Archive for the Category Misc.


The failed 2013 Keynesian experiment: even worse than you thought

When 2013 ended I couldn’t help pointing out that we passed Krugman’s famous “test” of market monetarism with flying colors.  GDP growth was initially estimated as being slightly higher in 2013 than 2012 (comparing Q4 to Q4.)

Now the annual revisions are in for 2012 and 2013, and the new numbers look even worse for the Keynesians.  Let’s start with the numbers that Keynesians always (wrongly) use as proxies for demand growth—RGDP:

2011:4 to 2012:4:   1.60%

2012:4 to 2013:3:  3.13%

So real GDP growth almost doubled under the weight of higher income taxes, higher payroll taxes and the famous “sequester” which reduced government spending.  I predict this will do nothing to shake the consensus Justin Wolfers discusses here.

The theoretically appropriate indicator is of course NGDP:

2011:4 to 2012:4:   3.47%

2012:4 to 2013:3:  4.57%

I was asked if the strong growth in Q2 caused me to revise my belief in the Great Stagnation.  Not really, as it is based on long term trends.  Or at least not very much.  (Don’t forget Q1 was very weak.)  I still think we are trending at about 3% NGDP and 1.2% RGDP growth over the next few decades.  With immigration reform, both those numbers might rise a few tenths of a percent.

Of course this means low nominal interest rates for the rest of my life.  I doubt I’ll ever again see T-bills yield 5%.  I hope I’m wrong.

Mark Sadowski missed on the GDP numbers this morning (he had RGDP up 1.6%) but given the massive revisions we often see, perhaps we should wait a bit.  He was far and away the best on Q1, but we didn’t know the actual Q1 RGDP figure was negative 2.1% until today.  It was originally up 0.1%.

When I started blogging I didn’t know we were in a Great Stagnation.  I still think I was right about the mostly demand-side nature of the 2008-09 recession, but in the early years of blogging I modestly overestimated the size of the output gap.  I think that gap is now mostly closed, and will be completely closed next year.  But keep in mind aggregate supply and demand can get “entangled,” and also that policies like unemployment insurance and Obamacare can slightly impact trend RGDP.  So these things are very tough to pin down.

PS. In fairness to the Keynesians, I don’t quite believe that 2012/2013 RGDP growth differential.  I think the BEA overestimated the speed-up in growth in 2013.

PPS.  I have another post on fiscal stimulus at Econlog.

HT:  Commenter Nick

Update:  Commenter Kailer Mullet added this:

The year of Austerity, 2013, had the highest Q4/Q4 (if you use absurd decimal precision) in 10 years.

Does monetary policy explain the British jobs recovery?

There’s been a lot of discussion of the disconnect between British output (which has done poorly over the past 6 years), and total employment, which is reaching new records, and is even at near record levels as a percentage of the population.  After discussing the strong UK jobs growth, Matt Yglesias presents data on the weak RGDP performance, and then comments:

This is a very long time for GDP to recover to its pre-crisis point, and GDP per person is at an almost shockingly low level. This is far worse than the US has done.

There are some different possible interpretations of this. North Sea fossil fuel production is down. Banking has taken a hit everywhere, and it’s a huge share of the British economy. Or perhaps the Keynesian story is right — Cameron and Nick Clegg have kept government spending lower and taxes higher than they should have been, depressing output.

What’s most interesting, however, is not the dispute but two things that look indisputable. One is that something (or perhaps several things) have gone badly wrong for the British economy. The other is that the Bank of England has managed to get the country to weather that bad stuff without endless mass unemployment. Monetary policy doesn’t solve all problems. But the very fact that the UK economy has so many problems, underscores the reality that monetary policy is extremely potent in fighting the particular scourge of unemployment. Here in the USA, productivity and total output have gone much better, but monetary policy has been less aggressive and joblessness is a bigger problem despite a better overall economy.

There are some concepts lurking in the background here, such as nominal GDP and sticky nominal wages.  Yglesias sometimes presents quasi-MM arguments, but couched in more theoretically neutral language.  In any case, I like the way he described the importance of monetary policy in the final paragraph.  I like it a lot. Good monetary policy will keep the labor market in equilibrium, even if RGDP is being battered by real problems.

