How do you spell ‘market monetarism’ in German?

The relentless march of market monetarism toward world domination continues:

The Bundesbank and political leaders in Berlin, amid mounting anti-German sentiment in the eurozone, conceded what was once unthinkable, allowing Europe’s biggest economy to risk inflation in order to pull the rest of the contracting continent back from the brink.

I guess when all the other alternatives (fiscal union, eurozone breakup, etc) are completely unthinkable, then the “highly undesirable” starts to look pretty good.  Trichet bragged upon leaving office that the ECB’s “stellar counter-inflation record” was “far better than that achieved by the Bundesbank.”  Perhaps the leaders of the Bundesbank have realized that going back to the levels of inflation that they tolerated in the 1990s is not quite as bad as “eurogeddon.”

I suppose Kantoos would know how to spell market monetarism in German.  He has a new post pointing out that the “inflation rate” being targeted by the ECB is just as much of a statistical absurdity as our CPI, indeed even more so.  Read it and weep—the world economy’s fate is being determined by fools.

PS.  For the first year or two of the Great Depression, Austrian economics was quite popular—Hayek was a rival to Keynes.  After all, it looked like a morality tale where speculative excesses in the late 1920s had led to the inevitable hangover in the 1930s.  But as the Depression worsened people lost interest in both austerity and Austrian economics, and looked for pragmatic solutions to the suffering of millions of unemployed workers.  One of those solutions was monetary stimulus.  It looks like the austerity backlash is arriving right on schedule.  It doesn’t take a rocket scientist to understand that one doesn’t solve debt problems by pushing 25% of the workforce into ranks of the jobless.


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79 Responses to “How do you spell ‘market monetarism’ in German?”

  1. Gravatar of John Papola John Papola
    12. May 2012 at 17:58

    Scott,

    Your “ps” is strange.

    A. Maintaining nominal stability is, as you yourself have admitted, a Hayekian policy norm. The massive deflation during the depression wasn’t “Austrian” policy.

    B. since Austrian policies were not followed during the depression (and the new deal’s non/monetary policies made it worse), insinuating that the unemployment was a result of Austrian economics is strange.

    C. Didn’t great Britain balance it’s budget in the early thirties, before it’s recovery took hold?

    D. I seem to recall the world engaging is massive fiscal “stimulus” for the past several years. And yet we have massive unemployment. Laying our current woes at the feet of the Austrians is, again, dubious.

    E. the backlash to so-called “austerity” seems to be happening in countries that haven’t actually cut spending in any real way, like Britain and France, as well as the southern PIGS which have far deeper issues. How does that work? Could it be that the media and keynesian rhetoric of “austerity” (which you are playing into here) has whipped up a frenzy which big government policies are, at least arguably, the cause?

    F. Neither Keynes nor Hayek would have advocated both big spending AND large tax hikes (Britain) to pay for it. This isnt “austerity”. It’s just insanity.

    Lastly, stability of nominal income isn’t about “stimulus”. It’s about monetary equilibrium is it not? Calling your monetary policy “stimulus” is confusing.

  2. Gravatar of ssumner ssumner
    12. May 2012 at 18:24

    John, During the early 1930s Hayek opposed monetary stimulus despite rapidly falling NGDP. Greg Ransom will say he didn’t know a depression and deflation was occurring, but that’s nonsense. Later in his life (the 1970s) he admitted that his policy views during the 1930s were mistaken, and that stimulus had been needed. But by then it was too late, the Keynesians had won. Yes, if the Austrians had followed their own advice in the 1930s their reputation would have held up much better, but they didn’t.

    The GD was caused by tight money. The rhetoric used by policymakers (in the 1930s) supporting that policy regime sounds a lot like the internet Austrians today. Obviously there are thoughtful Austrians who understand that money has been too tight since 2008.

    By “stimulus” I simply mean a more expansionary monetary policy than what’s currently being enacted—aimed at boosting the rate of NGDP growth. I think everyone understands I don’t favor high inflation.

    I agree that fiscal stimulus doens’t work, either then or now (with the obvious exception of massive spending during WWII, but that “worked” in a rather limited way.) Monetary stimulus was needed. The best predictor of when countries started to recover in the 1930s was the year they left the gold standard. The ECB can “print gold”, time to start doing so.

  3. Gravatar of W. Peden W. Peden
    12. May 2012 at 18:39

    (1) I think the Real Bills doctrine was a more important factor in the persistence of deflationary policies during the Great Depression. The Austrian School may have had some influence in Britain and in some continental countries at the time, but I have my doubts: there were plenty of “respectable” theories around in Whitehall during that period, without listening to a bunch of German-sounding foreigners.

    By the time Lionel Robbins brought the Austrian Good News (Bad News?) to Britain, we were on the right path of fiscal responsibility and monetary stimulus.

    (2) I’m relieved that there are Germans who are willing to tolerate a bit of inflation in order to save the European project. It isn’t a solution in itself, but it is a necessary condition of any scenario that doesn’t involve a second severe economic crisis.

  4. Gravatar of dwb dwb
    12. May 2012 at 18:43

    good post.

    p.s. I didn’t know there was a schedule.

    p.p.s I found and old Bloomberg article on the housing bust that noted that during Fed deliberations, the fed saw presentations that showed how bad it could be but decided to focus on inflation instead. but you knew that.

  5. Gravatar of marcus nunes marcus nunes
    12. May 2012 at 18:45

    If you substitute “Stalingrad” for “Austerity”, once again “winter” defeated the Germans. They´ll have to “retreat”!

  6. Gravatar of Benjamin Cole Benjamin Cole
    12. May 2012 at 19:07

    Excellent blogging.

    Print more money and extinguish government debt with it.

    Monetize national debts.

    Damn the torpedoes and debase away!!!

    Seriously, how often does a nation get a chance to monetize the debt and get only positive results? This is actually a great opportunity.

  7. Gravatar of Jim Glass Jim Glass
    12. May 2012 at 19:27

    Price movement-wise, why have the Germans apparently been so much more traumatized by the great inflation that after all ended and led into several years of good times, than the great deflation that led to the collapse of civil society and gave them Hitler? So that they never are going to brook an avoidable point of inflation again. And if risking deflation and endangering civil society around the periphery of Europe is the price of that, so be it.

    Or is this a misreading of them from afar? Just wondering.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. May 2012 at 19:27

    @Scott,
    I believe it is translated as “Markt Monetarismus” but Kantoos can confirm this.

    @John Papola,
    You wrote:
    “C. Didn’t great Britain balance it’s budget in the early thirties, before it’s recovery took hold?”

    The Austerians (vulgar internet Austrians) are also opposed to NGDPLT so examples of monetary led recoveries are kind of beside the point. However since you bring this up I recently used 1931-37 UK as relatively pure example of a monetary led recovery from a “liquidity trap” driven primarily by private domestic demand.

    The UK adopted ZIRP in 1929. Uemployment rose from 8.0% to 16.4% by 1931. In September 1931 the UK abandoned the gold standard which enabled monetary stimulus. Britain was able to leave ZIRP by 1934. GDP expanded by 23.0% between 1931 and 1937 and unemployment fell to 8.5%.

    What’s interesting about this incident is that it started with a fiscal austerity in which total government outlays fell in both real and nominal terms from 1931-1934. And although it rose afterward it rose at a slower rate than GDP. (UK began a very modest rearmament in 1936.) From 1931 to 1937 general government outlays as a percent of GDP fell from 33.1% to 28.6%. So this expansion out of the liquidity trap owes virtually nothing to fiscal expansion.

    More specifically the UK steadily improved its budget balance from 1931-1934 and ran a surplus in 1933 and 1934. The cyclically adjusted budget balance was in surplus throughout 1929-36. Gross government debt as a percent of GDP fell from 179.2% in 1933 to 147.2% in 1937.

    What about exports? The pound preceded most of the major currencies in depreciating in the Depression. But it had become more expensive than the dollar by 1934 and the franc by 1937. And in fact net exports contributed a very minor amount to the initial expansion.

    So to summarize:
    1) UK was in a liquidity trap type situation
    2) Abandonment of the gold permitted quantitative easing.
    3) Fiscal austerity was pursued initially followed by growth in government spending much slower than overall growth
    4) Net exports contributed little to the recovery

    It’s a nice case study for debunking Post Keynesians and MMTers with respect to the impotence of monetary stimulus in a liquidity trap.

  9. Gravatar of Jason Jason
    12. May 2012 at 19:54

    This eventually could look like some sort of weird predestination to future historians. The disaster in Greece creating only bad options besides monetary stimulus forcing the ECB to adopt them as a last resort. And then, supposing the monetary stimulus works in the EU, the Fed becomes less hawkish because of a concrete example and does the same here. The world is saved.

  10. Gravatar of Saturos Saturos
    12. May 2012 at 21:28

    Scott, I hope you’re not knocking austerity, you know it’s necessary. The tragedy is that it’s more painful than it has to be, without monetary accommodation.

    And as a counterweight to the FT report, I hope you’ve read this: http://uk.reuters.com/article/2012/05/12/uk-greece-ecb-idUKBRE84B08S20120512

    Wouldn’t a Greek exit and devaluation be very similar to a default, though, in terms of Greece’s future borrowing capacity?

  11. Gravatar of Greg Ransom Greg Ransom
    12. May 2012 at 23:54

    You are spinning myths — Hayek’s cycle work wasn’t understood, much less “popular”.

    Hayek’s presence in London was a sensation because Hayek actually knew 19th century British monetary theory inside and out — where most Brits, ESP, at Cambridge, knew little more than Marshall. And Hayek forced many Brits to to think or production and the economy as a process in time, with inputs coming in time before outputs.

