Four wrongs don’t make a right

Wolfgang Munchau started off a recent FT column as follows:

Just imagine it is this Thursday evening in the European Council’s gathering of Europe’s heads of state, and the Italian prime minister stands up and says this: “Mr President, dear colleagues. We are confronted with a simple choice: we can today either save the euro and build the foundation for a future political union, or we could flunk it and achieve neither. We all know what we need to do to save the euro. We require a banking union for Spain, a fiscal union for Italy and a political union for Germany.

“We can, of course, disagree on details. But we have to settle some of these differences this weekend, and take a decision on the steps that are needed right now. Our crisis resolution policies have failed time and again. We now need something that works fast. If we fail, I can assure you that I can no longer be part of this group, and my country can no longer be part of this project.”

I’m having a great deal of trouble following the logic of all this, but perhaps my commenters can set me straight.  Obviously lots of smart people agree with Munchau.

It seems obvious that the euro was a colossal blunder, for reasons ably explained by Paul Krugman in this post.  It also seems clear to me that the euro can’t be fixed with fiscal and banking unions.  If Greece doesn’t devalue, it will remain deeply uncompetitive for many years.  And yet most Very Serious People (and even Krugman is in that group) would be sad to see the euro collapse and are reluctant to pull the plug.  I think they overrate the effects on the European project, (which I agree has been mostly a force for good.)

In my view the euro is fatally flawed, and Europe would be much better off with the monetary regime of the late 1990s.  Yes, a collapse would be very messy, and perhaps it should be avoided, but let’s not ever forget that the system we are trying to save is a bad one, and if we “succeed” then the eurozone will be condemned to further crises in the future.  Maybe not debt crises, but at the very least competitiveness/unemployment crises.  So we shouldn’t enact other flawed policies to save this flawed one.

Now the talk is adding three more unions; banking, fiscal and political.  These are very poor policy options, which wouldn’t even be undergoing consideration if not for the frantic desire of the VSPs to save the euro.  Banking union will make the moral hazard problem even worse.  As it is, the Spanish government didn’t do enough oversight of the regionally-owned savings banks.  And now we are talking about shifting the burden of bank failures from the national governments to the eurozone taxpayers?  How is that likely to improve regulation?  And why stop there, why not an OECD banking union?  (The new issue of The Economist says the burden of financing the deposit insurance fund will fall on banks, not taxpayers.  Yeah, and motorists don’t pay petrol taxes, oil companies do.  I expect that from the mainstream media—but The Economist?  )

I can see how banking union might conceivably be defensible.  Perhaps the eurozone regulators will be controlled by countries that want much tougher standards.  Perhaps it will work.  But fiscal union and political union seem to be an even greater leap into the unknown.  I’d consider these as a pair, as I don’t see how you could have one without the other.  Whoever is cutting the checks will demand a say in how the money is to be spent.

It seems inconceivable to me that Britain would agree to a political union, so I presume this discussion refers to the eurozone, not the EU.  The eurozone excludes Norway, Iceland, Sweden, Denmark, Britain and Switzerland. That’s a fairly affluent group of countries.  The eurozone is shaped roughly like a pyramid, with Finland on top, and a wide base stretching from Portugal to Cyprus on the bottom.  Most of the weight if a pyramid lies in the bottom half, which in the case of the eurozone is mostly lower income countries like Italy, Spain, Greece, Portugal, Cyprus, and Malta.

The balance of power would probably lie with France.  Germany must be terrified that the new French government has just lowered the retirement age to 60 for some workers, and is throwing its lot in with the “pro-growth” PIIGS.  It seems to me that a fiscal union would basically be a regime for shifting wealth from the north to the south.  Given that Germany is one of the few northern countries that’s actually in the eurozone, they must be feeling very isolated right now.  Oh wait, I forget about Estonia . . .

I recall that Krugman mentioned that places like Greece and Portugal are about as far below the eurozone average as Mississippi is below the US average.  That’s true, but misleading for all sorts of reasons.