But no matter how much I like his conclusions, I must in good conscience point out that he’s slightly oversold his case here.  I had exactly the same view until I looked at the data.  I’m going to argue that he’s right, but for the UK/eurozone comparison, not the UK/US comparison.  Here are NGDP growth rates (total) between 2008:1 and 2014:1:

Eurozone  +4.68%

France   +6.62%

Britain  +12.43%

USA    +15.97%

I separated out France, as it’s the European economy most similar to Britain.  They have almost identical populations, GDPs and GDPs per capita.  I think the more expansionary monetary policy does explain why Britain has done better than France and the eurozone, or at least it’s part of the story.  But I see no evidence that UK monetary policy has been any more stimulative than in the US, at least in the sense that would be of importance to market monetarists—NGDP growth.  So why has Britain done better on the jobs front?  Very simple, their wage growth has been significantly more restrained.  Why?  I have no idea.  But in an accounting sense, that’s the explanation.  It might be viewed as a bit of an embarrassment to MMs, as we don’t have an explanation.  But the Keynesians don’t either, and even worse, the left wing of Keynesianism says wage restraint is contractionary.  At least we say it’s expansionary.

Britain a weird country with one really, really positive supply side fundamental–flexible labor markets.  And one really, really negative supply-side fundamental–horrible worker productivity. And it nets out to pretty decent job creation and poor output growth.

If you use the MM model to compare countries, you sort of implicitly assume similar labor markets. Then the country with the faster NGDP growth will have more job creation.  But of course labor markets are not all equal, and some of the inter-country differences in employment will be due to wages, and only a portion will be due to NGDP growth differentials.  Interestingly, none of labor mystery is explained by productivity.  But when you turn to real GDP, then you look at productivity and employment.

Britmouse has a related post:

There is an interesting asymmetry in how people read the macro data.

For a given increase in aggregate nominal spending (income) I think it would be generally agreed that “what we want to see” is a higher volume of output and not much inflation.  Does anybody disagree? Anybody out there who would prefer the trade-off shifts towards higher inflation and lower output growth?  No?

OK.  For a given increase in aggregate nominal income (spending) we can consider the same trade-off between employment and wages.  I had taken it as given that we had a depressed labour market and so “what we want to see” is that increases in aggregate income will translate primarily into higher employment.

Then he presents data on flat hourly wages and discusses how virtually all of the nominal income growth is feeding into jobs, jobs, jobs.  But the reaction from the left puzzles him:

Yet this is seen somehow as a bad thing, see, for example the Guardian here, which puzzles me.  Do you have a sticky wage model of the labour market, in which AD shocks can raise/lower employment, or not?   Is higher employment in 2014 a good thing, or not?   These questions have simple answers for this simpleton blogger.

I can never figure liberals out.  They say unemployment is far worse than inflation. It destroys a man’s spirit.  It’s just plain psychologically devastating in all sorts of ways, even with unemployment compensation programs. Then I suggest replacing the minimum wage and welfare with jobs for everyone and big hourly wage subsidies, and liberals respond; “But isn’t it punitive to make people work?  If the workers aren’t very productive, why not just left them enjoy leisure time with a guaranteed annual income?”

So like Britmouse I’m confused; is unemployment horrible, or isn’t it?

PS.  If someone told you about that 6 year eurozone NGDP growth total of 4.68% back in early 2008, they either would have thought you were crazy, or that the eurozone was about to go into a depression. But the eurozone VSPs insist that monetary policy has nothing to do with the actual depression that did occur. I’m speechless.

PPS.  And now Lars Christensen is telling us that the ECB wants employers to raise wages. Yeah, that’ll create lots of jobs in a eurozone that has seen 4.68% NGDP growth in 6 years.  In honor of Lars’ newest post, I’m going to invoke Godwin’s law: even the Nazis had a better monetary policy.

Hope for Indonesia

With all the focus on trivial issues in America, we sometimes lose sight of momentous events in the country where the population is closest in size to the US. Indonesia just elected a new President and here are some facts about him:

1.  Born in the summer of 1952

2.  Lived on the island of Java as a boy.

3.  Inspirational speaker, popular with young people.

So far he sounds exactly like Obama.  Posters also look similar.

