CPB Role and position and our take on the crisis

1. CPBRole and positionand our take on the crisis Mark Roscam Abbing

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

3. ‘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

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

6. 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

7. 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)

8. Position of CPB • Part of Ministry of Economic Affairs • Budget, personnel policy • Outside requests need Minister’s 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)

9. 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 => negative effect on fiscal performance • Reason: Ministries have incentives to paint a rosy picture (they appear successful; downplaying unpopular measures)

10. 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

11. Budget Plan and CPB forecast • Budget Plan always published on 3rd Tuesday in September • CPB’s short-term forecast published on same day • CPB’s economic forecast includes Budget Plan; Budget Plan includes CPB’s economic forecast • Only possible for forecast institute that is part of government – we have inside information

12. 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)

13. Extensive contact with line ministries • We make our own judgement with regard to impact and feasibility of proposed policies • Sometimes differences with MinFin’s figures • But these can always be explained! • We sometimes show policy breaches fiscal rules – and we say so!

14. Ideal position of forecasting authority Independent Ministry institute -------------------¦-------------------------¦------------------------- Public sector unbiased biased confidential info confidential info -------------------¦-------------------------¦------------------------- Private sector unbiased n.a. no confidential information -------------------¦--------------------------¦------------------------

15. 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)

16. Analysis of election platforms:process • 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

17. Analysis of election platforms:instruments • 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

18. 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

19. Report shows trade-offs:no pain, no gain Left Right Economic growth (efficiency) Income distribution (equity) Public spending Government budget + — — + — + + —

20. Purchasing power of households:redistribution from rich to poor

21. 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

22. 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

23. CPB and the crisis

24. GDP-growht 2009

25. 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 gov’t

26. 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

27. Global imbalances:Current account (%GDP) I-2

28. 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

29. 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

30. Bubble in US housing market? Really? Source: Robert J Shiller, Irrational exuberance I-3

31. 15 september 2008: Lehman starts a new phase Risk-premium corporate bonds I-5

32. Impact on world trade I-6

33. 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

34. Long-term impact? I-8

35. Crisis hits Dutch exports II-1

36. ‘recovery’ in 2010comparision with previous crises 2002 1982 2009 1931 II-2

37. ‘Recovery’ in 2010international comparison II-3

38. Unemploymenthistorical comparison 1931 1982 2009 2002 II-4

39. Budget balance deteriorates sharply II-8

40. 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

41. 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

42. 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)

43. 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

44. Policy: internation, long term • Address macro imbalances • Pop speculative bubbles • New architecture financial sector (and supervision) III-2