I wrote this a while ago and probably shouldn’t post it. “Not scientific.”  But I will anyway.  Don’t have time for anything new.

During the week of turmoil in Boston, I was on vacation in the Yucatan.  It was slightly surreal watching CNN and seeing the police stake out an area just a mile from where I live.

I’ve travelled to Mexico off and on since 1970, and like the country.  But there are some annoyances.  We were scammed several times while using credit cards (Pemex, Dollar Rental Car, etc)  I’d suggest using cash.  I should have been more careful, as the gas stations used to scam us back in the 1970s, although then it was by not setting the gauge back to zero before pumping gas.

This is one area where Mexico seems to lag China, where we’ve had far fewer problems with scams (although I don’t doubt there are plenty there as well.)  Here’s another difference I noticed recently.  In Mexico the teachers are upset that the government is going to try to improve the education system.  It seems teacher positions are bought and sold, and can even be handed down from one generation to the next.  That’s the sort of practice that is more common in low income countries like India than middle income countries like China.

If you go to the Yucatan, I’d stay in the Tulum area (or Merida), rather than Cancun.  Rent a car and you can explore the interior.  We went to Valladolid, which seemed virtually unchanged since I drove through in the 1970s, indeed it probably doesn’t look much different from the 1870s, or the 1670s. BTW, I recommend reading Stephen’s two books on the Yucatan (from 1840), if you plan to visit.  We didn’t have time for Merida and Campeche, but I saw them on an earlier trip and they are both worth visiting.

I was struck by the differences with China.  If you went to a small city in China today, it would look totally changed from the 1970s, indeed from 2003.  This trip made me more convinced than ever that China will blow right by Mexico in terms of GDP/person.

That’s not to say that China is “better” in any overall sense.  Mexicans seem very friendly and happy (and surveys confirm that it scores high in “life satisfaction.”) It’s full of charming old colonial cities and the climate is delightful.  China . . . well . . . not so much.  In utilitarian terms China may never catch Mexico.  And I’m a utilitarian.

But anyone who travels from Mexico to China can’t help but notice the vast differences in economic momentum.  Despite all its very real flaws, China has a system that generates ever higher GDP at an awesome rate, even in towns the size of Valladolid.  It’s not pretty, but it’s relentless and grimly effective.

The “disappointing” 7.7% RGDP number from Q1 (distorted by lack of adjustment for leap year) has led some to wonder if the China boom is over.  It isn’t.

PS.  I was originally going to entitle this post; “speed bumps on the road to prosperity.”  The argument was that Mexico has far more speed bumps than China, because it’s a more lawless society.  But then I realized that some commenter would probably point out there are speed bumps in Norway or Switzerland or some other rich country.  Hence my schlock theory got relegated to a footnote.

PPS.  The “lawless” nature of Mexico does have its charms.  In the 1970s we could go anywhere in Chichen Itza; I stood on top of one of the hoops in the ball court.  Now everything’s roped off—it’s getting more like the US.  But they still don’t close down entire cities of a million people because one 19 year old killer is on the run.  Thank God.

PPPS.  I saw that Matt Yglesias recently got into trouble by daring to tell the truth about Bangladesh:

It seems like the entire Internet has registered its objections to this piece I wrote on the Bangladesh factory disaster. And I have to say that my overwhelming personal response, as a writer and as a human being, is to be annoyed by the responses that I’m getting. But let me try to be mature about it instead and say—what happened in Bangladesh is a tragedy and a human disaster, and to the best of my knowledge it’s also quite literally a criminal disaster under the existing laws of Bangladesh.

It also seems like “the entire internet” lets feelings trump reason.  Don’t let them push you around Matt.  The Paul Krugman of the 1990s would have said the same thing.

I am traveling today, so only have time to complain about some themes I keep coming across when reading the press and speaking to people out in the real world.  No links.

1.  There is no reason at all for the ECB to look around for transmission mechanisms to boost the eurozone economy.  Europe is in recession because the ECB WANTS IT TO BE IN RECESSION.  Yes, the ECB doesn’t know that it wants a recession, but the NGDP growth it is producing will inevitably produce a recession in the eurozone.  OK, they aren’t even targeting NGDP, but the highly flawed CPI including oil and VAT that they are trying to hold well below 2% will inevitably produce the sort of slow NGDP growth that will inevitably produce recession.

2.  The ECB is not at the zero bound.  Over the past few years they’ve been repeatedly steering eurozone inflation through conventional policies of raising and lowering the short term interest rate.  If they had a broken transmission mechanism they would not have been raising rates during 2011.

