The mouse that roared

One of my best commenters is called “Britmouse.”  He frequently helps me to better understand what’s going on with the UK economy.  Now he has a new blog, and came out with both guns blazing in his first post:

The Office for National Statistics’ current data on quarterly UK nominal GDP growth in 2008 is as follows, at Seasonally Adjusted Annual Rates:

  • Quarter 1: 4.3%
  • Quarter 2: -1.7%
  • Quarter 3: -5.2%
  • Quarter 4: -3.4%

That collapse in nominal spending has no precedent in the data, and is certainly worse than anything since the 1930s. . . .

Let’s review the Bank of England’s base rate decisions during the first three quarters of 2008:
  • January: Bank Rate left at 5.5%
  • February: Bank Rate lowered to 5.25%
  • March: Bank Rate left at 5.25%
  • April: Bank Rate lowered to 5%
  • May: Bank Rate left at 5%
  • June: Bank Rate left at 5%
  • July: Bank Rate left at 5%
  • August: Bank Rate left at 5%
  • September: Bank Rate left at 5%

.  .  .  During September 2008, Lehman Brothers failed. In October, already well behind the curve, the Bank of England dramatically cut the base rate to… 4.5%.

That’s far worse than the Fed.  In the US the downturn in NGDP occurred a bit later, and the rates during this period were much lower.  The entire post is worth reading.

In another post he points out that both Labour and the Conservatives could have raised the inflation target (or switched to NGDP targeting) whenever they wished.

(A note to those who call for a higher inflation target: HM Treasury, not the Bank, has the legal power to change the specific interpretation of “price stability” at any time; there would be no need even for Parliamentary approval. It is easier to change the inflation target than to change the fiscal budget!)

Some commenters have argued that Bush and Obama shouldn’t be blamed for the recession, as they don’t control Fed policy.  The British case suggests this isn’t the real problem; rather the passivity of the executive branch represents either ignorance about monetary policy or fear of being labeled “inflationistas.”  If it’s fear of bad publicity, this strongly supports the argument I made in my National Affairs article; the strongest argument against inflation targeting is that the public has no idea what it is, and will resist attempts to intentionally raise the inflation target during adverse supply shocks.

Here he describes the new NGDP data for Britain:

For the year as a whole we have an estimate of 3.1% NGDP growth against a 2.3% deflator:

In my view that means Britain has serious problems on both the supply and demand side.  However the inflation numbers are biased by a VAT increase in early 2011.

Britmouse also criticizes Wren-Lewis’s advocacy of fiscal stimulus.  Because I went a bit overboard bashing a Wren-Lewis post a few months back, here I’ll say some good things about him.  Here is Wren-Lewis:

A rather better argument (see the first comment on this post) is that if fiscal policy had not tightened in 2010, the Monetary Policy Committee (MPC) of the Bank of England would have raised interest rates in 2011. In the Spring of that year, 3 of the 9 members voted for an interest rate rise from the zero bound floor level of 0.5%. If the economy had been stronger because of less austerity, would two or more committee members have switched sides, leading to an increase in UK interest rates?

A think it is far from clear that they would. Inflation was high in part because of the result of those austerity measures. VAT was increased from 17.5% to 20% at the beginning of 2011, which probably added around 1% to inflation in 2011. You could argue that as this was always going to be a temporary influence, it was neither here nor there as far as MPC decisions were concerned. I think this would be a little naive. One of the major concerns of MPC members around that time was the loss of reputation that the MPC might suffer if inflation got too high, and here I think the actual numbers mattered.

I’ve always conceded that fiscal stimulus that shifts SRAS to the right might work under certain conditions.  Those conditions would be a central bank that targets inflation out of either stupidity or public pressure.  In Britain they call these policymakers “inflation nutters.”  Examples of this sort of fiscal stimulus include employer-side payroll tax cuts and VAT cuts.  This is a supply-side policy that works through short run wage and price stickiness, and shouldn’t be confused with supply-side policies that work in the long run by changing incentives.   Here’s another interesting Wren-Lewis post:

Last and not least, the Chancellor should instigate an immediate investigation into the possibility of replacing the inflation target by a nominal GDP target. There is a significant amount of evidence, from the Great Depression and more recently, that expectations of rising prices can provide a strong stimulus to demand. A nominal GDP target, suitably constructed, could help generate those expectations.

