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Svensson, vindicated.

I once read a book where Richard Rorty debated another philosopher on the nature of “truth.” Rorty claimed something to the effect that; “Truth was what your colleagues let you get way with.”

The other philosopher countered with a hypothetical.  Suppose someone says: “Most people believe X is true, but I believe that Y is actually true.”  Clearly they’d have in mind a different conception of truth.  Rorty countered that claiming something not widely believed is “actually true” is implicitly a prediction that it will be accepted as the truth at some point in the future.  That doesn’t always work, but it’s an interesting way of thinking about truth.

In any case, it can now be said that Lars Svensson’s critique of Riksbank policy has been proven “true” in the sense that his opponents have now recognized it as true (the following is from the excellent Ambrose Evans-Pritchard):

Sweden’s Riksbank has torn up the rulebook of global central banking, cutting interest rates to zero even though the economy is in the grip of a credit boom.

The extraordinary step is intended to stave off deflation but it comes at a time when the Swedish economy is growing at almost 2pc and property prices are rising briskly. The bank has abandoned earlier efforts to curb asset bubbles by “leaning against the wind”.

The Riksbank cut the deposit rate to -0.75pc in what looks like a preparatory move to drive down the krona. Governor Stefan Ingves said the bank has a toolkit of extreme measures in reserve, including use of the exchange rate.

If the Riksbank was caught off guard, it’s because they weren’t paying attention to the only world class monetary expert on their committee.

The Riksbank has in effect washed its hands of the credit boom, leaving it to government regulators to control household debt with mortgage curbs, liquidity limits for banks and other “macro-prudential” tools as best they can.

You mean regulators should deal with specific problems in a specific sector of the economy with a scalpel?  I thought the central bank needed to deal with the housing market with a sledgehammer, smashing the entire economy.

“What the Riksbank is doing is something that a lot of central banks around the world are going to have to do: once interest rates approach zero, they are forced to think about far more radical instruments,” said Lars Christensen, from Danske Bank.

The Riksbank – arguably the world’s oldest central bank, with a tradition of bold monetary experiments – carried out a dramatic volte-face in July when it slashed rates and gave up trying to restrain asset prices. Governor Ingves was outvoted in what amounted to a policy mutiny.

The shift over recent months is a triumph for Mr Svensson, who resigned last year in a stormy dispute. He said the bank made a mistake by tightening before the economy had fully recovered, and then compounding the error by allowing itself to be distracted by the noise of asset bubbles. “Low inflation has actually increased the households’ real debt burden. Riksbank policy has been counterproductive,” he said.

Svensson, vindicated.

The Riksbank is now fully aligned with the Yellen Fed in Washington, which argues that raising rates to stop asset bubbles merely destroys jobs for little useful purpose. Both are pitted against the Bank for International Settlements. The BIS says radical monetary stimulus may help individual countries but only by displacing the problem onto others, leading to a “Pareto sub-optimal” for the world as a whole. It warns that speculative excess is reaching pre-Lehman levels, and calls on global central banks to take pre-emptive action before the bubbles becomes unmanageable.

What is far from clear is whether the Riksbank can get away with such policies. It may run into harsh criticism from rest of the world if it is seen to engage in “beggar-thy-neighbour” stealth devaluation at a time when the Swedish economy is expected to grow 2.7pc next year, and has a current account surplus above 7pc of GDP.

Does the BIS think the eurozone is a bubble?  How much tighter should ECB policy be?  As an aside, Sweden’s a good example of why people should never, ever reason from a current account surplus.  It tells us nothing interesting about the business cycle.

Sweden was one of the first central banks to adopt price level targeting, in the early 1930s. In an intellectual sense, the ECB is at least 80 years behind Sweden:

The institution enjoys a prestige beyond its size, a legacy of the great Swedish economists of the early 20th century: Knut Wicksell, Gustav Cassel, Bertil Ohlin and Gunnar Myrdal. It is watched closely as a pioneer in central bank theory.

The bank famously began “price targeting” in the early 1930s after breaking free from the Gold Standard. The revolutionary policy was the precursor of today’s inflation targeting. It enabled Sweden to escape deflation early in the Great Depression, suffering far less damage than countries that stuck doggedly to failed orthodoxies.

And speaking of monetary innovators, the intellectual leader of market monetarism was recently interviewed by Erin Ade on Boom/Bust (at about the 3 minute mark.)  He is just as good at explaining ideas verbally as in print. But he looks slightly different from what I expected.

HT:  TravisV, Saturos

Readers of TheMoneyIllusion are not confused

Headline from Yahoo:

Yields Rally as FOMC Signals QE Likely to End in October

Is that the real reason yields rallied?  Stocks also rallied, and the media reported the statement was slightly more expansionary than expected, due to the “considerable period” language.

The job market is improving faster for the least skilled

Some pessimists worry that we are merely creating “McJobs” for the least skilled. Others worry that most of the new jobs require lots of skills, leaving the unskilled without good prospects.  Most pessimists worry about both problems, even if it isn’t internally consistent.  Just as pessimists worry that machines will take the place of workers in Japan, and that there won’t be enough young people to take care of the elderly.

I’m an optimist; so let me take a stab at this Matt O’Brien comment that Tyler Cowen linked to:

Of course, “us” is a relative term. Unemployment fell from 3.3 to 3.2 percent for people with a bachelor’s degree or more, and from 5.7 to 5.5 percent for those with some college. But it actually rose from 6.3 to 6.5 percent for people with only a high school diploma, and from 8.9 to 9.1 percent for those without one.