1.   There are studies showing places like Mississippi receive massive subsidies from other states.  In my view those data are somewhat misleading.  If taxpayers in New York pay into Social Security for many years, and then receive benefits when they retire in Florida, it seems a bit misleading to view that as some sort of gift from the state of New York to the state of Florida.  Ditto for money spent on things like nuclear weapons silos in North Dakota.  Nonetheless, I accept the basic point that poorer states like Mississippi are net receivers of federal money.  But Mississippi does not elect Senators who call for higher taxes on the rich with the money going to support poor people in Mississippi.  The GOP would insist that’s because Mississippians have much more solidarity with the US than Greek voters would have with the eurozone.  Dems would insist it’s all about white Mississippians having solidarity with other white people.  But even using that worse case assumption, America’s fiscal union is still based on a more stable foundation, after all, there are affluent white taxpayers spread all across America.  There aren’t many affluent Greek taxpayers residing in Hamburg.

2.  The pyramid structure I referred to earlier is likely to get much worse as the eurozone grows over time.  And it seems to me that here you have a massive adverse selection problem.  Because of Abraham Lincoln, affluent states like Massachusetts can’t suddenly decide they want no part of our fiscal union, and would rather just reap the benefits of our large single market.  But Switzerland, Norway can and did make that choice.  Britain almost certainly would, and both Sweden  and Denmark might as well.  In contrast, Bulgaria, Romania and Croatia would like nothing more than to join such a union.  And all the likely future expansion of the EU is into areas further east, and much poorer than even Greece and Portugal.  Places like Armenia, Georgia, Ukraine (a country nearly the size of France) Belarus, Serbia, Macedonia, Bosnia, Moldova (the saddest place on Earth—even the name is depressing.)  And did I mention Turkey?  Indeed why not Russia at some distant point in the future?

I’m sure the actual fiscal and political union ideas being kicked around are much more modest than the scary picture outlined here.  But once you start down that road, there isn’t any natural stopping point short of the United States of Europe.  People often compare Europe to the US.  That’s wrong; the eurozone is sort of like the US, although a bit poorer.  But Europe as a whole is far poorer than the US, far more corrupt, backward, inefficient, whatever other pejoratives you want to apply.  Even America at its worst (say the treatment of ethnic minorities) isn’t as bad as the treatment of gypsies in Eastern Europe.  I hope the Europeans look before they leap.  (In case I sound like an ugly American, I’d add that Europe is also better than America in some respects; lower crime rates, more attractive cities, less carbon emissions, etc.  But none of that changes my basic argument here.)

Now it’s time for me to take off my reactionary hat, and put on my progressive hat.  The best way for the Germans to avoid this potential fiscal nightmare is to agree to modestly adjust the ECB mandate, perhaps to a 4.5% NGDP growth mandate for the eurozone, level targeting.  This would give wavering countries like Italy a sense of hope that there would be growth going forward, and that they would not get crushed under an ever growing burden of public debt to GDP.

I understand that most Germans would prefer the current 2% inflation target.  But they need to think long and hard about which would be worse, tweaking the ECB target, or an open-ended commitment to eventually transfer trillions in German tax money to the south and the east of Europe.  (I’m a utilitarian who is not opposed to redistribution.  But if they really feel that generous I’d suggest Bangladesh or the Congo, not Greece.)

PS.  After I wrote this post it occurred to me that more sophisticated euro analysts will view my scenario as simplistic and unrealistic—no one is seriously contemplating that level of integration.  My point was not to predict the future, but rather to provide a warning.  Once you start down that road, there will be constant pressure to go further.  Quite likely at some point the northern European taxpayers will rebel, and we won’t end up with a United States of Europe.  The policy will collapse.  But why start down a road that will end in failure?  The eurozone really only has two options; a more expansionary monetary policy or a breakup.  There’s no point in looking for alternative solutions.


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139 Responses to “Four wrongs don’t make a right”

  1. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    26. June 2012 at 06:05

    Most of the most severe problems are not directly due to downward wage rigidity, they’re due to ECB deciding to act like it’s not a real central bank, making bonds extremely risky, and lack of banking union making each country responsible for bailing out its banks.

    If the only problem was lack of downward wage flexibility (and that’s indeed a real problem), Europe would be in much less awful state. Greece would still be screwed up, but Ireland and Spain wouldn’t be.

  2. Gravatar of acarraro acarraro
    26. June 2012 at 06:07

    The funny bit is that (West) Germany has been in a similar position not long ago. When east and west germany united, they overvalued east germany’s mark. This made east germany uncompetitive and it was only solved by massive fiscal transfers. A higher inflation target (I think the ngdp split would not be great in countries like Italy) would be much better.