    Hayek also shook up British economics by exposing Keynes’s incompetence when it came to Keynes’s botched attempt to adapt Wicksell & Mises (e.g. the savings vs investment distinction) into the dominant Marshallian paradigm.

    The land of fantasy gives people happy fairy tales to tell themselves to help justify what they already want to believe.

    But fantasy contributes nothing to helping us make sense of the conceptual space of alternatives within a healthy science.

  12. Gravatar of Greg Ransom Greg Ransom
    13. May 2012 at 00:16

    You are talking a false story again, Scott.

    You have NO excuses at this point.

    Hayek is EXPLICIT.

    He says he was unaware of what turned out to be the FACTS taking place in the US in the early to mid 1930s.

    I.e. what changed what’s Hayek’s understanding of the FACTS, not his understanding of policy,

    As you are WELL AWARE Hayek’s position regarding Britian is VERY different,

    Hayek is explicit. The British situation is a disaster created by WWI inflation & the the idiot idea of attempting to return to gold at parity in 1925. Hayek was AGAINST this. He recognized that it was disastrous, and he pinted out that Ricardo explained why more than a 100 years before.

    But Hayek didn’t come to LSE until SEVEN years later — the policy question SEVEN years later was different than it was in 1925.

    Hayek believed that the FACTS were that Britian after SEVEN years was spcoming close to achieving its goals and that the economy was beginnng to coordinate both internally and in the international context.

    The big issue for Britian was overpriced labor in the internation market context. Hayek believed at the time as a FACTUAL matter that Britian was close to breaking the sticky wages that kept the economy from coordinating, and keep unemployment high — this involved political and social welfare factors as wall as economic.

    Hayek later estimated that he was WRONG about the political viability of this train of policy — not wrong about the economics, not wrong about the likelihood of re-coordination and the breaking of sticky wages, but wrong about the viability of “sticking out” such a program — which Hayek explicity identified as WRONg and a MISTAKE from the get-go.

    You are entitled to your own economics, but not your own facts.

    Scott writes,

    “John, During the early 1930s Hayek opposed monetary stimulus despite rapidly falling NGDP. Greg Ransom will say he didn’t know a depression and deflation was occurring, but that’s nonsense. Later in his life (the 1970s) he admitted that his policy views during the 1930s were mistaken, and that stimulus had been needed. But by then it was too late, the Keynesians had won. Yes, if the Austrians had followed their own advice in the 1930s their reputation would have held up much better, but they didn’t.”

  13. Gravatar of 123 123
    13. May 2012 at 01:48

    Scott, are you saying that BuBa is more market monetarist than Draghi is? This is Draghi one month ago:
    “Question: You mentioned the importance of wage and price adjustments, especially in the periphery, and given that this will probably lead to a period of disinflation, do you share the view that this means – arithmetically – that some of the core countries will actually need higher inflation in order to achieve your objective of “below, but close to, 2%”? How will you explain that to some of the more inflation-phobic populations in the core, if you share this view?

    Draghi: I think that the discussion here is like the one we are having as regards the rebalancing of growth. I think we will have to have rebalancing, with an inflation rate for the euro area which is below, but close to, 2% in the medium term. And this rebalancing should be achieved, ideally, without inflating the good performers. In a sense, I would say that this discussion is like the one where people say that we have low growth in certain areas because the best performers are actually exporting everything, so they should expand domestic demand to absorb some of the supply coming from the other countries. Again, I think the solution would be to make all countries as competitive as the most competitive performer, rather than trying to bring the best performer down.”

  14. Gravatar of RebelEconomist RebelEconomist
    13. May 2012 at 01:59

    Kantoos makes a good point, and I would like to see more asset prices in the price index targeted by central banks – it seems to me that such an index should include practically everything on which we spend money, with some weight at least. But that said, the absence of house prices from the EU HICPs is well-known, and does not prevent national authorities taking other action to restrain house prices. One of the more amusing criticisms of Germany recently (to which I reacted on David Bentley’s blog http://macromarketmusings.blogspot.com/2012/03/germany-stiffs-ecb.html?showComment=1333141499415#c4493444108761276528 ) was that the German authorities were considering action to constrain German credit growth as German house price inflation rose above 5%. As if: “its not fair – we were irresponsible so now you must be irresponsible too to allow us to recover our competitiveness”.

    I would expect the Bundesbank to be sceptical about NGDP targeting.

  15. Gravatar of Bill Woolsey Bill Woolsey
    13. May 2012 at 02:46

    The language of national competitiveness and worry about national inflation rates proves that the Eurozone is not an appropriate (much less optimal) currency areas.

    If it were an appropriate currency area, then the focus would be on getting Greek, Italian, Portuguese, and Spanish workers to move north and meet the growing labor demand in the northern region.

    Worries about “Core” area inflation would make about as much sense as complaining about how the cost of living is higher in New York than in Charleston, South Carolina.

    If all of Europe had a money supply rule, when contant growth, then there prices could rise faster in some regions. Managing the quantity of money so that one region had constant inflation would be possible, of course. How much sense does that make?

    Or what making sure that no price ever rises? That is a rule. Every releative price change only occurs by the money price of the good with the lower relative price falling.

  16. Gravatar of genauer genauer
    13. May 2012 at 03:03

    Scott,
    you need some calibration. “higher inflation” means 2.5% in Germany http://www.expatica.com/de/news/german-news/bundesbank-damns-absurd–comment-on-relaxing-inflation_226789.html

    Trichets comment was about the average 1.5 % inflation in Germany during Euro times.

    The absence of OOH from the HICP is well known, and is the only logic consequence of in most Euro countries not having house price indices in a quality anywhere like needed, or in the US (even UK is not really good)

    If you would have read the proposals, you would have seen that they claim only a 0.15% difference (net aquisitions, see pdf page 68) for a time period form 1996 – 2002. Showing first that HICP is working very well, second that they do not even have recent data from the house price bubble to show some impact beyond the noise level, even forthe bubble of all bubbles.

    A very good example of the brain childs of ivory tower dwellers. Fantazising about mathematical formulas, and forgetting that you need real input data.

    @Jim
    We are not scared of a hyperinflation, which was engineered by the german government.

    What we dont want is this permanent 5 -15% inflation, so many of our neighbors had in the 70ties and 80ties.
    And that is why we wrote the Maastricht treaty the way it is. People who dont like, are free to leave. Probably the best thing for Greece. Just nobody wants to be seen to make the decision. Sooo, in good European and management tradition, it will happen somehow, without anybodies name on it.

    But this treaty will be not broken, only bend, like now, LTRO.

    how to translate Market Monetarims ? Todessehnsucht like in “death wish”

  17. Gravatar of Mike Sax Mike Sax
    13. May 2012 at 05:01

    Scott I think I understand why you don’t criticize the Austrians more often. LOL

    And Major Freedom isn’t around yet.

  18. Gravatar of Becky Hargrove Becky Hargrove
    13. May 2012 at 06:02

    Why austerity matters for the average person: Austerity basically amounts to both business and government throwing up their hands and saying, we give up. Both manage to publicly profess a lot of hot air and accusations at one another, both are unwilling to compromise with one another, but neither are willing to look at previous strategies that – with the collective weight of hobbling together – finally bring economic activity to a standstill. It is also hard for average citizens to effectively rectify the overall situation, because impediments to progress exist in endless hardened terms, each of which unfortunately must be revisited on their own merits. Plus, neither government or business has real inclination to just come out and be honest about the actual problems, because that would mean revisiting stupid bargains with one another that never should have been made. Unfortunately, monetary policy bears the brunt of all the above when it tries to unblock the dam.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. May 2012 at 06:37

    @Bill Woolsey,
    You wrote:
    “If it were an appropriate currency area, then the focus would be on getting Greek, Italian, Portuguese, and Spanish workers to move north and meet the growing labor demand in the northern region.”

    One has to wonder if the U.S. is an OCA by that criterion. I read a report recently that pointed out 70% of Americans live their entire lives in one state.

    I’m also wondering if you’re overstating the health of the economy in the Northern eurozone. Both Belgium and the Netherlands are in a technical recession currently, and for all the hype about Germany its RGDP has only grown by an average rate of 0.6% from 2007-11. This is primarily due to stagnant productivity but still I see no signs of a booming economy further north.

    @genauer,
    You wrote:
    “And that is why we wrote the Maastricht treaty the way it is. People who dont like, are free to leave.”

    True, Greece and Portugal were violating the convergence criteria but what about Ireland, Italy and Spain (which dwarf them in total GDP)? Prior to the recession Ireland and Spain were meeting the criteria and Italy was only in violation of the overall public debt limit (60% of GDP) but was making good progress towards meeting it.

    And note that thanks to the fact that the ECB’s tight money policies have eroded revenues throughout the eurozone, the only countries among the 17 that are meeting the gross public debt limit now are Cyprus, Estonia, the Slovak Republic and Slovenia. Maybe you should all be thrown out of the eurozone for failing to meet the criteria.

  20. Gravatar of Tommy Dorsett Tommy Dorsett
    13. May 2012 at 08:35

    For what it’s worth, the Eurozone GDP price deflator is well below 2%; NGDP contracted in Q4 11. A damning indictment of Trichets 2011 rate hikes.

    Draghi’s initial burst of stimulus helped, but has been partially sabotaged by Bundesbank sabre rattling about ‘exit’ strategies. Hopefully this news on the Germans backing off will help Trichet move forward with more open-ended stimulus.

  21. Gravatar of Tommy Dorsett Tommy Dorsett
    13. May 2012 at 08:37

    I meant Draghi moving forward w more stimulus.

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. May 2012 at 09:03

    Maybe they are the master race after all.

  23. Gravatar of genauer genauer
    13. May 2012 at 09:06

    Mark,
    we all know that we had the deep 2008 recession due to the bursting of the house bubble. And it was only the translation into financial panic in the US which got that really going.