With Britmouse, we have another excellent market monetarist blog.  It is gratifying to see all the interest in market monetarism, particularly in the Anglophone and Nordic countries.

Paul Krugman recently had this to say:

On the academic side: look, to a first approximation nobody ever admits being wrong about anything. But my sense is that a lot of younger economists are aware, even if they don’t dare say so, that freshwater macro has been a great embarrassment these past four years, and that liquidity-trap Keynesianism has done very well. This will affect future research; it will, over time, break the stranglehold of decadent Lucasian doctrine on the journals.

I believe that “liquidity-trap Keynesianism” is one of the major causes of the Great Recession—it contributed greatly to the monetary policy passivity.  It’s been an abject failure.  But I agree with Krugman’s deeper point.  This recession will lead younger economists to rethink the conventional wisdom.  I’ve recently been doing a lot of speaking at other colleges, and I’m seeing lots of interest in the ideas of market monetarists among grad students.  I also get many emails from macroeconomics students all over the world.  I’ve recently received two different emails from textbook writers who plan to add market monetarism to their EC101 texts.

In my view the major battle going forward in mainstream macro will be between those who favor monetary policy rules as a demand-side stabilization tool, and those who favor fiscal stimulus.  On the fringes you’ll have the MMTers, the Austrians, the RBC-types, etc.  But they’ll never have much influence, because they don’t offer (stabilization) policy advice that is taken seriously in the halls of government.

Update: I forget to mention Nicolas Goetzmann’s excellent work in France.  Here’s the abstract of a piece he wrote for Atlantico:

Dans son discours du 17 mars, François Hollande annonce son intention de réformer la BCE. Cette dernière devrait selon lui agir selon un double mandat afin de contenir l’inflation tout en soutenant la croissance. Derrière la promesse électorale, quelles implications politiques réelles ?

Google translate:  “In his speech on March 17, Francois Hollande announced its intention to reform the ECB. This he said should act according to a dual mandate to contain inflation while sustaining growth. Behind the campaign promise, real policy implications?”


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25 Responses to “The mouse that roared”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. March 2012 at 10:29

    I’ve been so focused on eurozone data that I hadn’t noticed this implosion in Bristish NGDP. It’s absolutuely breathtaking (I mena that in the worst way). 2.5% in three quarters is a disaster.

    Now mind you the Keynesians will spin this one way and the Austrians/RBCers the other. Can we Monetarists make hay out of this?

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. March 2012 at 10:31

    Obviously I’m suffering from finger dislexia. Excuse me.

  3. Gravatar of Steve Steve
    24. March 2012 at 11:39

    So much to respond to in this post.

    “July: Bank Rate left at 5%
    August: Bank Rate left at 5%
    September: Bank Rate left at 5%”

    That’s another one of the reasons the Fed was under so much pressure to “do nothing” in Q3 2008. They were already “easy” compared to the rest of the world, and the USD was paying the price. It all reversed quickly once people realized the Fed was less wrong rather than more wrong.

    Krugman: “On the academic side: look, to a first approximation nobody ever admits being wrong about anything.”

    Krugman: “liquidity-trap Keynesianism has done very well.”

    This rank hypocrisy is why I can’t stand Krugman. You are more genteel about it than I would be.

  4. Gravatar of Steve Steve
    24. March 2012 at 11:40

    I forgot to comment on this:

    “In his speech on March 17, Francois Hollande announced its intention to reform the ECB. This he said should act according to a dual mandate to contain inflation while sustaining growth. Behind the campaign promise, real policy implications?”

    SHOWDOWN WITH THE BUNDESBANK? What happens when France and Germany realize that they can’t live with the same currency?

