear similar silliness from Republicans in Congress. While I admire Krugman’s tenacity in pointing out how the evidence vindicates the good old fashion Keynesian IS-LM model, let’s do something we do even in our classrooms with college freshmen. Interest rates can be low for a couple of different reasons. The Cameron version is consistent with a full employment view where very modest fiscal austerity is offset with a very effective monetary expansion – aka something akin to a shift along an IS curve. Krugman’s view is consistent with a massive inward shift along a flat LM curve. Either way – interest rates fall. So what’s the difference? Well considering how weak the UK economy is – no intelligent person could describe this situation using Cameron’s view of the world – at least with a straight face. Since I’m told Cameron is an intelligent person, I really have to wonder how he can make this most recent statement.


Bill said...

Does the UK prime minister know what an IS curve is?

bettergiants said...

He is intelligent. He is convinced that the nation he leads are either a) rich like him, and therefore able to ignore the public relations line because they know he's on their side, or b) undereducated, stupid and poor, and thus not his problem.

Frederic Mari said...

Do you think he might have bigger concerns than looking smart? Such as protecting his career?

Also, what 'bettergiants' mentioned. Like Romney, albeit with more grace and good manners, I don't think Cameron truly cares about the lower classes except in a classically conservative 'paternalistic' fashion...

Mark A. Sadowski said...

"OK, the ECB, Federal Reserve, and the Bank of England are all doing all they can to reverse their weak economies as the fiscal policy decision makers are doing all they can to screw things up."

Purely from a monetary policy point of view, there's a lot more that all three central banks could do, and this is no more true than in the case of the ECB.

True, in a bid to prevent the eurozone’s disintegration, the ECB stepped in. But to be allowed to step in (with its LTRO and OMT programs, the latter of which is still only theoretical) the ECB had to enter into a bargain with the core eurozone countries. In exchange of being unshackled from the prohibition from acting as a lender of last resort (i.e. acting like a true central bank) the ECB had to commit to using its coercive powers ("conditionality") in order to impose fiscal austerity upon the periphery. And thus the ECB-based "solution" brings temporary stability to the inter-bank and bond markets as it nevertheless allows the fundamental eurozone macroeconomic conditions to spiral into a renewed depression.

So does that count as the ECB "doing all they can?" Given the political contraints, perhaps. But then aren't fiscal policy makers under similar political constraints? And if that's the case then everybody's "doing all they can" and we can just let them all off the hook, right?