    And for such shocks you do the classical text book short term Keynes reaction for 1 or 2 year, just as Germany did, you have automatic stabilizers, cash for clunckers, accelerating planned public projects, you know the drill. HRE / Depfa blew up to the tune of 8 % GDP into the face of Germany, due to horrible lax Irish banking oversight. These guys were so clueless, that they just found some 50 billion Euros (plus !)last fall in their accounting. But now it is 4 years later, and the problems in Spain and Italy are long term structural.

    And how to turn around the overall high debt data, please look at the Fiscal Compact gliding rules. 80 % of GDP debt, instead of the target 60 % ? Correct by 5 % of the difference, meaning 5% * 20 % = 1.0%, horrible austerity ?
    I don’t think so.

    Tight ECB money policies ? at a rate of 1 % ? In which parallel universe ? Ever heard of the 1 trillion LTRO ?

    0.5 – 1 % GDP growth will be normal for Europe.
    The working population shrinking by 1%, total factor productivity 1 – 1.5 %, as usual, that’s it.
    From where do you want to get additional miracles?

    And since we now all know, that the Maastricht criteria from 20 years ago and by themselves not good enough, we now have the Scorecard with 10 checks. http://ftalphaville.ft.com/blog/?p=879781
    Leaning more towards IMF debt sustainability analysis, signed off in June 2003 by somebody named Timmy Geithner.

    Pumping inflation into the system would kill off the spending mood of the remaining people with money like my German neighbour.

  24. Gravatar of Saturos Saturos
    13. May 2012 at 09:28

    genauer,

    If you’re new to the blog, you might want to start by reading the FAQ’s. Scott’s whole thing is that tight money caused the 2008 recession, not the housing bust, which was mostly over by then. The financial crisis was an epiphenomenon. For a good introduction, see Scott’s presentation on Youtube. People misdiagnosed the crisis, thinking that low interest rates meant that monetary policy couldn’t have been to blame. We’re calling that the MoneyIllusion.

  25. Gravatar of genauer genauer
    13. May 2012 at 09:35

    @Tommy

    according to http://www.economist.com/node/21554564
    EU Inflation was and is projected to be above the target of <= 2.0% and in every single Eurozone country (erm, little Slovenia projected at 1.6%) What data are you using ??

  26. Gravatar of Steve Steve
    13. May 2012 at 10:06

    http://latimesblogs.latimes.com/world_now/2012/05/angela-merkel-takes-a-loss-in-key-german-election.html

    Merkel’s party suffers loss in key German state, early results show
    May 13, 2012 | 10:32 am

    DUSSELDORF, Germany — Voters in Germany’s most populous state dealt a decisive blow to Chancellor Angela Merkel’s Christian Democratic Union on Sunday, according to preliminary results, a potentially ominous preview of things to come for the chancellor in next year’s federal election.

    With 59% of the vote counted, Merkel’s party was mustering just 25.8% of the vote in the state of North Rhine-Westphalia, a drop from 35% in 2010 and 45% in 2005, the year she took office. The opposition Social Democrats and Greens, with 38.8% and 11.9% respectively, appeared to have secured enough votes to form a majority coalition.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. May 2012 at 10:43

    genauer,
    You wrote:
    “we all know that we had the deep 2008 recession due to the bursting of the house bubble.”

    I don’t know that. What makes that the gospel truth? Australia and Poland had “housing bubbles” and they didn’t have a recession. Germany had a recession and it didn’t have a housing bubble. I fail to see a correlation.

    And:
    “And it was only the translation into financial panic in the US which got that really going.”

    The US finacial crisis caused the eurozone to go into a recession? Then why didn’t it cause Australia or Poland to go into a recession? What makes the eurozone so fragile?

    And:
    “And for such shocks you do the classical text book short term Keynes reaction for 1 or 2 year, just as Germany did, you have automatic stabilizers, cash for clunckers, accelerating planned public projects, you know the drill. HRE / Depfa blew up to the tune of 8 % GDP into the face of Germany, due to horrible lax Irish banking oversight. These guys were so clueless, that they just found some 50 billion Euros (plus !)last fall in their accounting.’

    All of which would have been avoided if the economy didn’t tank, right?

    And:
    “But now it is 4 years later, and the problems in Spain and Italy are long term structural.”

    If Spain is the one with structural problems how come productivity is surging there and is stagnant in Germany? And how come Germany is the one worried about high domestic inflation? It sounds like Germany is the country with an aggregate supply problem, not Spain.

    And:
    “And how to turn around the overall high debt data, please look at the Fiscal Compact gliding rules. 80 % of GDP debt, instead of the target 60 % ? Correct by 5 % of the difference, meaning 5% * 20 % = 1.0%, horrible austerity ?
    I don’t think so.”

    Which countries can even make the gliding public debt rules? Only the same five countries (I forgot to mention Luxembourg last time) that made the 60% rule. Most of the eurozone is still flunking.

    And:
    “Tight ECB money policies ? at a rate of 1 % ? In which parallel universe ? Ever heard of the 1 trillion LTRO ?”

    Monetary policy should be measured by its results, not its actions. (using a nautical analogy, nobody cares about the angle of the rudder, only the course heading.) Eurozone NGDP was growing at an average annual rate of 4.3% in the decade through 2007. As of 2011 it was nearly 12% below trend. That sounds like extremly tight money to me.

    And:
    “0.5 – 1 % GDP growth will be normal for Europe.
    The working population shrinking by 1%, total factor productivity 1 – 1.5 %, as usual, that’s it.
    From where do you want to get additional miracles?”

    Actually the eurozone’s labor force growth averaged over 0.4% a year from 2007-11. Germany’s alone also averaged over 0.4% a year over the same period.

    On the other hand labor productivity and TFP growth in France, Germany and Italy were practically zero over 2007-2011 (in fact it was negative in Italy).

    If zero is the new normal that’s entirely because of stagnant productivity growth, not because of a shrinking labor force.

    “And since we now all know, that the Maastricht criteria from 20 years ago and by themselves not good enough, we now have the Scorecard with 10 checks. http://ftalphaville.ft.com/blog/?p=879781
    Leaning more towards IMF debt sustainability analysis, signed off in June 2003 by somebody named Timmy Geithner.”

    The scorecard makes my life easier. It indicates that the entire eurozone is failing at least two criteria, with Germany, France, Belgium and Luxembourg each failing three, the same exact number as Italy.

    And:
    “Pumping inflation into the system would kill off the spending mood of the remaining people with money like my German neighbour.”

    Year on Year core HICP in Germany averaged 1.3% last month. What inflation?

  28. Gravatar of genauer genauer
    13. May 2012 at 10:46

    @ Saturo

    I am not new to this blog and Scotts NGDP.
    But people in Germany go by Ordnungspolitik and Soziale Marktwirtschaft, 2 things I warmly recommend US folks to read on. It would be nice if US people would also try to at least know the background of how other countries think about it. We have enshrined this in the Maastricht treaty, the binding document for how the ECB must work. The sole purpose of the central bank is to keep inflation stable. Everything else must be controlled with fiscal policy (taxes, social minimum settings. We regard keeping the buying power of money very stable and predictable as key to that.

    As I just that at http://kantooseconomics.com/2012/05/09/ooh-do-we-measure-inflation-correctly/#comment-7570
    Scottt mentioned above

    “For the MMers it would be actually easier, because they try to divert the attention away from inflation, and only want to count and target the total NIPA (or VGR, Volkswirtschaftliche Gesamtrechnung, as we say in Germany) “NGDP”.
    And the US found last spring a 2 % accounting “error”, just happening at precisely the right time (Spring 2009) to avoid some panic.”

    “Engineers spent a lot of time and intelligence to get (PID) closed loop “control systems” and SPC (statistical process control) set up properly, to not be fooled by statistical noise. In supply chain management this is called the bullwhip effect, just to dro off a few key words for folks interested in that stuff, to read on.”

    @Steve
    state elections as in NRW today happen 16 times between German national elections. As for the inter-presidential elections in the US the opposition usually gains. Here they just got from a minority tolerated government to getting a not so large (38.8 left + 12.2 % green) majority. Gosh, I am running scared. The good news is that the liberals are solidly back.

  29. Gravatar of marcus nunes marcus nunes
    13. May 2012 at 10:58

    @Mark
    Just put up a post on “Germany & the Periphery”. There are some nice charts (at least Saturos liked them):
    http://thefaintofheart.wordpress.com/2012/05/13/saint-and-sinners-germany-the-periphery/

  30. Gravatar of Saturos Saturos
    13. May 2012 at 11:14

    Genauer, you said:

    “The sole purpose of the central bank is to keep inflation stable. Everything else must be controlled with fiscal policy (taxes, social minimum settings.”

    I see. So the central bank controls inflation, but not employment, and the Treasury controls employment, but not inflation. Please show me the model in which that is true.

    “We regard keeping the buying power of money very stable and predictable as key to that.”

    The very definition of a demand side recession, which is in part what’s ailing Europe, is that there is insufficient purchasing power. Boosting spending would therefore in the main buy more output instead of raising prices. An NGDP target allows the central bank to ensure that spending is always at adequate levels without losing credibility on inflation. Even a price level target would allow a recovery in spending without compromising long or even medium run price stability.

  31. Gravatar of ssumner ssumner
    13. May 2012 at 11:15

    W. Peden, Yes, I didn’t mean to say that Austrian economics caused the Depression, just that at the time their message was austerity. Obviously the Fed didn’t follow Austrian policy during the 1920s.

    Thanks dwb.

    Marcus, Good analogy.

    Thanks Ben.

    Jim Glass, I view the hyperinflation explanation as a myth, partly for the reasons you indicated. Deflation did far more damage to Germany than hyperinflation.