    And it would be much fairer than the opposite. Aggregate debt in Italy is not very different from Germany. An inflation tax would penalize rich Italians as well as rich Germans. Euro bonds would transfer resources from poor Germans to rich Italians.

    Plus debt to gdp statistics are mostly rubbish. There is no distinction between consumption and investment and no accounting for promised benefits.

    Right now we are telling Germans to cancel their holidays (in Greece) in order to pay unemployment benefits to greek waiters… It’s just a terrible equilibrium…

  3. Gravatar of ssumner ssumner
    26. June 2012 at 06:08

    Tmasz, It’s a combination of nominal wage rigidity (in all countries) and falling NGDP (in some countries.)

  4. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    26. June 2012 at 06:18

    And why is NGDP falling in some countries? You can plausibly claim that ECB controls total eurozone NGDP, but it definitely doesn’t control how it is divided between countries.

    The policy of national zero-haircut bailouts of banking systems forced most of NGDP collapse to happen in bailed out countries like Spain and Ireland.

    Otherwise impact would be more equal, even if not perfectly so (and presumably crisis in Germany would force ECB to get its act together rather than do austerian moralizing, but that might be wishful thinking).

  5. Gravatar of Randy W Randy W
    26. June 2012 at 06:32

    Scott – and you say you know nothing of foreign policy, yet it seems to me you nail this one. I do think the transfer payments to Mississippi are as huge as they appear to be, though that’s not the case with Florida or North Dakota.

  6. Gravatar of Bubbles and Busts Bubbles and Busts
    26. June 2012 at 06:56

    Good post Scott. Soros, in a recent interview on Bloomberg, laid out the case that introduction of euro bills will inevitably force the Eurozone to accept euro bonds and then finally create a political/fiscal union. So there are VSP trying to promote the steps that ensure that level of integration. Although there will be short-term costs, it’s important to keep reminding people that a United States of Europe is not the only possible outcome and may even be worse than ending the current monetary union.

  7. Gravatar of Shane Shane
    26. June 2012 at 07:02

    On the bright side, if you or other Market Monetarists can just convince some clever PIIGS politician to say “Level targeting or we’re out!” monetary fixes might finally get the credit they deserve.

  8. Gravatar of dwb dwb
    26. June 2012 at 07:25

    “perhaps to a 4.5% NGDP growth mandate for the eurozone, level targeting.”

    the ECB used to have (and still does) a “second pillar” on 4.5% m3 growth.

    I see both outcomes (full political integration, fall apart) as being a possibility. monetary policy which prevents a breakup only prolongs the inevitible outcome.

    As far as a political union, I think it comes down to whether there are returns to scale. In the arena of foreign policy and defense, i can certainly see how a larger union provides leverage that 27 smaller countries would not have. Do Spain and Italy really need their own army? In the area of regulation like banking, i definitely see some returns to scale, having one set of rules rather than 27. I could certainly see some benefits to common labor rules and a less balkanized banking system to provide some shock absorbers and to smooth convergence.

    but: its either full integration or bust. Once they go down the road its harder and harder to turn back. A full integration means a full political union that delegates sovereignty to a central democratic authority to something like the EU parliament that allows Germans to get a vote over things like French pensions (really, a vote over common pension rules).

    or, dissolve the whole thing. i dont think there is room or benefit in half measures.

  9. Gravatar of Bill Ellis Bill Ellis
    26. June 2012 at 07:26

    Now I am convinced…
    The North should secede from the Union. The south can keep DC and the name and their backward philosophy.

    We will keep our money.

  10. Gravatar of mbk mbk
    26. June 2012 at 07:29

    Munchau is late to the table, here we go, all this is already proposed by the European Commission:
    http://www.bbc.co.uk/news/business-18592135
    and Germany’s Schaeuble calls for an elected European President too. I actually prefer the integration route and the Euro. Just back from holidays in Europe and as in the years before I strongly believe Europe is far better than it is made to look like in the anglo press, and yes, that includes economically.

  11. Gravatar of Gabe Gabe
    26. June 2012 at 07:35

    “(The new issue of The Economist says the burden of financing the deposit insurance fund will fall on banks, not taxpayers. Yeah, and motorists don’t pay petrol taxes, oil companies do. I expect that from the mainstream media—but The Economist? )”

    I guess you didn’t know the Economist is owned by the Rothcild group?

    http://en.wikipedia.org/wiki/Economist_Group

    Your naivity on ownership of the media is similar to your naive hope that Bernanke and the Fed are honestly trying to make life better for the common man through scientifically valid monetary policy…as opposed to operating as a tool for the politically powerful people that knows how useful it is to control a economic manipulation machine.