  5. Gravatar of Becky Hargrove Becky Hargrove
    24. March 2012 at 12:54

    “The major battle going forward in mainstream macro” does seem to be increasingly clarified. However, with a little luck, the ‘least of these’ will once again be included in the total picture of economic life, when enough voices finally speak up for them: the marginalized, the isolated, the homeless, those who cannot find work, young people who think prostitution is the only way to survive…God be with them in these crucial years ahead.

  6. Gravatar of OGT OGT
    24. March 2012 at 13:39

    The good young US Econ-bloggers seem to be more inclined toward De Long-Krugman L-trap Keynesianism, like Daniel Kuehn and Noah Smith. Or heterodoxy like my favorite, Steve Waldman.

    How representative they are of other younger researchers I don’t know.

  7. Gravatar of Benjamin Cole Benjamin Cole
    24. March 2012 at 13:42

    Congrats to Britmouse!!!

    Sumner’s reasoning about targeting NGDP for PR reasons is sound. The public has been confused about inflation, what with so much pompous pettifogging and sanctimonious sermonettes from Theo-Monetarists polluting the airwaves. The layman knows his paycheck is fixed for a year at best, but inflation is not. Telling someone to take wage cuts for the general good….

    It doesn’t help that whole platoons of good economists–Meltzer, Friedman, Bernanke, Mishkin, Taylor—who advocated for QE/ inflation in Japan now are mute in the USA or worse (Friedman, of course, has sadly passed on, and many suspect his independent nature would have allowed him to proclaim in favor of NGDP targeting or QE in the USA).

    For econ-gov’t textbook writers out there, or other deep thinkers, I recommend this simple pyramid for national prosperity. I also call this my “three-legged stool of prosperity.” I think it holds water.

    1. Free market orientation of government policies, in general.
    2. Market Monetarist monetary policy
    3. Honest government, culture with work ethic

    I suppose 3 could be split into 3 and 4, and then we have a square of prosperity.

    It is interesting to apply these three criteria to different national economies. One sees Japan—strong on 1 and 3, but weak on 2. The USA okay on 1 and 3, but floundered recently on 2.

    A Sweden (until recent market reforms) might score well on 2 and 3, and lack a bit on 1. Mexico might be okay 2, and a hard-working population, but has a hopelessly corrupt government, undermining 1 and 3.

    China is a cypher. According to the Hong Kong Monetary Authority, China’s central bank is growth-oriented, so perhaps they are strong on 2. They have been freeing up (people say), so 1 is getting better. And they have work ethic. Honest government?–complaints are up. And the Chinese CP still controls every enterprise in China, either through board seats or voting stock, or otherwise.

    For me, the rise of China and the stagnation of Japan suggest just how powerful monetary policy is. Even hidebound, red-tape infested India has been obtaining growth of late aided by an expansive monetary policy.

    It may be monetary policy and a work-ethic culture can trump other factors, as long as government is not too corrupt

  8. Gravatar of anonymous anonymous
    24. March 2012 at 14:35

    From an interview with Vince Cable, currently the UK’s business secretary:

    “Asked about a suggestion that the Bank of England’s mandate to tackle inflation could be replaced by a broader target of national income, or more specifically “nominal GDP”, Cable said: “I am attracted by it.”

    He said he could not go further or he would set hares running about recasting macroeconomic policy in the press. Even so, Osborne may be displeased about this encroachment into a field which is a Treasury responsibility.”

    As Britmouse has pointed out, the Bank of England’s inflation target can be easily changed by the government.

    A nominal GDP target would be a step in the right direction.

    http://www.guardian.co.uk/politics/2012/mar/24/vince-cable-coalition-banking-row

  9. Gravatar of StatsGuy StatsGuy
    24. March 2012 at 15:16

    ” the strongest argument against inflation targeting is that the public has no idea what it is, and will resist attempts to intentionally raise the inflation target during adverse supply shocks”

    I saw a slightly different argument that caught my attention – savers being punished. I’ve heard this before, but it was framed slightly differently this time… to wit:

    The system is rigged so that TBTF institutions can take risks at taxpayer expense, with the bailout taking the form of a combination of higher inflation (to restore nominal growth) and taxes, thus depleting real savings. Common people did not reap the rewards of wall street largesse, but they see inflation taxing their savings, and thus believe that inflation is a mechanism that exists to subsidize wall street excess.