    Switzerland had no hyperinflation, but has a Germanic culture, and has low inflation. So do other nearby countries like Austria, Netherlands, Denmark, etc.

    Mark, Thanks for the info.

    Jason, Let’s hope so.

    Saturos. The term “austerity” usually refers to lower AD. I am mocking that idea. But what I favor is monetary stimulus, not fiscal stimulus.

    I agree that a Greek exit might not lead to a complete collapse of the euro.

    Greg, You said;

    “You are spinning myths — Hayek’s cycle work wasn’t understood, much less “popular”.”

    And you keep putting words in my mouth. I never claimed his technical work was, just his analysis of the problem. What’s important isn’t an economist’s “models” but rather their talking points and their policy recommendations. I’ve read the newspapers from that era. They are full of the ideas of overinvestment in the 1920s, and the need for a long painful austerity in the 1930s. They were contemptuous of using monetary stimulus to artificially inflate the economy. It doesn’t matter how personally popular he was.

    123, I don’t know enough to comment. Obviously the Bundesbank is split.

    Rebeleconomist, I don’t want anyone targeting house prices, that’s an awful idea. Just as targeting inflation is a terrible idea.

    Bill, I agree.

    Genauer, That link supports my post. Germany is split, and the rest of Europe is increasingly uniting against Germany. That pretty much tells you the direction things are moving.

    In America the CPI shows house prices up 8% since 2006, and Case-Shiller says they are down 35%. Housing is 40% of the core CPI. This is a HUGE problem.

    I know less about Europe, but I’m pretty sure policy was too easy during the housing boom and much too tight since.

    Tommy, Falling NGDP is all I really need to know. I can’t imagine any NK model where falling NGDP is a “good thing.”

    Patrick, They are certainly masters of Europe right now.

    genauer, You said;

    “And for such shocks you do the classical text book short term Keynes reaction for 1 or 2 year, just as Germany did, you have automatic stabilizers, cash for clunckers, accelerating planned public projects, you know the drill.”

    Fiscal stimulus was basically tossed out of grad textbooks 20 years ago–and for good reason. This is most certainly not what you do. What you do is enough monetary stimulus to prevent NGDP from falling.

    You said;

    “Tight ECB money policies ? at a rate of 1 %”

    Since when are we judging the stance of monetary policy by interest rates? That was discredited 50 years ago. Suppose Brazil had 120% nominal interest rates, would you call that tight money? Interest rates tell us nothing about whether money is easy or tight. Never reason from a price change. If NGDP is falling in Europe, then money’s obviously very tight.

    Steve, I’d add that the problem is much deeper than Merkel personally. It’s partly German hostility to monetary stimulus, and partly the folly of many other countries joining the euro. Given the hand she was dealt, failure was inevitable.

  32. Gravatar of genauer genauer
    13. May 2012 at 11:20

    Sarturos, Marcus,

    LOL, before we run practically the same discussion in 4 blogs,

    I kindly suggest we continue here.

    for the timing of German government deficits, please take a look here:

    http://www.nakedcapitalism.com/2012/05/bill-black-new-york-times-reporters-embrace-the-berlin-consensus-and-ignore-krugman-and-economics.html#comment-712398

    And always keep in mind, it was a left / green Government which implemented Agenda 2010, after the conservatives raising marginal taxes up to 60 %

  33. Gravatar of Saturos Saturos
    13. May 2012 at 11:21

    Scott, I just watched your video on the Great Depression, and it’s the best thing ever. Literally. The. Best. Thing. Ever.

    Please finish your book soon, I promise I’ll buy like six copies.

  34. Gravatar of marcus nunes marcus nunes
    13. May 2012 at 11:26

    Guys Satorus is really Benjamin Cole II

  35. Gravatar of marcus nunes marcus nunes
    13. May 2012 at 11:37

    genauer
    Yes, Germans have always been “obedient”. Orders are orders.
    Greece is a basket case. It was from the (late start in the euro) a free rider. But Spain and Ireland were “victims” of the set up. They didn´t run debts and deficits. They were the prefferd destination of “foreign” investment. BP crisis in a fixed exchange rate regime are “easily” dealt with by allowing the ER to float. In a MU more symetry of adjustment is required. And the Irish and Spaniards are not as respecfully obedient as Germans!

  36. Gravatar of CA CA
    13. May 2012 at 11:47

    “Please finish your book soon, I promise I’ll buy like six copies.”

    Me Too!!

  37. Gravatar of genauer genauer
    13. May 2012 at 11:48

    saturos,

    In the german model, this split between Fed / treasury does not exist in your way.

    We have the Bundesbank and the ministry of finance.
    The former is strictly independent. The ministry, like all others, does, what the government (chancellor) tells it. And the government is elected and deselected by parliament, the Bundestag.

    This is Europe. We have more parties, majorities are found by coalition, and if one party switches sides, the chancellor is replaced by a new one, within one day, if necessary. We did this in 1982.

  38. Gravatar of 123 123
    13. May 2012 at 11:52

    “123, I don’t know enough to comment. Obviously the Bundesbank is split.”

    Split between the realists and the people who hope PIGS can do enough structural reforms and VAT increases to achieve 2% inflation?

  39. Gravatar of genauer genauer
    13. May 2012 at 12:14

    marcus,

    maybe it makes you feel a little better about Germans following rules:

    http://marginalrevolution.com/marginalrevolution/2012/05/the-culture-that-is-germany-2.html#comments

  40. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. May 2012 at 12:19

    genauer,
    You wrote:
    “state elections as in NRW today happen 16 times between German national elections. As for the inter-presidential elections in the US the opposition usually gains. Here they just got from a minority tolerated government to getting a not so large (38.8 left + 12.2 % green) majority. Gosh, I am running scared. The good news is that the liberals are solidly back.”

    The CDU just turned in its worst performance ever in North Rhine-Westphalia. And for the FDP it is a victory in the sense that they avoided losing all of their seats as they had in five of the previous six state elections. The SDP now controls eight states to CDU’s seven.

    I hope the CDU coalition continues to have such “victories” straight into the national election.

  41. Gravatar of marcus nunes marcus nunes
    13. May 2012 at 12:21

    genauer
    It just proves they are obedient. Thta´s positive trait but at times and some circumstances can be boring (and even dangerous, depending on who´s giving the orders)

  42. Gravatar of genauer genauer
    13. May 2012 at 13:08

    Marcus,

    1. what do you prefer, a disciplined German police man at a cost of 83 k€/a, not shooting up his fellow citizens,
    or a Stockton, CA police guy at a cost of 239 k$/a, who complains bitterly, that his bloated department is reduced to national average levels.

    2. what do you prefer, a disciplined German Auto Union, (having half the seats on the board) which adjusts wages according to global competitiveness, with a flourishing company, or a UAW which first bankrupted their GM and Chrysler, before accepting wages in line both nationally and global http://wbrussee.wordpress.com/2012/04/12/mid-april-2012-update-of-the-great-depression-of-debt
    BTW, the guy who predicted the “Second great depression 2007-2020″ even before the US bubble really go started

  43. Gravatar of Major_Freedom Major_Freedom
    13. May 2012 at 13:27

    But as the Depression worsened people lost interest in both austerity and Austrian economics, and looked for pragmatic solutions to the suffering of millions of unemployed workers.

    Because the “pragmatic” solution of getting wages to not fall worked out so well, the only possible alternative was more government tinkering.

  44. Gravatar of genauer genauer
    13. May 2012 at 14:36

    its a little off topic and general,
    but I think it is necessary for more discussion:

    3. obedience
    All this weird stuff about Germans just following orders.
    There was and is a lot of soul searching in the US army and with folks like Fukuyama “The virtual corporation”, why
    German units were fighting so much better, with inferior numbers and material support.
    Just google a little bit for yourself “auftragstaktik” and “unit cohesion” “german model”
    Just one example: Bassford 1990 Military Review: “Cohesion, personnel stability and the German model”
    http://cgsc.contentdm.oclc.org/cdm/singleitem/collection/p124201coll1/id/541/rec/11
    Read the details !
    Why does it cost 1 million dollar to sent a US soldier around the world ? Soembody, who would be happy to work for 15$/h
    at home ?

    4. values
    a) safety
    Germany was the first to introduce universal health care 1885, universal retirement insurance.
    b) social justice
    the NET income distribution is the same as it ever was.
    the 10th percentile has half the median, the 90th twice, and the upper 1% gets 11%. NOBODY falls through the cracks.
    An unemployed family of four gets 27k€. horrible austerity, isnt it?
    c) simple rules
    No adjustable rate mortgages, bankrupting life insurances.
    Wages are set by employer and employees (means unions)
    d) stability
    no inflation, pacta sunt servanda, no local communities being able to renege on their pension promises
    e) responsibility
    we temporarily deactivated the draft last year. When the fatherland goes to war, everybody serves.
    No Bushie “Champaign units”

    5. international stability
    huge investments into our neighbours:
    http://money-go-round.eu/

    some more tomorrow

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. May 2012 at 15:27

    genauer,
    You wrote:
    “its a little off topic and general,
    but I think it is necessary for more discussion:”

    Frankly genauer this would be a terible topic for further discussion.

    Notice I avoided the temptation to pass judgement on the German national character. This is because, quite frankly, I have very little that’s positive to say about it. Moreover most of these characteristics are highly subjective and unquantifiable.

    I will however take issue with this statement (precisely because it is quantifiable):

    “b) social justice
    the NET income distribution is the same as it ever was.
    the 10th percentile has half the median, the 90th twice, and the upper 1% gets 11%.”

    We’ve been over this ground before at Economist View:

    1) Gini Index

    In terms of the increase in the before taxes and transfers Gini index, Germany ranks third (after France and Italy) among the 13 OECD members for which we have data over 1990-present. In terms of the actual pre-tax and transfer Gini index value, Germany currently ranks third (after Italy and Chile) among the 34 OECD members, and ahead of the US.