  12. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 07:39

    The best way for the Germans to avoid this potential fiscal nightmare is to agree to modestly adjust the ECB mandate, perhaps to a 4.5% NGDP growth mandate for the eurozone, level targeting.

    For some reason I am picturing a prescription drug addict who is inwardly chaotic, but outwardly calm, going to the doctor and politely asking him that maybe, perhaps, not really sure but oh let’s just try it out anyway, the doctor should give the addict another prescription hit. Perhaps it will help. Perhaps it’s better than withdrawal.

    Once you start down that road, there will be constant pressure to go further.

    Kind of like going down the road of price inflation targeting has eventually resulted in market monetarism arising, whose sole purpose is putting pressure on central banks to inflate more for the sake of NGDP, which will of course raise prices, on the basis that 2% price inflation is deemed no longer beneficial (Austrians already knew that a priori).

    Then, should they adopt 4.50000000364536% NGDP targeting, there will arise pressure to raise the target, since it is deemed no longer beneficial (Austrians are also saying that a priori, but it looks like market monetarists do not know how to reason, and can only think on the basis of the data produced by actually trying the next crackpot inflationist scheme).

    Then a new sub-sub-branch of monetarism will arise, let’s call it neo-market monetarism, and its proponents will believe that the 4.50000000364536% NGDPLT should be raised to 5.000000824284%. Then, oh I don’t know, perhaps 5.25000009735%. Then, let’s just say for argument’s sake, 5.5000000253637%. Then, hmmm, we could try 5.7500000378926% just to see what happens, as economic yahoo over in jerkwater USA has a model that shows the benefits of raising the target by another 25 bps as a temporary emergency measure. And thus accelerating NGDPLT, let’s call it ANGDPLT, is born.

    Neo-market monetarism will advocate that constant level NGDP targeting is “restricting” employment and output because it ignores the problems caused by an absence of ANGDPLT, pretty much the way market monetarists are today saying that constant price targeting can end up restricting employment and output if NGDPLT is ignored.

    Then some Fed chief might let it slip that the only valid measure of monetary policy is not aggregate demand, not the growth rate of aggregate demand, but the acceleration in the growth rate of aggregate demand. Then the neo-market monetarists will argue “Aha! The Fed chief once agreed with us. We must try it!”

    So constant level NGDP targeting eventually gives way to the next flavor of the month, called ANGDPLT. If people complain about it, then they’ll just be told “What, you don’t accept the empirical fact that NGDP constant growth doesn’t have detrimental effects on the economy? Look at the periods of history when we had the most growth! NGDP was accelerating! We had the best times during those periods. If your nominal wage increased by “only” the same rate each year, you’d be way worse off as compared to my proposal. My proposal is far less restrictive than the old pseudo gold standard thinking influenced NGDPLT. Just look at the historical data. The period 2014-2018 had accelerating NGDP, and unemployment averaged 1% and real GDP was 3% per year! You’re denying the evidence? Yes, I realize we had a deflationary depression 2018-2025 once aggregate demand collapsed to a mere constant 4.500000328338% growth, but that is precisely what caused the depression! If only the Fed didn’t fall asleep at the wheel, and kept accelerating NGDP, then we could have avoided the depression.”

    ——

    The whole of the European state is nothing but a mechanism of systematic wealth transfer run by sociopathic crooks who smile. Just like babies react favorably to adults who smile, so too does the average voter believe a politician has their interests at heart if they smile.

    What Europe needs is to politically (and thus monetarily) decentralize. Let the centralization of money evolve according to individual preferences based on individual property rights, not political force. Dissolve the behemoth, wasteful, inefficient, and destructive states.

    Political decentralization is the path to prosperity for humans. Political centralization is the path to ruin. Both theory and history bear this out.

    Europe’s problems are not caused by not enough political centralization. They are caused by the positive political centralization that exists and has been continuing to grow. Did Europe ever have so many problems for so long before the rapid centralization that took place in the latter half of last century? One would have thought that the USSR experiment would be enough experience to steer clear of centralization.

