CPB Role and position and our take on the crisis

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CPBRole and positionand our take on the crisis

• Mark Roscam Abbing

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Content

• CPB in headlines
• Independency is crucial
• Our role during the crisis
• Our take on the crisis

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Stylized facts about CPB

• Founded in 1945 (by Tinbergen)
• 150 employees (100 economists)
• Formally part of Ministry of Economic Affairs
  ......
• .... though completely independent
• Legal basis for making forecasts

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Illustrations of CPBs unique position

• All political parties ask CPB to analyse the
  economic effects of their election programmes
  (results are published before election)
• Consensus about taking CPBs short-term forecast
  as basis for
• 1) Budget Proposal 2) Wage negotiations

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Central Planning Bureau?

• No planning in strict sense
• Independent analyses relevant for economic
  policy
• Official name CPB Netherlands Bureau for
  Economic Policy Analysis
• Customers
• Government, ministries
• Parliament, political parties
• Trade unions, employers associations
• Public debate

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Tasks of CPB

• Short-term economic forecasting
• (4 times a year)
• Medium- and long-term economic scenarios
• Economic analysis of policy proposals (short-term
  long-term, CBA)
• Economic research (policy relevant)

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Position of CPB

• Part of Ministry of Economic Affairs
• Budget, personnel policy
• Outside requests need Ministers approval
• Insight in confidential reports and plans
• No political interference with models, methods
  and analyses
• No paid assignments from third parties
• (all publications free of charge)

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Most GDP forecasts are biased

• EC (2004) analysed forecasting errors of GDP
  growth in EU countries (Econ. Papers No 210)
• Conclusion optimism bias GDP growth projections
  used in budgetary process gt negative effect on
  fiscal performance
• Reason Ministries have incentives to paint a
  rosy picture (they appear successful
  downplaying unpopular measures)

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Independent forecasts?

• 3 countries with unbiased GDP growth forecasts
  Netherlands, Belgium, Austria
• In these 3 countries independent institutes, in
  other countries forecasts made by ministries
• Advice forecasting in budgetary process done by
  independent authority

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Budget Plan and CPB forecast

• Budget Plan always published on 3rd Tuesday in
  September
• CPBs short-term forecast published on same day
• CPBs economic forecast includes Budget Plan
  Budget Plan includes CPBs economic forecast
• Only possible for forecast institute that is part
  of government we have inside information

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Headlines of Budget process
prel. budget plan
MoF (May)
macro forecast
budget forecast
CPB (June)
adapted budget plan
MoF (Aug)
final macro forecast
final budget forecast
CPB (Sept)
final budget
MoF (Sept)
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Extensive contact with line ministries

• We make our own judgement with regard to impact
  and feasibility of proposed policies
• Sometimes differences with MinFins figures
• But these can always be explained!
• We sometimes show policy breaches fiscal rules
  and we say so!

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Ideal position of forecasting authority

• Independent
  Ministry
• institute
• ------------------------------------------------
  ---------------------
• Public sector unbiased
  biased
• confidential info
  confidential info
• ------------------------------------------------
  ---------------------
• Private sector unbiased
  n.a.
• no confidential
• information
• ------------------------------------------------
  ---------------------

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How to remain independent?

• Scientific basis
• Total transparancy (results, assumptions,
  instruments)
• No revenues from clients
• Organise your own criticism (national and
  international visitations)
• Large risk of harming good reputation (organise
  internal checks and balances)

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Analysis of election platformsprocess

• Financial appendix of election platforms
• Further details provided by representatives
  political parties
• Interim report by CPB on feasibility and ex-ante
  effect government budget
• Interim report by CPB on macroeconomic effects
  and purchasing power
• Adjustment of plans by political parties
• Report in concept to political parties for final
  check of own chapter
• Final CPB report about all election platforms

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Analysis of election platformsinstruments

• Data base with policy measures
• Changes with respect to base scenarios
• Ex-ante effect on government budget
• Code for link with macroeconomic model
• Labour market model (MIMIC)
• Effect on labour supply, equilibrium unemployment
• Macroeconomic model (SAFFIER)
• Effect on output, labour demand, prices, wages
• Model for taxes, social security and purchasing
  power (MIMOSI)
• Common sense of 20 economists during 3 months

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Analysis of election platforms overview of report