    In terms of the increase in the after taxes and transfers Gini index, Germany ranks third (after Sweden and Finland) among the 13 OECD members for which we have data over 1985-present. In terms of the actual post-tax and transfer Gini index value, Germany currently ranks 20th (After Italy and Chile) among the 34 OECD members.

    Source – OECD

    2) Income Shares:

    1986/2007 income shares including capital gains

    10%-5%-1986-2007-Change-%Change
    Germany-10.09-11.38-1.29-12.8%
    U.S.-11.14-11.07-(-0.07)-(-0.6%)

    5%-1%-1986-2007-Change-%Change
    Germany-11.49-14.02-2.53-22.0%
    U.S.-13.43-15.17-1.74-13.0%

    1%-0.5%-1986-2007-Change-%Change
    Germany-2.42-3.14-0.72-29.8%
    U.S.-3.30-4.19-0.89-27.0%

    For these three high income categories, which comprised of 28.53% and 30.43% of income in Germany and the U.S. respectively in 2007, the rate of increase in income shares was greater in Germany than the U.S. over this period.

    Source – Facundo Alvaredo, Tony Atkinson, Thomas Piketty and Emmanuel Saez

    3) Ratio of Incomes:

    Median income as a percent of average income declined from 64.4% in 1992 to 48.7% in 2001, implying a trend towards a more unequal distribution of income. Also, the ratio of income at the 90th percentile to the 50th percentile increased from 3.60 to 5.09 over the same period.

    Source – CEPR

    By almost any measure one chooses there is a strong trend towards greater income inequality in Germany since at least 1990.

    And there are several studies that corroborate this quantitive evidence. Such as:

    Growing Income Inequality in OECD Countries:
    What Drives it and How Can Policy Tackle it ?
    Forum, Paris, 2 May 2011

    Page 6:
    “But countries such as Denmark, Germany and Sweden, which have traditionally had low inequality, are no longer spared from the rising inequality trend: in fact, inequality grew more in these three countries than anywhere else during the past decade.”

    http://www.oecd.org/dataoecd/32/20/47723414.pdf

    So, in short, it is most definitely not “the same as it ever was.”

  46. Gravatar of Josiah Josiah
    13. May 2012 at 17:38

    It looks like the austerity backlash is arriving right on schedule.

    Great. Eight more years of depression plus a world war and we should be golden.

  47. Gravatar of Neal Neal
    13. May 2012 at 18:08

    “There is no word for ‘market monetarism’ in Dothraki.”

  48. Gravatar of John Papola John Papola
    13. May 2012 at 18:53

    Scott,

    I’m coming back in here a bit late, but I want to implore you to consider reframing your language and taking a cue from Lars. As he puts it, the purpose of nominal income stability is to allow Say’s law to kick in and have relative prices accurately transmit information about economic change. It’s about monetary NEUTRALITY.

    “Stimulus” as a term is not neutral. It’s active. It’s incentivizing. It’s a push to spend. It’s keynesian.

    So, consider this. Bob is freaked out about the future and start shoving cash in his home safe. A free banking system would accommodate his effort with new note issuance and a nominal stability norm by a central bank would crudely attempt to approximate the same. This is not a “stimulus” for Bob to go out and spend money or save in financial assets. It’s supply equilibrating with demand for money.

    Using the term “stimulus” as you so often do makes your policy norm sound much closer to keynesian “stimulus”, which IS an effort to get people to spend by whatever means necessary and without regard for where it goes or whether it coordinates with others or not.

    Now, maybe I’m missing something. But I seem to recall you posting about how your ideal would be NGDP growth stability that was maintained immaterial of the unemployment rate. So that, to me, says that you’re thinking the way I do about what monetary policy should aim to do: neutrality, not “stimulus”.

    “Stimulus” deserves to be a word relegated back to the land of monetary cranks.

  49. Gravatar of Bonnie Bonnie
    13. May 2012 at 20:28

    The euro zone only makes sense to me if there are more commonalities in supply side issues than not. Yglesias pointed out recently that Germany needs more supply side reforms to keep from having a problem with inflation if monetary policy would be better matched to entire area. His reasoning is that inflation occurs when there is more demand than what an economy can produce, and if the Germans were to increase supply, then there wouldn’t be so much a threat to them if euro policy were to be loosened a bit. This is beside the fact, my interjection, that a bit more inflation for them now is likely cheaper than the burdens placed on taxpayers for fiscal bailouts. I think his intent was more to challenge the Germans to take a look in the mirror before passing around criticism, but it illustrates the point that there could likely be too much of a disparity in supply policies among the individual economies. If that were true, perhaps supply-side integration is more imperative than fiscal, unless that is what is assumed when they talk about fiscal integration.

    Additionally, I don’t believe what the Germans have been demanding of these cash-strapped economies is even possible for them to accomplish in the short term, except for maybe the Irish. They can’t all go to bed having lived their lives as de facto wards of the state, wake up the next morning as classical liberal free marketers and be successful enough to stop the heavy bleeding that is going on in the present. Changing minds is the first thing that needs to be accomplished, then they need to learn how to build that kind of economy as a society. It is something these societies have to be worked into and convinced about, and if it looks like it’s broken on the test drive, they will never be gotten past the finish line. If they are to be retained in the euro, and longevity of the arrangement is desired, there is no other choice but to have monetary stimulus because the heavy bleeding in the south must be stopped. To do anything other than that is courting social and political disaster and the possibility of losing them completely to socialism, or worse, for a generation or more doesn’t seem to be worth the very temporary trade off of low inflation now.

    This is as much a political and ideological issue as it a fiscal/monetary one, and it would be far more helpful if the Germans were a little less self interested for the present and more advocates for what they believe to get everyone through this mess better off than before it started. If the Germans want an integrated Europe, they need to start thinking about what’s good for the whole and lead them to where they ought to go in a way that a least has a chance of success. This bailout scheme is simply not it.

  50. Gravatar of Saturos Saturos
    13. May 2012 at 21:56

    It looks like the austerity backlash is arriving right on schedule.

    Great. Eight more years of depression plus a world war and we should be golden.

    +1

  51. Gravatar of genauer genauer
    14. May 2012 at 01:44

    Mark,

    I do refrain to make personal remarks about you.

    If you want to continue the discussion from
    http://economistsview.typepad.com/economistsview/2012/05/the-high-cost-of-germanys-economic-success.html

    then this is your choice.

    1. DIW
    I ll gave you the Source for the the NET income statement there http://diw.de/documents/publikationen/73/diw_01.c.357505.de/10-24-1.pdf please look at the first Graph and the data.
    In the text they “sharpen” the message by comparing the arbitrarily take 1999 to 2008. If you take the latest available year 2009, half the claimed effect is gone, and if you take the first available year, 1993, the effect is gone completely. The former boss of the DIW had a knack for “sharpening the message”, not only in this study,
    and was fired since then.

    2. OECD
    I am a little tired of these OECD studies, or piketty / Saez who engage in data mining. The income of the upper 10 or 1 % go with the business cycle, we know that. So what they do, is pick a bad starting year (1985) and a in this counting good year (2007 or 2008), compare them, and then derive a “trend” from them. If you look on the longer term yearly data, it is stable with a little business cycle noise on it.We have been through that at the link above. To compare German data pre and post reunification without checking for what happened then is misleading.

    3. CEPR
    When you cite again those clowns, why dont you give the source
    http://www.cepr.org/pubs/PolicyInsights/PolicyInsight4.pdf
    Then people there claim that in 2001 all the lower 40% of Germans were living in 2001 on MINUS 0.07% of their total “gross market income” !
    No wonder they can calculate a Gini coefficient of 0.6 !

    4. Mark
    The problem I have with you is, that I showed you that already in detail, you just added the 6th decile to the bottom half, and you continue to distribute this obvious CEPR nonsense.

  52. Gravatar of genauer genauer
    14. May 2012 at 01:56

    Bonnie,

    could you tell me what who means with “supply side reform” in Germany in practice?

    I ll have been pro Europe all my life, for more integration.
    But this died last year. The blackmail by Greece, a Berlusconi in Italy not being able to pass a retirement reform, so that Italian retire at the same age as Americans since 1983 and Germans since 2003, even in the face of insolvency. Promising the ECB one thing, and then repeatedly doing another thing. The endless attempts by some many to break the Maastricht treaty.

    There will be no fiscal union. Greece and maybe some others will leave the Euro, things will be ugly, but we will not fight secession wars. There can be no union with people who steal your money.

    And then, maybe in 20 years, there will be a new approach for a “more perfect union”

  53. Gravatar of James in London James in London
    14. May 2012 at 02:08

    Ambrose Evans-Pritchard at the Daily Telegraph challenges his old self, the Berlin consensus and his own readership, and how.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9263196/World-edges-closer-to-deflationary-slump-as-money-contracts-in-China.html

  54. Gravatar of Ryan Ryan
    14. May 2012 at 04:26

    For the first year or two of the Great Depression, Austrian economics was quite popular—Hayek was a rival to Keynes. After all, it looked like a morality tale where speculative excesses in the late 1920s had led to the inevitable hangover in the 1930s.

    Kind of disingenuous to take the single worst aspect of FDR’s rhetoric and tack it onto the Austrian School, isn’t it?

    Any supposed “Austrian” who suggests/suggested that “speculative excess” caused the Great Depression is a minority among Austrian-adherents (to put it lightly!!!).

    Credit expansion causes recession. That’s what Austrians say, that’s what Keynesians say, that’s what everyone says. Keynesians say the short-run benefits outweigh the long-run drawbacks, and Austrians say the short-run benefits make things worse in the long run.