  13. Gravatar of Russ Anderson Russ Anderson
    26. June 2012 at 07:43

    The eurozone really only has two options; a more expansionary monetary policy or a breakup. There’s no point in looking for alternative solutions. That pretty much nails it. And the ECB has made it abundantly clear they will not provide expansionary monetary policy.

    This really is similar to the situation in the late 1920′s with the gold standard, where for various reasons the gold standard was resulting in excessively tight money which was strangling countries economies. As each country left the gold standard they were freed from the tight money constraint and their economy began to recover. Spain and Greece are in a similar situation where their economies are so depressed by tight money and austerity that leaving the Euro will be less painful than staying on, and allow their economies to recover.

    It is a shame because monetary union could have provided economic efficiencies, had the ECB simply provided sane monetary policies.

  14. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 07:48

    Just look at the evidence!

    Krugman always likes to say how awesome 1950-1980 was.

    See how the NGDP growth trend was accelerating during that time?

    Let’s just skip the market monetarist NGDPLT stage, and go straight to ANGPLT, so that we don’t have to play “catch up” later on.

  15. Gravatar of RebelEconomist RebelEconomist
    26. June 2012 at 08:10

    Nah, this is all rubbish. As I wrote here a few days ago ( http://www.themoneyillusion.com/?p=15072#comment-166073 ), most Europeans understand that German monetary discipline has made a key contribution to their economic success, and if forced to choose, they will cling to German money. All Germany needs to do is put WWII behind them, accept that they will probably lose some of their past transfers to the periphery like the TARGET2 balances, and say to the other eurozone countries, “this is what we are prepared to accept, take it or leave it”. A quorum of the other countries will then fall meekly into line behind Germany, the French will be forced to follow and the Germans won’t miss any country that does not. And then economists can put their theories about optimal currency areas back on the shelf, and start engineering other ways of instilling the necessary economic flexibility to allow a monetary union with limited fiscal transfers to work (eg by improving industrial relations to make wages less sticky).

  16. Gravatar of D.Gibson D.Gibson
    26. June 2012 at 08:25

    I think the EMU should consider going with 10% NGDP target. It will be good for the southern countries. The northern countries can’t afford (and won’t accept) the debts of the south. The southern countries can’t stick with austerity. That just leaves splitting up or inflating.

    And stop picking on Mississippi. If cotton and peanut farmers had the political power of the banking and insurance cartels, the money would flow the other way.

  17. Gravatar of Shane Shane
    26. June 2012 at 08:41

    D. Gibson raises an interesting point. This may in some way dovetails with issues raised in the China and NGDPLT post. If the problems of the Euro Zone are monetary, then there should also be a monetary fix–no groundbreaking claim there. Would the Euro Zone need 10% NGDPLT, or would something in the 5-7% range suffice?

  18. Gravatar of Wonks Anonymous Wonks Anonymous
    26. June 2012 at 09:11

    Off-topic, but Josh Hendrickson and David Andolfatto are having an interesting back-and-forth on an Overlapping Generations model of NGDP targeting. Andolfatto definitely seems the nicer of the “St. Louis twins”.

  19. Gravatar of ssumner ssumner
    26. June 2012 at 09:18

    acarraro, Good point.

    Tomasz, I agree the bailouts were a bad idea, but even without them you’d need a big devaluation–as in Iceland.

    Randy, I didn’t mean I know nothing about European economics, I was talking about military policy, etc.

    Bubbles, I agree.

    Shane, Let’s hope so.

    dwb, I see huge diseconomies of scale in governance, which is why I think political union would be a disaster for Europe.

    Bill, I don’t thinks the subsidies from the north to south are as large as advertised. Also recall that some southern states like Arkansas, Texas and Georgia pay more to the government than they get back.

    mbk, I doubt the people of Greece and Spain would agree with your view that Europe is doing well.

    Gabe, You said;

    “I guess you didn’t know the Economist is owned by the Rothcild group?”

    Congratulations on the most idiotic comment of the week (excluding MF of course.)’

    Russ, Very good post.

    D. Gibson, I don’t recall picking on Mississippi.

    Shane, The 10% figure would obviously never be accepted by Germany. I think even 5% would help a lot.