• Effect on macroeconomic development
• GDP growth, employment, wages, prices
• Effect on purchasing power
• Scatter diagrams
• Effect on public finance
• EMU balance in end year
• Sustainability of public finances in long run
  (ageing)
• Other topics
• Environment and infrastructure
• Knowledge policy
• Health care

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Report shows trade-offsno pain, no gain

• Left Right
• Economic growth (efficiency)
• Income distribution (equity)
• Public spending
• Government budget

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Purchasing power of householdsredistribution
from rich to poor
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Merits of analysis

• Improves quality of proposals
• Clarity about details of proposals
• Check on costs and effectiveness of proposals
• Improves quality of political debate
• Less debate about assumptions or facts
• More debate about political choices
• Enhances informed choice by voter
• Improves comparability of election platforms
• same base scenario for medium term
• uniform analysis and presentation of effects
• Facilitates negotiating terms of coalition
  agreement

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Limitations of analysis

• Only policy measures of national government
• No measures of EU, local government, unions
• Emphasis on economic effects
• Emphasis on medium-term effects
• Effect of policy measures on labour supply, not
  on labour productivity
• Better education and investment in infrastructure
  may enhance productivity growth
• Uncertainty on quantitative effects

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CPB and the crisis
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GDP-growht 2009
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Role CPB

• Demand for our product (forecasts) has gone up
• Quality (precision) has gone down.
• Some things we cannot predict
• But some we can
• Constantly discuss policy with govt

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A perfect storm

• Large global imbalances
• Low interest rates and risk perception, mainly in
  US
• Financial innovation, lagging supervision
• Housing and stock bubbles
• Bubbles burst
• ? Bank capital hit hard
• ? Credit supply falls much more

I-1
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Global imbalancesCurrent account (GDP)
I-2
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Global imbalances

• China and oil exporting countries (and NL!)
• Large savings
• China no social security, state pensions
• Oil producers large windfalls
• NL mandatory savings, ageing, memento mori
• US consumption and investment
• Underestimate risk
• Greenspan keeps interest rate low
• Rising house and asset prices
• All stimulate consumption

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Financial innovation, lagging supervision

• Subprime mortgages
• For low income borrowers
• Only sustainable when houseprices keep rising
• Securitised debt cut up and pass on risk
• Avoid regulation, off-balance vehicles
• Failing risk management at banks
• Spread the risk inadequate monitoring
• Lenient rating agencies
• Conflict of interest and lagging skills
• Lagging supervision
• Rely on self-regulation

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Bubble in US housing market? Really?
Source Robert J Shiller, Irrational exuberance
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15 september 2008 Lehman starts a new phase

• Risk-premium corporate bonds

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Impact on world trade
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Consequences of a credit crisis can be
substantial (average previous crises)

• Time between peak and through
• Income per head 1.9 year
• Unemployment rate 4.8 year
• Total change peak to through
• Income per head - 9
• Unemployment rate 7-point Source Reinhart
  Rogoff (januari 2009)

I-7
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Long-term impact?
I-8
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Crisis hits Dutch exports
II-1
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recovery in 2010comparision with previous
crises
2002
1982
2009
1931
II-2
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Recovery in 2010international comparison
II-3
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Unemploymenthistorical comparison
1931
1982
2009
2002
II-4
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Budget balance deteriorates sharply
II-8
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Risks for public finances

• Debt increases as GDP
• Financial sector support
• High deficits (instead of expected surpluses)
• Lower GDP (denominator)
• Increased risk due to guarantees
• Structural problem
• Expenditure higher as of GDP
• GDP on a structurally lower path

II-10
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Conclusions

• Demand-side, different from earlier crises
• Crisis will cost several years of growth
• Hits vulnerable groups on labor market
• and wealth (incl. pension funds!)
• Long term damage to public finances

II-11
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Conclusions II

• Best economists in the world differ on
• Cause of the crisis (micro vs. macro)
• Monetary policy (risks of inflation vs deflation
• Fiscal policy (effectiveness now vs risks to
  sustainability)
• On all three issues, we sit in the middle (or on
  the fence)

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Policy international, short term

• Fiscal policy strong international spillovers
• Prevent protectionism
• Save financial system
• What is the consequence of increasing interest
  rate spreads within E(M)U?

III-1
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Policy internation, long term

• Address macro imbalances
• Pop speculative bubbles
• New architecture financial sector (and
  supervision)

III-2