    But Prof. Sumner knows this very well, so I’m not sure why he said what he said in his P.S.

  55. Gravatar of RebelEconomist RebelEconomist
    14. May 2012 at 05:20

    I must say, it is good to see someone putting the German point of view on this blog (I usually concur with the Germans, although in my case that reflects my experience of the repeated failure of compromising monetary policy in the UK). It is remarkable how NGDP targeters ignore or disparage the relative economic success of the industrialised country that is perhaps the least likely to accept their monetary policy proposals.

  56. Gravatar of J.V. Dubois J.V. Dubois
    14. May 2012 at 06:06

    RebelEconomist: “Germany” point makes sense only in a tragic way, like that the threat of nuclear strike makes sense if you are Kennedy. You can understand the logic, and see the outcome as inevitable, but you still can wish it was different.

    And this is how I see it: perfectly understandable German position from cultural point of view on inflation drives the rest of the Europe into the maw of chaos. If the thing will proceed as they do now, total disintegration of the large part of the Europe is inevitable. Europe lived through these moments in 1914, during great depression and in 1939. Everyone knew that these moments were inevitable and the only thing that it brought us was destruction on the scale previously unimaginable.

  57. Gravatar of dwb dwb
    14. May 2012 at 06:36

    I would agree that the European welfare state including the UK needs some serious reforms and that Germany has been a comparative success. However, the Germans did their reforms during relative boom times. That is the the time to be doing it (“countercyclical macro policy”). Crushing the southern economies with both tight money and fiscal austerity ends with 20% unemployment and voters rejecting the necessary reforms, like what is happening in France, Greece, and elsewhere.

    To get traction on reforms, the ECB needs to open the spigots. That might mean higher inflation in Germany but its not inevitable: they could use the opportunity to increase the labor force and loosen work restrictions which would reduce inflationary pressures, they could make it easier for people to move to Germany from Spain and Greece to work, there are a lot of things they could do. more beatings are not helpful.

    People in the U.S. do not see subsidizing the southern states like Alabama, Tennessee, with unemployment insurance and government grants for medicare, and so on as “theft.” The attitude that Spain is stealing from Germany illustrates why the EU was a bad idea in the first place. You are either in it together, better or worse, or not.

  58. Gravatar of Negation of Ideology Negation of Ideology
    14. May 2012 at 06:49

    I like that you use the term “morality tale”. One of my favorite quotes is “Economics is not a morality play” – I think by Krugman. (I like “Never reason from a price change”, but it doesn’t have as much pizazz.)

    I’ve always been amazed at how people believe that nonsense. Supposedly, the 1920s, with people owning more houses and cars, etc., were not “real”. But the suffering of the 1930s were real – and some kind of punishment for the good times (I’m unclear who is supposed to be doing the punishing. God? Nature?). How do they know it’s not the other way around? That the cars and houses built in the 20′s were real, and the 30′s were artificial constraints on living standards? If we could produce things before, why can’t we now?

    The only constraint on living standards should be the technical capacity of society to produce goods and services. Not some Autrian economist’s subjective judgement on whether we “deserve” it or not.

  59. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2012 at 07:33

    genauer,
    You wrote:
    “I do refrain to make personal remarks about you.”

    I said national character, not personal, although I suppose they are the same for many.

    You wrote:

    “1. DIW
    I ll gave you the Source for the the NET income statement there…. please look at the first Graph and the data.
    In the text they “sharpen” the message by comparing the arbitrarily take 1999 to 2008. If you take the latest available year 2009, half the claimed effect is gone, and if you take the first available year, 1993, the effect is gone completely. The former boss of the DIW had a knack for “sharpening the message”, not only in this study,
    and was fired since then.”

    This paper takes a unique approach categorizing Germany into three income classes. However it reaches similar conclusions. From the introduction:

    “Im längerfristigen Trend ist einerseits nicht nur die Zahl der ärmeren Haushalte stetig gewachsen – sie wurden im Durchschnitt auch immer ärmer. Auf der anderen Seite gibt es im Trend immer mehr Reichere, die im Durchschnitt auch immer reicher werden.”

    Which translates roughly as:

    “In a longer-term trend on the one hand not only the number of poor households has grown steadily – they were on average also poorer. On the other hand, there is also a trend towards more and more rich, on average, who are also getting richer.”

    And on page 4:
    “Betrachtet man die von uns verwendete Einteilung in drei Gruppen, fallen vor allem die stetigen Anteilszuwächse der Haushalte mit niedrigen Einkommen in den letzten fünf Jahren ins Auge (Abbildung 1). Der Anteil der Haushalte mit geringem Einkommen stieg von 19 Prozent 2004 auf fast 22 Prozent 2009. Parallel dazu ist auch eine Zunahme der Anteile der Haushalte mit mehr als 150 Prozent des Medianeinkommens festzustellen. Sie sind sogar schon seit 2000 nahezu kontinuierlich gestiegen. Lediglich 2009 ist mit der Finanz- und Wirtschaftskrise der Anteil reicher Haushalte leicht gesunken. Im längerfristigen Trend hat damit vor allem die mittlere Einkommensgruppe an Anteilen verloren.”

    Which translates roughly as:

    “To investigate the fall in equality we use a classification of three groups, and observe especially the steady growth in the proportion of households with low income in the last five years (Figure 1). The proportion of households with low incomes rose from 19 percent in 2004 to almost 22 percent in 2009. In parallel, an increase of the shares is held by households with more than 150 percent of median income. They have increased almost continuously since 2000. Only in 2009 with the financial and economic crisis of the proportion of wealthy households declined slightly. In a longer-term trend the group that has declined especially is the middle income classification. The importance of the so-called middle class has declined.”

    I short, according to the source you cite, income inequality is on the rise in Germany.

    You wrote:

    “2. OECD
    I am a little tired of these OECD studies, or piketty / Saez who engage in data mining. The income of the upper 10 or 1 % go with the business cycle, we know that. So what they do, is pick a bad starting year (1985) and a in this counting good year (2007 or 2008), compare them, and then derive a “trend” from them. If you look on the longer term yearly data, it is stable with a little business cycle noise on it.We have been through that at the link above. To compare German data pre and post reunification without checking for what happened then is misleading.”

    Aside from the absurdity of claiming thta the OECD or Piketty and Saez are engaging in data mining (they are the ones putting forth the effort to collect the data), the choice of dates is entirely purposeful. It is precisely over this timeframe (1985/1990-present) that we see a steep rise in inequality in Germany. And I personally would choose a later date than 2007 for the Piketty-Saez data except for one thing: it’s not yet available. But based on the more recent studies this shouldn’t matter, because, much like the US, although there was a dip in income shares accruing to those with the highest incomes in the recession, this dip has proved to be temporary, and the previous trend has reasserted itself.

    With respect to how reunification affected income inequality in Germany let me refer to figure three in the source you cite. It shows that when Germany is decomposed into its Eastern and Western halves that the trend towards the polarization of incomes is even more pronounced, with the trend somewhat stronger in East than in West, and that this trend has been more or less continuous since 1997.

    You wrote:

    “3. CEPR
    When you cite again those clowns, why dont you give the source
    ….. Then people there claim that in 2001 all the lower 40% of Germans were living in 2001 on MINUS 0.07% of their total “gross market income” !
    No wonder they can calculate a Gini coefficient of 0.6 !”

    Gross market income is income from business activity, wage income, capital income, exclusive public and private pensions. So it is a measure of pre-tax and transfer income. And although it produces a Gini coefficient of 0.6 this is not too much higher than the Gini coefficient computed by the OECD for the same income measure (pre-tax and transfer). In fact as I mentioned previously, Germany ranks third out of 34 OECD members in terms of the OECD pre-tax and transfer Gini coefficient, even higher (and consequently more unequal) than the US. So this is not a unique result, it is corroborated by the OECD.

  60. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2012 at 08:15

    dwb,
    You wrote:
    “I would agree that the European welfare state including the UK needs some serious reforms and that Germany has been a comparative success. However, the Germans did their reforms during relative boom times. That is the the time to be doing it (“countercyclical macro policy”). Crushing the southern economies with both tight money and fiscal austerity ends with 20% unemployment and voters rejecting the necessary reforms, like what is happening in France, Greece, and elsewhere.”

    There are many kinds of reform that could take place of course, but I think implicitly we are talking mostly about fiscal reforms. And what I find most ironic about the current situation is that all of the GIIPS historically, with the possible exception of Italy, have low levels of government spending and small welfare states, relative to European standards, and especially by the standard of Germany. Are these really the countries that need to be reigning in their bloated welfare states?

    I also like your implicit point about Germany really being the country that needs to be pursuing structural reforms. It’s a point I made earlier, and as Bonnie has pointed out, so has Yglesias. It’s a simple AS/AD exercise that reveals if you’re the country having trouble with inflation, productivity growth and constraints to AS in general, that means you’re the country that needs to be pursuing those kinds of reforms.

    In a very real way Germany should stare in the mirror when doing its lecturing.

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2012 at 08:31

    J.V. Dubois,
    You wrote:
    “And this is how I see it: perfectly understandable German position from cultural point of view on inflation drives the rest of the Europe into the maw of chaos. If the thing will proceed as they do now, total disintegration of the large part of the Europe is inevitable. Europe lived through these moments in 1914, during great depression and in 1939.”

    And I find it very interesting that these woeful moments always seem have Germany as a central player.

    I firmly believe that one of the worst things that ever happened in European history, both for Europe’s sake, and for Germany’s sake as well, was German unification in 1871. That’s why when Germany was reunified at the end of the Cold War many Europeans believed it was crucial that this be done in the context of increased European integration.

    Unfortunately, what I suspect we have seen recently, are the resurrection of some forgotten ghosts. Germany’s contempt for its European neighbors is showing, and it is not a pleasant sight and is full of dreadful implications.