  20. Gravatar of Neal Neal
    26. June 2012 at 09:27

    Scott, since we all know that social security is a transfer system, not a retirement account system, I don’t think it’s wrong to call the payroll taxes of workers in NYC a transfer to retirees in Florida. There’s also federal funding for Medicaid and unemployment insurance, too.

  21. Gravatar of ssumner ssumner
    26. June 2012 at 09:45

    Wonks, Thanks, I left a comment over at David’s blog.

    Neal, That doesn’t address my point. I’m fine with viewing it as a transfer program, and then viewing things in a Kotlikoff-type intergeneration sense. In that case places don’t matter, groups of people matter. The question then becomes what’s the lifetime contribution in taxes of people currently residing in Florida (they may have paid taxes elsewhere) and what’s the lifetime benefits received, wherever they resided at the time. The key unit is “people currently residing in Florida”, not money delivered to the geographical area of Florida.

    So either way you cut it my criticism stands.

  22. Gravatar of mbk mbk
    26. June 2012 at 10:05

    Scott, the current crisis nonwithstanding, total GDP of Argentina is only about 30% higher than Greece. Just think about the enormity of this fact: a country the size of a subcontinent with vast resources, land, educated people, and they just barely make it beyond tiny, belittled Greece. Also, GDP of Spain, around 20% below Russia and 25% below Brazil, again, subcontinents with vast resources and several times the people than Spain.

    What does this tell us? It tells us, Europe is orders or magnitude ahead of a whole lot of current favorite worldwide hopefuls. Crises come and go. I am just really sick of the sick talking of Europe.

    See, compare say Vienna, Austria’s electronics and wholesale superstores to Singapore’s, just because I am familiar with both of them and have direct comparison. These stores’ areas are four, five times larger in Vienna than in Singapore. There is much more variety in them in … Vienna. The prices in Vienna incl. 20% VAT and massive European taxes are up to 20% *lower* than Singapore’s retail prices incl a 7% VAT here. And that is when everyone agrees the Euro is still massively overvalued. Of course in the US retail prices are cheaper still. And why is that so? Massive economies of scale in a single market, a single currency. That is why the European Union, the Euro, are worth saving, that is why everyone just clenches their teeth and hopes they get through this crisis with the main structures intact. The benefits have been enormous, I have seen it over the years, I see it every year with great surprise when I compare efficient Singapore to ‘benighted’ Europe: Europe has an edge where you’d expect it the least, and much of this comes from the single market and the single currency. Americans are so used to theirs, they have never known anything else of course, so they don’t realize how much of a boon it is.

  23. Gravatar of Doug M Doug M
    26. June 2012 at 10:13

    The fiscal union / banking union / bailout driven strategy to date is to embrace a system that says that we will all go down together. This is not stablity — quite the opposite. A stable economic system is one that can allow any agent in the system to fail without threatening the stability of the entire system. Embrace failure!

    The current system of the Euro lacks the flexiblity for prices to adjust locally. If the EZ followed the market monetarist and targeted 5% NGDP system wide, we would expect to see 4% real growth and 6% inflation in Germany, with 0% NGDP in Southern Europe. The Southern Europeans would still be begging for easier policy and the Germans would say that inflation is intolerably high.

    All of Europe’s problems aside, Spain and Italy would much rather stay in the Euro than drop out. Those two countries may complain about how high there debt service numbers have climbed recently. But Spanish rates at 7% are well below the 12% rates they were paying, and would again pay, if they went back to the Peseta.

  24. Gravatar of Saturos Saturos
    26. June 2012 at 10:32

    Scott, I don’t get it. Are you saying the Euro was never a viable proposition? Don’t you think that there was some merit to the idea that the existence of the Euro would itself promote the labor mobility that is needed to make it work? Do you or don’t you think that if there was no NGDP crisis, and if sovereigns could somehow be made to behave responsibly, then it might have chugged along for another few decades?

  25. Gravatar of johnleemk johnleemk
    26. June 2012 at 10:40

    mbk,

    “The prices in Vienna incl. 20% VAT and massive European taxes are up to 20% *lower* than Singapore’s retail prices incl a 7% VAT here.”

    As someone who’s lived in and been back to Singapore many times, and also travelled in Europe, I find this a little hard to believe this is true in general. The “up to” in your comment is a bit of a giveaway that this isn’t true across the board. I am also skeptical of the proposition that the Euro has been integral to this success, assuming your description of it is true, if only because you seem to have begged the question (in the sense of the logical fallacy).