    It’s not that regular people don’t understand inflation, it’s that they understand it too well – their hatred of inflation is their attempt to rebel against the failure of the system to adequately punish wall street.

    The specific example: the four largest banks conducted massive crime (forgery, perjury, mail fraud, maybe racketeering) in the robosigning fiasco. The result? A civil settlement.

    If a private citizen had defrauded one of the four largest banks, that citizen would not only be fined, but be in jail and have lost their jobs.

    The argument is this: awareness of persistent corruption on wall street ==> massive resentment of inflation.

    It’s an interesting argument. The public might be willing to tolerate some inflation (and job growth) if they saw 1000 wall street bankers put away for fifteen years.

  10. Gravatar of marcus nunes marcus nunes
    24. March 2012 at 15:35

    Scott; You said:
    “In my view the major battle going forward in mainstream macro will be between those who favor monetary policy rules as a demand-side stabilization tool, and those who favor fiscal stimulus. On the fringes you’ll have the MMTers, the Austrians, the RBC-types, etc. But they’ll never have much influence, because they don’t offer (stabilization) policy advice that is taken seriously in the halls of government”.
    I just made a “plea” that those advocating fiscal stimulus should band together and push for MP:
    http://thefaintofheart.wordpress.com/2012/03/24/a-man-for-any-season-before-it-was-about-expansionary-austerity-now-it%C2%B4s-convenient-to-call-for-self-financing-fiscal-stimulus/

  11. Gravatar of Bonnie Bonnie
    24. March 2012 at 16:29

    Stats:

    I violently agree that lower inflation is probably the best way to go in general and as warranted. What I object to is the approach that was taken to get there, you know, having the preference for ~1% inflation by monetary policymakers sprung on us in the midst of a crisis, as if that were the only thing that mattered. It caused an enormous amount of confusion among intellectuals and in the political system, markets and everywhere else for that matter; I just don’t think people expected the Fed to just stand by and let NGDP plummet for nearly 18 months straight.

    The “savers” argument does have a place in this discussion, but because of the way it happened, a lot of unsuspecting people got ripped off, many of nearly everything they had, banks included. Two wrongs just don’t make a right.

  12. Gravatar of Morgan Warstler Morgan Warstler
    24. March 2012 at 16:49

    “It’s not that regular people don’t understand inflation, it’s that they understand it too well – their hatred of inflation is their attempt to rebel against the failure of the system to adequately punish wall street.”

    This is EXACTLY right.

    It is violently correct because the those that spend some time in the 80-99%, are the A power.

    They vote and have 4x the $ of the B power (the top 1%).

    —-

    They KNOW Scott wants to print money to help either:

    1. the B power – see above
    2. the C power – the bottom 60% who don’t own anything and vote during blue moons.

    And unless Scott gets down and kisses both their cheeks in a very sensuous way, they will continue to make his dreams impossible.

    The OTHER thing they know is that printing money makes life easier on public employees and govt. debt in general.

    THEY WANT to see the govt. shrink simply becuase the cost of borrowing goes up.

    Yu are guy with cash in back – you want:

    1. gvt to shrink
    2. to get 5% on your money YoY

    Printing money is against your wishes.

    —-

    The last thing to note is this: Scott is FORCED to root for Obama in 2012.

    If Obama loses, I have been right all along!

    And if I’m right it means that the GOP spending all the money, the Tea Party flexing their muscles, and the Fed being a biased anti-Democrat institution is all enough of a fact, that it OUTWEIGHS Scott’s terror that econ crisis breeds liberalism.

    And if Scott doesn’t have that assumption to underlie his strategy, he’s screwed with his pants on.

  13. Gravatar of ssumner ssumner
    24. March 2012 at 16:54

    Mark, I’m not sure if you noticed but those are 2008 figures.

    Steve, Yes, the low interest rates equal easy money myth played a role.

    The eurozone crisis is far from over–it will be interesting to see how it plays out.

    Becky, Amen.

