Ha-Joon Chang — Making things matters. This is what Britain forgot

It’s being blamed on the Brexit jitters. But the that the latest figures reveal is actually a symptom of a much deeper malaise. Britain has never properly recovered from the [2008 crisis]….

At the root of this inability to stage a real recovery is the serious imbalance that has developed in the past few decades – namely, the over-development of the UK financial sector and the atrophy of manufacturing.…

This is remarkable, given that the value of sterling has fallen by around 30% since the crisis. In any other country a currency devaluation of this magnitude would have generated an export boom in manufactured goods, leading to an expansion of the sector.…

The weakness of manufacturing is at the heart of the UK’s economic problems. Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.

Real-World Economics Review Blog
Making things matters. This is what Britain forgot

Ha-Joon Chang

Brad DeLong — We Are so S---ed. Econ 1-Level Edition

As I told my undergraduates yesterday:

Y = μ[co + Io + NX] + μG - μIrr

where:

• Y is real GDP
• μ = 1/(1-cy) is the Keynesian multiplier
• co is consumer confidence
• cy is the marginal propensity to consume
• C = co + cyY is the consumption function--how households' spending on consumption goods and services varies with consumer confidence, with their income which is equal to real GDP Y, and with the marginal propensity to consume
• Io is businesses' and banks' "animal spirits"--their confidence in enterprise
• r is "the" long-term risky real interest rate r
• Ir is the sensitivity of business investment to r
• NX is foreigners' net demand for our exports
• And G is government purchases. Read MOAR

And as I am going to tell them next Monday, real GDP Y will be equal to potential output Y* whenever "the" interest rate r is equal to the Wicksellian neutral rate r*, which by simple algebra is:

r* = [co + Io + NX]/Ir + G/Ir - Y*/μIr

If interest rates are low and inflation is not rising it is not because monetary policy is too easy, but because r* is low--and r* can be low because:

• consumers are terrified (co low)
• investors' animal spirits are depressed (Io low)
• foreigners' demand for our exports inadequate (NX low)
• or fiscal policy too contractionary (G low)
• for the economy's productive potential Y*.

The central bank's task in the long run is to try to do what it can to stabilize psychology and so reduce fluctuations in r*. The central bank's task in the short run is to adjust the short-term safe nominal interest rate it controls i in such a way as to match the market rate of interest r to r*. For only then will Say's Law, false in theory, be true in practice….

Grasping Reality

We Are so S---ed. Econ 1-Level Edition
Brad DeLong | Professor of Economics, UCAL Berkeley

Brad DeLong — Why Is the U.S. Economy Still Depressed?: DeLong FAQ

And even though exports are up, net exports are not.

Grasping Reality
Why Is the U.S. Economy Still Depressed?: DeLong FAQ
Brad DeLong | Professor of Economics, UCAL Berkeley