3.  And even if they were out of room to cut rates, they are not out of paper and ink.  There is no need to look for wacky UK-style proposals to stimulate bank lending–that’s what got us into this mess in the first place.  They need to do monetary stimulus, WHICH HAS NOTHING TO DO WITH BANK LENDING.  More currency depreciates the value of a euro note for the same reason that a big apple crop depreciates the value of an apple.  Does a big apple harvest only cause apple prices to fall if bank lending is stimulated?  Of course unlike apples, currency is durable.  Hence the increase needs to be (expected to be) at least partly permanent.

4.  Money is very tight in the eurozone, using the Bernanke NGDP/inflation criterion for tightness.  They don’t need new ideas, they need to adopt an easy money policy.  The bank lending channel was just as broken in 2010, when eurozone GDP was rising.

5.  Is there any excuse for the press to still be talking about “easy money” throughout the developed world?  (A view that seems to be based on little more than low interest rates.)  I mean seriously, after the last 6 months in Japan, how can people still equate easy money with low rates?  Just to refresh your memory, Japan’s had near zero rates for 16 years and nothing has changed in the past 6 months.  Yet when you talk to finance-types you get the impression the current stock market booms are due to low interest rates caused by easy money.  That “easy money” policy of low rates  brought the Japanese stock market from 39,000 in the early 1990s to 8675 by mid November 2012.

6.  Then Japan really did adopt a slightly easier money policy, and stocks soared 70% in 6 months, even though the dominant paleo-Keynesian narrative says that monetary stimulus has no effects at zero rates.  Oh wait, they’ve just invented a new theory!  How convenient!  At zero rates the liquidity trap applies to output but not stock prices, which are raised though the finance equivalent of “immaculate conception.”

7.  For anyone with two eyes, the past few months have decisively confirmed the Bernanke/Friedman/Mishkin/market monetarist view that low rates do not mean easy money.  That high rates don’t mean tight money.  And yet the other 99.999999% of humanity continues to blather on about “tight money” in 1979 and the Latin American hyperinflations, and “easy money” in the 1930s and the late 1990s Japanese deflation, and the current morass.

8.  Again, eurozone tight money is keeping eurozone NGDP flat, and that’s a sufficient condition for a recession.  Yes, they may also have supply-side problems, but that’s beside the point.  Tight money is a sufficient condition for recession.  They can adopt a policy of 4% NGDP growth if they want to; they simply don’t want to.  Until that dynamic changes, the eurozone will continue to under-perform.

9.  Nothing is gained by disaggregating the eurozone.  Yes, some countries are healthier than others, but easier money will boost the overall eurozone NGDP, and that’s likely to help the weak as much as the strong, perhaps more.  Recall that the current tight money policy HURT THE WEAK MUCH MORE THAN THE STRONG.

Japan’s new GDP numbers look a bit puzzling:

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.

Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions.

. . .

Annualized real growth exceeded all but two of 36 estimates in a Bloomberg News survey. Nominal GDP, which is unadjusted for changes in prices, rose 1.5 percent, also the most in a year. The nominal gain was 0.4 percent from the previous three months, less than the median forecast for a 0.5 percent increase. 

On the plus side, it certainly supports my claim that faster NGDP growth in Japan would not merely lead to equally higher inflation.  But as Matt Yglesias correctly points out, it’s almost too good for the demand-side framework.  Faster nominal growth should boost both RGDP and inflation.

Still, I’d caution readers not to overreact to this data.  Recall that in the 15 years before the 2008 recession Japanese NGDP was basically flat (one percent RGDP and minus one percent deflator).  The Japanese labor market had mostly adjusted to low NGDP growth, although I think money illusion near the zero nominal wage increase point had still modestly depressed Japanese employment and output. 

If we use a standard expectations-based natural rate model, then a 1.5% NGDP growth rate in Japan is sort of like a 6.5% NGDP growth rate in the US., i.e. about 1.5% higher than “normal.”  If America suddenly got a 6.5% NGDP growth rate for a single quarter, and it broke down as 1% inflation (i.e. 1% less than the normal 2%) and 5.5% real GDP growth, then I think most people would see that as a sign of robust AD, even though they’d be mildly surprised by the low inflation number.  In other words:

1.  Japanese data must be seen from the Japanese perspective, not the American perspective.

2.  Quarterly results bounce around quite a bit.

I think this is modest evidence that Abenomics is beginning to work, but I also believe that Japanese RGDP growth cannot be maintained at 3.5% for any extended period of time.  Still, faster NGDP growth also makes the debt situation in Japan slightly less catastrophic.

I’ve been quite busy recently, and hence haven’t had time to blog.  I will eventually get to the old comments.

A commenter asked me to do a post on what would have happened if NGDP targeting had been put into effect in mid-2008.