    OGT, It’s discouraging that smart young people have bought into the liquidity trap snake oil. Out in the real world (i.e the markets) no one seriously disputes that fiat money central banks can always inflate; it’s simply a question of whether they want to. I think even Krugman and DeLong understand that on some level.

    Ben, Good points.

    Anonymous, Thanks, that’s very interesting.

    Statsguy, You said;

    “It’s not that regular people don’t understand inflation, it’s that they understand it too well”

    No, they confuse inflation with supply shocks. They think inflation hurts living standards. If both wages and prices rise by 10% most people don’t think the cost of living has increased.

    Marcus, Thanks for the link.

  14. Gravatar of ssumner ssumner
    24. March 2012 at 16:55

    Morgan, I’m not rooting for Obama in 2012, although Romney’s views are so similar I’m not sure it matters.

  15. Gravatar of Morgan Warstler Morgan Warstler
    24. March 2012 at 18:01

    Scott, if Obama loses, you have been wrong. Period. The end.

    You underlie ALL your policy conclusions from a base assumption that the owners of society (Tea Party / Main Street) will not be able to use massive fiscal deficits to drown the gvt. in the bathtub.

    You are a child of the 60-70′s, I am a child of the 70′s-80′s.

    One of us is right.

    You might not LIKE that we can starve out the liberals (assuming it is possible), but your ideas are based on the premise that we CANNOT starve out the liberals.

    If I’m proven right, that we can starve them out – force all Dems to either be Bill Clinton, or get ridden out on a rail..

    Then we can discuss the morality of of it, we can discuss the efficiency and time lines of it, but until Nov2012, one of us is right and one of us is wrong.

    And that is our bet.

  16. Gravatar of W. Peden W. Peden
    24. March 2012 at 19:34

    anonymous,

    Vince Cable has the advantage over someone like George Osborne in that he’s a trained economist and has been employed as such in the past. I remember seeing him give a lecture in 2010 and being impressed- he had a broad & deep familiarity with Adam Smith, Scottish economic history since 1980 and the disproportionate burden of regulation on small businesses. He’s a bit of a leftie firecannon at times, but overall I’m glad he’s in government.

  17. Gravatar of Postkey Postkey
    25. March 2012 at 01:37

    This is what a ‘monetarist’ thinks about ‘Krugman’s liquidity trap’.

    “According to that column, a classic liquidity trap occurs when “a zero short-term interest rate isn’t low enough to restore full employment”. Krugman – who won the Nobel economics prize in 2008 – is widely regarded as the USA’s most articulate and effective spokesman for Keynesian ideas. For those uninitiated in macro-economic theory his words are taken as gospel. However, the trap called “classic” by Krugman is no such thing.
    Krugman talks about the “short-term interest rate”, by which he means the interest rate set by the central bank. Yet, Keynes’ trap arises when increases in the quantity of money cannot push nominal bond yields beneath a certain level (which must be above zero) because investors have perverse expectations about the price of bonds. Krugman’s trap holds when the central bank cannot, by increasing the monetary base, cut the short-term interest rate beneath zero. That leads to an unacceptably high real interest rate if people are concerned about falling prices. Krugman’s trap is not at all a classic trap originating in the debates of the 1930s. It is an entirely new trap that he has invented. Keynes’ trap is implausible and certainly does not exist today.
    Modern Keynesians are untrustworthy, if they can so wilfully misunderstand and misrepresent their supposed intellectual hero. The supposed “liquidity trap” is a plaything of left-wing intellectuals, not an argument for the subversion of a hugely successful capitalist economic system. In the form suggested by Keynes the liquidity trap does not exist today. In the form suggested by Krugman, his so-called liquidity trap does not invalidate monetary policy because monetary policy can still be effective using instruments other than short-term interest rates.”

    http://www.imr-ltd.com/graphics/recentresearch/article26.pdf

  18. Gravatar of ssumner ssumner
    25. March 2012 at 05:26

    Morgan, That’s your bet, not mine.

    Postkey, Thanks, that’s a good quotation.

  19. Gravatar of Morgan Warstler Morgan Warstler
    25. March 2012 at 06:21

    You’ve made your intellectual bed Scott, and I’ve made mine.