  62. Gravatar of dwb dwb
    14. May 2012 at 08:38

    not just fiscal reforms (although I think that govt spending equal to 50% of gdp as is the case in many European countries is too high), but labor,legal, and industry reforms: for example, the 35 hour workweek in France and the fact that the electricity market is dominated by EdF. pension reforms. We could go on for days. When you enact these kinds of reforms and govt is 50% of gdp, people are going to be unemployed and very unhappy if there is no private sector to suck up the slack.

  63. Gravatar of genauer genauer
    14. May 2012 at 13:24

    I try to address many things and persons here, in a way to keep to the chronology and persons. Please be a little patient, that this will not look as a coherent flow of thought to many. I tried my best to minimize the discontinuities.

    @Mark,
    that you said you avoid drawing judgment from me towards my nation,
    does not mean that I have to respond in kind. I just said
    “I do refrain to make personal remarks about you.”

    I ll told you took at the graph and the data, because somebody was fired (not directly 1) for “sharpening the text”
    and you continue with the text. Why do I write something ?

    Please divide the numbers in Table 1 and look if you see a trend from begin (1993) to end (2009). I dont.

    Since we have data from 1950, and 1913, for Germany, for the US, and for the UK even from somewhere around 1850, we did not need the OECD and certainly not Piketty Saez to collect those data.

    P/S merely interpret data collected by others (government) and they do it in a very biased way. They look at pre tax, and they only look only at the upper 10 %. Their analysis is in conflict with the government interpretations. It is well known that the after tax data look very different that

    What counts for the (lower) 90 % is, what they get out end as a net income, at that is what P/S do not even look at.

    A Gini coefficient of 0.6 is off the typically cited 0.25 – 0.3 in a huge way. This CEPR stuff has nothing to do with what people have in their wallet. It is just pure propaganda.

    @ Scott,
    the last time we had the votes counted in Europe it was 26:1 against UK, and 25:1 for the German stability pact. The one abstention besides UK was Czech, who are so fed up with the Euro stuff and paying for the PIGS that they even contemplate leaving the EU. Look them up in the financial scorecard, and you find them to be model citizens.

    It is the left / US public opinion which gives a very different impression.

    With the CPI / house prices. I had looked on how people try to incorporate that. It is one of the few things, I have the same opinion as Paul Krugman, that the Fed is right to go with the PCE ex food and energy to exclude that.

    And that the Euro HICP is fine exactly the way it is. (Short comment on the energy, since 2/3 of that in Europe is taxes, and only half the consumption, we have much less noise. Food prices in Europe also seem to be significantly more stable,
    maybe because production is more spread across different countries with different local climate)

    “automatic stabilizers, cash for clunckers, accelerating planned public projects, you know the drill.” This is what we obviously did, independent of any US textbooks.

    Monetary policy is in german textbooks (e.g. Felderer Homburg page 158) rate setting. Or 30 years or more ago, volume of money (M3). This is how people in Europe use this word “monetary policy”

    And your NGDP is not even mentioned. Can you tell me a US textbook where “Monetary policy = NGDP targeting”? I would be very interested.

    For us a normal interest rate is inflation / ( 1 – capital taxes) plus a little something, lets say 0.5 – 1%. And with respect to that the present ECB policy is ultra loose. Especially with the 1 trillion LTRO.

    We had these different vocabulary thing before at Worthwhile Canadian …. Remember? Your US academia is different to my EU political / business. Like “liberal” means very different things here and there.

    I think, your NGDP and the deutsche Ordnungspolitik are now the most pronounced poles in the economic area. I check on your thinking, and given that the german situation doesnt look too bad, I also expect that others at least try to know and understand the german thinking.

    Agreeing is a very different thing. But often it also helps to sharpen your own thinking, when you rub it against the alternatives.

    Since there is
    a) no bundesbank-blog, and can not really be, and
    b) kantoos certainly not representing “german mainstream” and often very slow to update
    your blog would be at present the best place to discuss things out, calmly and disciplined.

    I think, I am open for arguments. I changed my mind on the exogenous growth theories (Solow like, Goldman-Sachs BRIC (hard) “macro”, and see the endogenous “soft” “cultural” factors as way more important, after going through the details of analysis and facts. Solow TFP 1957 is wrong, and both Krugman and Barro still bought into it 1992 with respect to Singapore / Hongkong

    @ Marcus
    in a MU as in any other x-Union, to live by the law and treaties is the first order of business. From our perspective, constitutions and property rights are the core of western civilization, and not achieving certain (N)GDP numbers, which have much less importance to us, compared to You.

    To NRW elections
    One reason the CDU challenger lost so badly, was that it became apparent in the last few months, that he is
    a loudmouth, like Guttenberg before.

    We have a pretty demanding national goal to phase out nuclear energy, and it would be him, as the enviromentment minister, together with the liberal economics minister Roesler, to come up with the plans and details, how to get there. Both were not even invited to the meeting with Merkel last week. I do not expect both to last more than 6 months from now. Both are personal failures. People like me, who are in support of their general positions, dont like them.

    @dwb
    the “stealing” intention so far is focused solely at Greece. And I stand by this. These folks are not part of the western civilization. Samuel Huntington was right, I have to accept this now.

    Neither the EU nor the Euro was ever a “United States of Europe” with some federal army to enforce civil rights, for example. A very big difference

    I think we have a lot more long term thinking in Germany, like this gigantic photo voltaic program, people are willing to subsidizes.

    to the income distribution
    I brought this up here, because in so many discussion about economic policies, I realized that you have to discuss the hole packages, or we will always argue around in circles.

    In the US, being long term unemployed, is an economic catastrophe. You loose health insurance, and when this finally ends up in the emergency room, most of the damage is already done, often irreversibly. To loose unemployment benefits leaves you to these state-specific 5-year life-time rule, which not only Germans but the very most of Europeans find barbaric.

    I see your NGDP thinking as substantially driven by this.

    In Germany, long term unemployment is certainly not a joyful affair. But it is not a catastrophe. You are entitled to a social minimum, which is actually not so bad, and as long as you show some good will, people do not fall into a deep hole. That makes some gradual turn-around over many years way more socially tolerable. And that makes “riding things out” possible. People are aware of a lot of intra-German solidarity, financed by high taxes across the board.

  64. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2012 at 15:50

    genauer wrote:
    “I ll told you took at the graph and the data, because somebody was fired (not directly 1) for “sharpening the text”
    and you continue with the text. Why do I write something ?”

    What you call “sharpening” I call analysis. In any case you cited the paper. But you want to only look at one graph out of context, ignoring all of the other data presented in the paper and ignoring the text. Why did you cite it then?

    You wrote:
    “Please divide the numbers in Table 1 and look if you see a trend from begin (1993) to end (2009). I dont.”

    Please note that if you read the paper and consult figure 3 the reversal in the trend towards greater inequality by this measure reversed from 1993-1999 mainly because of reunification.

    You wrote:
    “Since we have data from 1950, and 1913, for Germany, for the US, and for the UK even from somewhere around 1850, we did not need the OECD and certainly not Piketty Saez to collect those data.”

    Having data and a way of accessing it are two different things. Piketty and Saez have done all the hard work with respect to historical tax data internationally. That is why they are the most widely consulted source for that data now. Similarly the OECD is the leading source for comparable international Gini indicies for the advanced nations.

    You wrote:
    “P/S merely interpret data collected by others (government) and they do it in a very biased way. They look at pre tax, and they only look only at the upper 10 %. Their analysis is in conflict with the government interpretations. It is well known that the after tax data look very different that”

    There is no easily accessible source for the same percentiles for post tax and transfer data (yet). Since few government institutions produce data equivalent to Piketty and Saez I don’t see how anyone can argue that it is in conflict. You don’t need to tell me about the difference, that’s why I went to the trouble of including both measures.

    You wrote:
    “What counts for the (lower) 90 % is, what they get out end as a net income, at that is what P/S do not even look at.”

    In the final analysis it was you who brought up the 11% figure for the top 1% in Germany (which has risen to 12.7% as of 2007). Where did you get that figure? Piketty and Saez of course.

    “A Gini coefficient of 0.6 is off the typically cited 0.25 – 0.3 in a huge way. This CEPR stuff has nothing to do with what people have in their wallet. It is just pure propaganda.”

    The OECD’s Gini index for Germany post tax and transfer is currently 0.295, which is slightly better than median for the OECD. The OECD’s Gini index for Germany pre tax and transfer is 0.504, which is the third worst in the OECD. In any case the issue is not the degree of inequality but the change in inequality. The general consensus is that inequality has been getting worse in Germany since at least 1990.

  65. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2012 at 16:12

    OECD (2008),
    Growing Unequal? : Income Distribution and Poverty in OECD Countries
    COUNTRY NOTE: GERMANY

    “Since 2000, income inequality and poverty have grown faster in Germany than in any other OECD country. They increased by more in five years (2000-2005) than in the previous 15 combined (1985-2000).