Screen Shot 2014-07-25 at 1.29.40 PM

Screen Shot 2014-07-25 at 1.28.56 PMBefore you say “here we go again with all that ‘hope and change’”, consider that Jokowi favors market reforms.  Equity markets celebrated his election. There was one difference between the two figures.  One was falsely accused of being a moslem, and the other was falsely accused of not being a moslem.

Oh yeah, this is the Obama poster:

Screen Shot 2014-07-25 at 1.28.44 PM

Mea blog-o

Yesterday I felt horrible, and today I woke up with a fever for the first time in years.  So that’s my excuse.  I was already sick.

Seriously, I haven’t changed my views 180 degrees since yesterday, but I have changed them about 90 degrees.

1.  I still feel the ACA wording was ambiguous.  This probably reflects its size, the way it was rushed through after Scott Brown was elected, and the fact that early in the process most people assumed states would set up the exchanges.  (This article from 2012 discusses its ambiguity, as well as the intent of the drafters.)

2.  I still think the intent was to provide subsidies via the federal exchange.

So why have I somewhat changed my mind?  I don’t think I can continue to claim the courts were engaged in their typical overreach.  There are too many arguments on both sides.  It seems to me now that judges on both sides of the split decision had good arguments.

And commenters raised some issues that I found appealing:

1.  I hate ultra-long bills like Sarbanes-Oxley, Dodd-Frank and the ACA.  Complexity makes for bad governance.  So there is an argument that the Dems are paying the price for their belief in complexity.  The bill was so big they were not careful in drafting it.  Of course that’s not really reason enough to gut the bill.  But it’s an argument I find appealing.

2.  Another argument from commenters (and Tyler Cowen and Ross Douthat) is that it makes sense for courts to interpret laws literally, and then the Congress can change the language if there is a problem.  Now in this case the peculiarities of America politics makes that unlikely, at least in the near future.  But that merely shows the danger of trying to force through major changes in social policy with razor thin margins, and zero support from the other side.  (BTW, both parties have become much more extreme in recent years, so both are to “blame.”  The GOP probably fell further, but with the new Ryan proposal they show signs of having hit bottom and rebounding, whereas the Dems are still falling.  On the other hand if the GOP is serious about impeachment . . . )

3.  Look what happens when I try to help a liberal with whom I strongly disagree about everything. He undercuts me with a very weak response to the second set of revelations.  (He said “same answer.”)  That’s not the answer I would have given in that situation.  Do MIT profs ever do soul-searching?

4.  Perhaps the Dems are weaker on the time inconsistency front than I am.  If I had used subsidies as a club for the states to set up exchanges, I’d sure as hell carry through with the threat.  On the other hand this is the administration that drew a “red line” in the sand with Syria and chemical weapons, so who knows?  And I’m a bit on the stubborn side.

It’s now clear to me that this is not just another case of judicial overreach, but rather a very complex set of factors that are unlikely to ever again come together in exactly the same way.

I’d like to thanks Megan McArdle for providing me with some useful information.

Gun control and Haldig

There are two views on gun control.  Those who study original intent believe that the Second Amendment applies to individuals. That’s clearly what the founders intended.  (Read Joyce Malcolm for the historical background of the 2nd Amendment.)  Those who focus on the precise wording of the amendment are split, but some believe it only applies to citizens who are members of the National Guard.  (I don’t buy that interpretation, but my views are not relevant here.)

So we can assume that when and if Haldig is appealed to the Supreme Court, all the liberal justices who tend to uphold gun control laws will look at the precise wording of the ACA, and deny subsidies to people who purchased insurance through federal exchanges.  And all the conservative justices who often strike down gun control laws will look to Congressional intent, and uphold the subsidies.

I can hardly wait to see the Supreme Court implement the “judicial philosophy” of each member in the Haldig case!  Fortunately the members of the Supreme Court do not let personal political preferences interfere with their decisions.  Shame on you if you expect a split vote based on personal political preferences.