The immediate effect would have been a boom in asset prices, and most likely Lehman would not have failed. The big financial crisis of October 2008 would not have happened. In other words, macroeconomic conditions in 2009 would have played out much like the consensus of economists expected in mid-2008—nothing special.

But let’s say I’m wrong, what then?

1.  A sharp drop in demand for credit due to the real estate crash. Note that “demand” is a misleading term, as some of the drop comes from tighter lending standards. This drop in demand for credit would sharply reduce real interest rates in the US, which would reduce the value of the dollar in forex markets.

2.  The lower real interest rate would tend to boost consumption, business investment (including infrastructure), and the lower dollar would boost exports. However another factor (what Tyler Cowen calls “we’re not as rich as we thought we were”) would reduce consumption. The wealth loss comes from the housing crash and an adverse move in the terms of trade (higher oil prices.) Net effect: business investment and exports rise, residential investment falls, and consumption is ambiguous.

3.  There are also cross currents in the labor market. The loss of wealth would increase labor supply, boosting employment. But the re-allocation out of housing construction lowers employment.  Net effect is ambiguous.

4.  The rising oil prices and weak productivity would reduce real wage growth. The RGDP/P split from 5% NGDP growth would be modestly less favorable than normal. Maybe a couple years of 1.5% RGDP growth and 3.5% inflation. If Europe had a severe recession despite sound US policy, then that would make the RGDP/P split even more unfavorable.

PS.  Tyler Cowen has a recent post discussing how capital controls might be able to prevent an overheated economy.  In my view NGDP targeting is the best way to prevent “overheating.”  Real overheating is not much of a problem.  As long as nominal national income continues to grow on trend, the labor market will stay close to equilibrium.

Always focus on the labor market.  Keep that in equilibrium and the free market can handle the rest.

PPS.  Lars Christensen has an excellent new post pointing that that devaluations caused by monetary stimulus tend to boost output by stimulating domestic demand, not net exports.  If I had more time I’d do a post.  BTW, I’ll be busy for the next week, and will have very little time to answer comments.  I will get to them eventually.

Here’s Clive Crook:

The substance of DeLong’s complaint about my column and post appears to be that they lack supporting documentation. I asserted (thinking it self-evident) that many Republicans are thoughtful and public-spirited. DeLong is incredulous and finds it revealing that I failed to give examples. I also accused Krugman of letting partisan politics taint his analysis and said he cared as much about undoing the Bush tax cuts as about expanding and extending the fiscal stimulus. At this, DeLong is aghast. He demands to see my evidence.

Will this do? From Krugman’s column, Let’s Not Make a Deal, in December 2010.

Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010.

The plan, of course, was to come back later and make the thing permanent, never mind the impact on the deficit. But that never happened. And so here we are, with 2010 almost over and nothing resolved.

Democrats have tried to push a compromise: let tax cuts for the wealthy expire, but extend tax cuts for the middle class. Republicans, however, are having none of it. They have been filibustering Democratic attempts to separate tax cuts that mainly benefit a tiny group of wealthy Americans from those that mainly help the middle class. It’s all or nothing, they say: all the Bush tax cuts must be extended. What should Democrats do?

The answer is that they should just say no. If GOP intransigence means that taxes rise at the end of this month, so be it.

Krugman proposed raising taxes on all Americans while the recovery was still very weak. He recognized this as a fiscal tightening that would put people out of work. He advocated it because the alternative of retaining the Bush tax cuts would have handed the Republicans a victory, and because — get this — he was worried about the long-term deficit implications. There you have it: Krugman the apolitical Keynesian.

Isn’t putting ideology ahead of pragmatism exactly what Paul Krugman accuses those fools and knaves on the GOP side of doing?  Why yes it is.

Am I (and others on my side of the issue) that much smarter than everyone else? No. The key to understanding this is that the anti-Keynesian position is, in essence, political. It’s driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy. Too many influential people just don’t want to believe that we’re facing the kind of economic crisis we are actually facing.

In many ways Krugman’s position is even less defensible.  At least those on the right claim to believe that fiscal stimulus won’t help the unemployed.  (And I for one really believe that.)  Krugman thinks it will help, but is willing to put his annoyance at the rich paying too little in taxes ahead of the well-being of the unemployed.

Keynesian bloggers are constantly whining about fiscal austerity in America.  But most of the austerity came from the tax increase bill that President Obama signed December.  I opposed the bill.

PS.  I presume that Brad DeLong opposes the effort of a number of GOP senators to reform the immigration laws.  After all, there are no examples of public-spirited behavior by the GOP.

PPS.  Someone sent me an investment report from a British financial firm that has a market monetarist approach to the BoE.  In the previous post I linked to a similar report from Lars Christensen.  It seems that MM is making inroads into the investment community.

HT:  Caroline Baum