     Labour market changes have been a main driver of rising inequality. First, the distribution of gross wages widened significantly after 1995, after a long period of stability. Second, the share of jobless households has increased by 4 percentage points since 1995 to 19%, the highest level across the OECD area.
     The increase in inequality is also linked to changes in household structures, such as the increase in the number of people living alone or in single-parent households.
     Government redistribution through household taxes and benefits has reduced income inequality and poverty but not enough to stop the rapidly increasing gap between rich and poor. Transfers are less targeted to lower income groups than in other countries.
     More German adults and children are living in poverty – that is, living in a household with less than half the median income – today than in 1985. For the total population the income poverty rate increased from 6% to 11% while for children it increased from 7% to 16%. There was no increase among older people: their poverty rate remained stable at around 7% (for those aged 66-74) and 11% (those aged 75 and over).
    * Although poverty rates are high, people do not stay poor for long. Only 2-3% of the population are poor for 3 or more years in a row, which is only half of the OECD average. Also, fewer households than in most other countries struggle to purchase basic goods and to have decent housing and other living conditions.
     Publicly provided health, education and social housing reduce overall income inequality, but by less than in most other countries.”

    http://www.oecd.org/dataoecd/45/25/41525346.pdf

  66. Gravatar of dwb dwb
    14. May 2012 at 16:42

    I see your NGDP thinking as substantially driven by this.

    no: whether inflation targeting, flexible inflation targeting, or ngdp targeting is best depends on the nature of the shocks that generally hit the economy (i.e. mostly aggregate supply or Ag. demand) and the nature of the rigidities that prevent employment from adjusting (i.e. nominal wages being downwardly rigid at zero, nominal debt contracts, and so on).

    Generally, from what I see, in Europe, there is a complete denial that nominal wages are difficult to cut in aggregate. That’s why the strategy of internal devaluation in the periphery results in such high unemployment. Unfortunately, there is also not a fiscal union that would mitigate the adjustment process.

    In the US we have 4% unemployment in the heartland and 12% unemployment in some western states, a very large spread that is somewhat mitigated by federal transfers.

    Overall Fed policy can only adjust the average, but could be too loose in South Dakota and too tight in California. The correct way to offset that differential is fiscal policy and transfer payments which act as stabilizers. The Euro has no mechanism therefore it will continue to get ripped apart unless Germany accepts a higher inflation rate (or enacts further supply side fiscal reforms) to enable the ECB to raise the inflation rate so that internal devaluation ceases.

  67. Gravatar of ssumner ssumner
    14. May 2012 at 17:00

    Saturos. I’m not sure what video that was, but thanks. I hope to have the revisions done in a month, assuming I don’t do too much blogging. I just finished my grading.

    CA, Thanks, now I’ll sell at least 12 copies.

    123, I’m not sure, maybe the split is between the finance ministry and the Bundesbank.

    Josiah, Don’t worry, we’ll avoid the world war this time.

    John, You said;

    “So, consider this. Bob is freaked out about the future and start shoving cash in his home safe. A free banking system would accommodate his effort with new note issuance”

    I’m not at all convinced this is true. I’ve read the free banking papers, but I don’t find them convincing.

    And do I have to write “more expansionary than current monetary policy” every single time? I’m already too busy.
    ‘Stimulus’ is much quicker.

    Thanks James, I have a new post up on that article.

    Ryan, I don’t recall Keynesians saying credit expansion caused recessions.

    RebelEconomist, You said;

    “It is remarkable how NGDP targeters ignore or disparage the relative economic success of the industrialised country that is perhaps the least likely to accept their monetary policy proposals.”

    I hope this isn’t directed at me. I agree with the German view that they shouldn’t be asked to bail out the PIIGS. I agree the German economic model is superior to the PIIGS. I just happen to think their preferred monetary policy is both bad for Europe and bad for Germany. You may think Germans don’t agree with me, but I assure you that German stock investors would very much welcome faster NGDP growth in the eurozone.

    dwb, In fairness to the German position, people in Alabama don’t get to retire at 60. And Massachusetts voters do get to vote on welfare programs that spend money in Alabama. So I don’t think the US is a good analogy.

    genauer, I don’t quite see how your comment on the 26-1 vote relates to anything I wrote. In any case, Britain was an outlier when the euro was created, and I think everyone now agrees they were right.

    You said;

    “Monetary policy is in german textbooks (e.g. Felderer Homburg page 158) rate setting. Or 30 years or more ago, volume of money (M3). This is how people in Europe use this word “monetary policy”

    And your NGDP is not even mentioned. Can you tell me a US textbook where “Monetary policy = NGDP targeting”? I would be very interested.”

    I’m sorry to hear that German textbooks are so behind the times. The idea that low interest rates mean easy money was discredited decades ago in America. Never reason from a price change. Ask why the price changed.

    How has eurozone M3 been doing recently? I recall the M2 figures have been quite low, so that certainly wouldn’t indicate easy money.

    As you know, market monetarism is a very new idea, but I’m told that a number of economics textbooks plan to add it to their next edition.

    As for the CPI, it is an embarrassment. I have a new post showing that the GDP deflator, which is still highly imperfect, but more comprehensive, has been below 1% in recent years.

  68. Gravatar of Saturos Saturos
    14. May 2012 at 18:33

    I was talking about your talk at the Oxford Libertarian Society – the first search result when you Google “Scott Sumner video”.

  69. Gravatar of dwb dwb
    14. May 2012 at 19:13

    In fairness to the German position, people in Alabama don’t get to retire at 60. And Massachusetts voters do get to vote on welfare programs that spend money in Alabama. So I don’t think the US is a good analogy.

    good point.

  70. Gravatar of Saturos Saturos
    14. May 2012 at 19:46

    Scott, I would say that your analysis of the Great Depression is basically an utter triumph of the supply and demand model. Who says it ain’t no good

    ;)

  71. Gravatar of genauer genauer
    15. May 2012 at 03:15

    Scott,

    a quick, short, technical question in between:
    your “In America the CPI shows house prices up 8% since 2006, and Case-Shiller says they are down 35%. Housing is 40% of the core CPI. This is a HUGE problem.”

    we have a little discussion about that over here at kantoos.
    Do you have links handy for how the calculation is done exactly? and where the recent data are for the housing part,
    you are refering to. Maybe even in comparsion to the PCE ?

    Economic indicators of the US in general, I do know how to find, I actually checked with some people the details, when they changed the unemployment calculation back in December 2011. (Book recommmendation: Baumohl, Economic Indicators)

  72. Gravatar of MMJ MMJ
    15. May 2012 at 05:42

    @ Jim Glass: “why have the Germans apparently been so much more traumatized by the great inflation … than the great deflation”

    Perhaps because the former was domestically-generated while the latter was a global phenomena. An untestable hypothesis, for sure, but this is a macro blog, after all.

  73. Gravatar of Greg Ransom Greg Ransom
    15. May 2012 at 12:39

    Scott, these conceptions are not what Hayek contributed — Hayek offered a _malinvestment_ mechanism, and they are not derived from Hayek:

    “They are full of the ideas of overinvestment in the 1920s, and the need for a long painful austerity in the 1930s. They were contemptuous of using monetary stimulus to artificially inflate the economy. It doesn’t matter how personally popular he was.”

    And the fact is, the demand deficiency work of Foster & Catchings were ALL THE RAGE in America between 1925-1935, endorsed by Sen Wagner, President Hoover, and on an on, and know by ALL academic economists of the time, NONE of whom could identify any flaw in the argument. NOT one flaw identified by a single English or American economist.

  74. Gravatar of Greg Ransom Greg Ransom
    15. May 2012 at 12:40

    Scott — identify a SINGLE economist in America endorsing or advocation Hayek’s macroeconomics in the period between 1925 and 1939.

  75. Gravatar of ssumner ssumner
    15. May 2012 at 18:31

    Thanks Saturos,

    Genauer, The official BLS website that handles the CPI also breaks it down by categories. And you can easily google an article discussing the Case-Shiller index, I frequently read articles discussing the 35% price drop figure. Their data is also available online.

    To be precise, housing is 38.9% of the core CPI, and 29% of the overall CPI.

    Greg, If demand side explanations were so popular, how come NGDP fell in half in the early 1930s? Why did Hoover oppose monetary stimulus in 1930?

  76. Gravatar of genauer genauer
    16. May 2012 at 00:52

    Scott,

    thanks for the answer.
    I ll gave up last night waiting (I am in Europe) and went about it by myself.

    I think I solved your puzzle:

    http://kantooseconomics.com/2012/05/09/ooh-do-we-measure-inflation-correctly/#comment-7612

    With respect to Hayek in the 30ties, it is also my impression, that the very most, outside of Austria, regarded him as a little foreign nut, and that it was only his “Road to Serfdom” 1944 which made him famous and part of larger debate, at a point where he has given up to ever put his thoughts into a formal framework, like Hicks did for Keynes.

  77. Gravatar of ssumner ssumner
    17. May 2012 at 09:03

    Genauer, I couldn’t understand what you were doing at all. Do you think housing in America is 8% more expensive than in 2006?

    I’d add that none of the BLS numbers can be trusted. For instance the index number for rents doesn’t measure actual market rents, and hence doesn’t correspond to what economists call “inflation’ in their economic models. If you ever took a close look a what the BLS does you’d be appalled.

  78. Gravatar of genauer genauer
    17. May 2012 at 13:18

    @ Scott,
    I am not here to defend the BLS or the BEA in any way, shape or form. But the way house prices show up via OER is according to what they say, and how this plays out, first order estimate (!), to the average consumer. The most people bought their house before 2007 and did not benefit from the price drop.

    I mean, what I did at kantoos, was exactly arguing, that these kinds of calculations practically nobody understands (well, me a little bit, a 0.01 % ?, I understand your number, and the BLS number) and especially nobody does accept, and that we therefore continue to keep similar stuff (OOH) out of the EU inflation (HICP). Some temporary 0.2 % (very vague approximation in a follow up calculation) are not worth the loss of trust.

  79. Gravatar of ssumner ssumner
    18. May 2012 at 18:19

    Genauer, The question of whether people “benefit” or not has no bearing on whether something counts as inflation, at least the inflation central banks care about. The reason central banks care about inflation is that it affects the real economy. If house prices fall then you tend to get less construction of new homes. That’s why deflation is contractionary. The harm from deflation has nothing to do with when people bought their homes, or when they signed rental contracts etc.

    What matters is the value of new homes and new apartment buildings–as those number influence construction, which is what enters into RGDP.

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