    If I lose the bet, I’ll be gracious, and when you lose I expect you to bow to my supreme political economy analysis.

  20. Gravatar of Aeon221 Aeon221
    25. March 2012 at 09:01

    Here’s another young person who studied economics (at Emory, as it happens, where we shared our building with the theater department) and has taken to market monetarism.

    So, you know, bonus data point. I tend to argue in favor of it on forums (a mostly overlooked zone of discourse in the wider media, but no less interesting) rather than in blogs.

    I think Krugman was entirely incorrect with his statement about the rise of Keynesian thought of any sort. I know several Keynesians who, over the course of the crisis, have fallen away from the doctrine in favor of a more explicitly monetarist viewpoint. NGDP targeting in particular has gone from a radical proposal to received wisdom within a stunningly short period of time.

    All anecdotal of course, but what isn’t on the internet.

    I will say that it has been amazing watching and even participating (albeit on the fringe as a commentator) in the development of a new school of economic thought. Very cool.

  21. Gravatar of StatsGuy StatsGuy
    25. March 2012 at 10:57

    Scott:

    “No, they confuse inflation with supply shocks.”

    In a sense, you are of course correct. But, in a sense, you are not. I am reminded of optimal punishment games in IO. Imagine you are colluding with a partner, and the partner cheats. You threatened to punish him, but that punishment is costly. It’s always optimal to renegotiate, and write a new contract, except for reputation effects.

    The same is true with the middle class. They have a deal with Wall Street that big finance doesn’t abuse its position too much. But banks cheated. Now that they’ve abused that position, and regulators failed to punish them, people realized they could punish by imploding everything, but the cost is very high. Some are willing to pay the cost, some are not.

    Your comment that they confuse supply effects is correct, but in the long term they are the same – a situation in which big finance always gets to take subsidized risks (and commit crimes) without punishment translates into a massive transfer of purchasing power to individuals whose only activity is white collar crime. In this sense, this is a massive supply tax because these people would otherwise be engaged in productive activity. A permanent subsidy for this activity translates into a permanent supply reduction, with a tax to subsidize non-productive financial activity.

    The optimal response to this, of course, is to fix the problem at its source. However, the failure to punish via regulatory and judicial means was so blatant that many people have given up on good regulation/laws and want to punish non-optimally (by going to a gold standard).

    The more I watch this debate, the more I see these linkages being made – largely by Morgan’s crowd. But Morgan’s crowd doesn’t have the capability to approach this with consideration, so it’s all or nothing – and now it’s nothing. The Fed is one of the major issues in the presidential campaign. That is NOT normal.

    Bad regulation contracts the pareto frontier.

  22. Gravatar of Cable and Hutton on Nominal GDP Targeting « uneconomical Cable and Hutton on Nominal GDP Targeting « uneconomical
    25. March 2012 at 13:54

    [...] to commenter “anonymous” on Scott’s blog. Share this:TwitterFacebookLike this:LikeBe the first to like this post. [...]

  23. Gravatar of Britmouse Britmouse
    25. March 2012 at 14:02

    Scott, thank you for your generous words of support!

    anonymous – great find, I’ve posted a transcript of the relevant part of the interview.

  24. Gravatar of Master of None Master of None
    26. March 2012 at 09:29

    I am sick of this whole exercise. We are going in circles (granted, ever-expanding circles, but circles nonetheless).

    Let’s just remove the word “inflation” from the English language. In its place, one may either use “wage growth” or “increase in the cost of living”.

    That will let the Fed target an increase in wage growth without threat of being tried for treason.

  25. Gravatar of ssumner ssumner
    27. March 2012 at 05:47

    Aeon221, Thanks, That’s great to hear.

    Statsguy, I just think you greatly overrate the public’s awareness of this issue. Even most college educated people I talk to have no idea what inflation is, what the Fed does, etc.

    I don’t think the public ever felt they had a deal with the titans of finance.

    Britmouse, Great blog!

    Master of none, I’m all for removing ‘inflation’ from the language. Or at least requiring: money inflation, price inflation, wage inflation, profit inflation, commodity price inflation, etc.)

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