In other words, our polarized labor market isn’t getting any less so. The Cleveland Fed points out that routine jobs disappeared during the Great Recession, and haven’t come back during the not-so-great-recovery — which partly explains why our economic upswing, such as it is, has been much less dramatic for the least educated.

I certainly agree with Matt that the labor market is kind of lousy, despite the recent record set in employment.  But I also think one month is too short of time to draw any conclusions.  Let’s look at how the job market has improved for each of these groups, compared to the worst of the recession.  In each case, I look at unemployment rates for people above age 25 (because that’s all I could find, and because it seems more consistent):

Less that high school:   17.9% —> 8.5%

High school grad:   11.9% —>  6.1%

Overall:   9.2% —>  4.9%

Some college:    8.8% —>  5.5%

College grad:   5.3% —> 3.0%

The reduction in the unemployment rate has been much bigger for the less skilled workers.  You’d expect that given that they started at a much higher rate. Unemployment cannot go below zero.  But it’s also true that even the relative change has been considerably bigger for the less skilled.  The least skilled workers saw their unemployment rates fall by more than in half.  The high school grads by nearly half. The two college groups saw unemployment fall by even less.

Obviously in an absolute sense the less skilled are doing far worse.  But their abysmal job situation actually seems to be improving faster than for the more skilled groups.  It’s an easy mistake to make.  When I was young I often heard people say, “the rich get richer and the poor get poorer.”  Confusing levels with changes.  Actually, in 1969 the poor and working class had been gaining on the rich for 40 years.

Mark Sadowski nails it again

The GDP data just came in, and Mark Sadowski continues to demolish the experts:

Actual RGDP growth:  minus 1.0%

Mark Sadowski’s initial forecast:  minus 1.4%

Initial Consensus:  PLUS 1.0% to 1.5% (depending on source)

NGDP came in at 0.3%, slightly below Mark’s 0.5%.  I don’t have the consensus, but it must be around 3.0%

In the 4th quarter of 2013 the consensus RGDP growth rate was around 3.8% or 3.9%.  Mark forecast 2.5% and the actual was 2.6%.  Mark forecast 4.2% NGDP growth, and the actual was 4.2% NGDP growth.

I can only find one other Sadowski GDP forecast, for the second quarter of 2013.  The consensus called for 1.0% RGDP growth, Mark forecast 2.0%, and the actual was 2.5%.

If he’s not snapped up by an investment bank in the next 30 days I am going to have to revise my views on the EMH.  Don’t make me do that.  Mark understands government data better than anyone I’ve ever met.

PS.  I notice that the fall in NGDI was entirely due to a collapse of corporate profits, which fell 10% in the first quarter (from the previous quarter.)  That’s an annual rate of decline of 34.4%!!  Does anyone know the explanation for that? Was it measurement error?  Does it comport with the numbers being reported on Wall Street?

Let’s all be Germans

Over at Econlog I have a post discussing the German jobs miracle.  One counterargument is that all countries can’t be like Germany, because their success comes from a large current account surplus. And if there is one thing that all economists agree on, it’s that all countries cannot simultaneously run CA surpluses.

Those who have not studied economics might be surprised to discover that standard economic theory suggests CA surpluses have no impact on job creation.  Many people draw the wrong implication from an accounting identity:

GDP = C + I + G + (X – M),     Where (X – M) is the CA surplus.

It looks like a bigger CA surplus would boost GDP.  That ignores the ceteris paribus problem. Here’s another accounting identity:

I  = Sp + (T-G) + (M-X)   [money for investment comes from private, government, and foreign saving]

If one ignores the ceteris paribus problem, then it looks like a CA surplus reduces investment dollar for dollar.  So accounting identities get us nowhere.  There is a slightly more sophisticated argument that CA surpluses can have a negative impact on foreign AD when the entire world is at the zero bound.  The argument is that CA surpluses created by thrifty Germans will increase global saving and depress global AD for old Keynesian reasons.  The monetary authority is assumed not to offset the effect.

I’m skeptical of that argument, but even if true it’s a cyclical argument not a secular argument.  If other countries reduce their W/NGDP ratios, then in the long run the number of hours worked should rise.  Remember that macro is not a zero sum game; all countries can simultaneously increase employment and output.  And even if central banks are letting inflation run a bit below target, surely there are limits as to how low they’ll allow inflation to go.  Cut wages by more than that and you create jobs.

By the way, I’m not suggesting everyone should work super hard; German hours per year are fairly low. Their jobs miracle comes from creating more jobs, having fewer people who are completely unemployed.  Nor am I suggesting lower living standards.  The share of income going to labor in Germany has been rising.  If total income also rises (as it should with more employment), then Germans are better off.  (Unless you don’t think unemployment is a problem.)

It’s ironic that back in the golden 1990s the Clinton Democrats favored many of these policies. They advocated thrift (budget surpluses).  They advocated moving people from welfare to work with welfare reforms and low wage subsidies.  Finally a major country adopts the Clinton Democrat plan and achieves great success in job creation relative to other developed economies.  And how do Democrats react?  All they seem to do today is trash the German model:  ”Run deficits”, “put more people on welfare and food stamps”, “raise the minimum wage”, “low wage subsides just help fat cat corporations pay workers less.”  Very sad.

Take a look at one of the very first articles at the new website “The Upshot”

Sometimes all I have to do is read a post title.