    In any case, remember you are commenting on a blog titled “The Money Illusion.” The crisis of the Euro, as Scott concluded, can only be solved by money loosening or a breakup of the Eurozone. Given the key premise this blog is dedicated to, I think it’s obvious that Scott isn’t anywhere as pessimistic about the idea of Europe as you seem to think he is.

  26. Gravatar of Lars Christensen Lars Christensen
    26. June 2012 at 10:57

    Saturos, no it was never a viable idea. Scott is totally right about that. Everything about the euro construction was wrong – and it is getting worse day-by-day. And even worse the best thing in the EU – the internal market – is likely to get under attack from European politicians in the attempt to save the euro. Without monetary easing it will continue downhill for the euro and like in the 1930s it is likely to lead to more and more interventionism and nationalism. It is a sad, sad story.

  27. Gravatar of Gene Callahan Gene Callahan
    26. June 2012 at 10:58

    @Gabe: “Your naivity…”

    What does the day Jesus was born have to do with this?

  28. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 11:00

    ssumner:

    John, You can’t beat something with nothing. Tell me what monetary policy you favor, and we can see if it’s better than what I propose. And don’t say abolish the Fed. The Fed exists, we are all trying to minimize the damage it does.

    NGDP targeting at the Fed doesn’t exist either, and yet you’re advocating for a change to what exists.

    Why are those who want a change to the monetary system – by abolishing the Fed, not allowed to say “abolish the Fed”, but you who want a change to the monetary system – by abolishing price targeting, are allowed to say “abolish price targeting”?

    If you say you can change what exists, then so can John. Every progress entails a change to what exists. In fact, every individual action presupposes an ability to change external reality according to cause and effect. We wouldn’t act at all if this weren’t possible.

    The excuse that “the Fed exists, deal with it” is just an inability, or refusal, to deviate away from your own idealistic crusade of change. Is it because you know deep down that abolishing the Fed is better than what you are proposing? Is that why you don’t want to hear End the Fed? Is that why you don’t want to measure up NGDP against it? Do you only want to measure NGDP up to worse Fed targets, because, of course, NGDP presupposes the Fed MUST exist? Is that why you ex-post rationalize by saying “the Fed exists, deal with it.”?

    Is there common ground between us, indeed all people, that goes beyond the Fed? Obviously. Why not then make economic arguments on the basis of that, so that we can find an individual based solution, rather than a collectivist monetarist based solution that invariably implies exploitation between groups, namely of those who print money as against those who do not?

    The optimal solution to economic problems that concerns individuals, is economics based on individual action, not groups of individuals like the Fed, or the Treasury.

    ——

    What if an old world monetarist told you “We have price targeting, that exists, just deal with it you market monetarists!”? You’d then argue exactly like John, and say “Well, let’s change what exists then!”

    The difference between your proposal, and abolish the Fed proposal, is a PRODUCT of the ideas people have, not some necessary historical process apart from people’s ideas. The mass of people won’t change their ideas unless the intellectuals change their ideas. The mass of people have been taught that price stability is important. Why? Because that’s what they were taught to think. Well, if you teach them that we should abolish the Fed, then the masses of people will think the Fed should be abolished!

    If you admit that people’s ideas can change when it comes to what the Fed should do, then you admit people’s ideas can change when it comes to whether or not a Fed should even act at all. It’s up to academics like you to trailblaze, and yet you’re failing by capitulating to the very system, the very reason, you’re here in the first talking about monetary problems and why the Fed failed. Central planning always fails. Central planners always think the previous plan failed not because central planning fails, but because the chosen plan wasn’t the right plan, and that finally central planning will work if only a newer, better plan were adopted.

    You’re a central planner who doesn’t want to accept that central planning fails, because you have faith your new and improved plan will work, just like every central planner has thought so before you. Yet no central plan has ever produced gains for the mass of people. It has only ever, and only will ever, reduce the gains that would have otherwise been made, by wealth transfer and wealth destruction. Mises showed why: the lack of a price system for the means of production in the socialist commonwealth. Please note that his refutation goes far deeper than showing communism on the USSR pattern doesn’t work. It actually proved that any communist intervention whatsoever is destructive, including communist central banking in a capitalist economy! He showed that market economies are harmed to the extent that the price system is harmed. Please admit that money production in central bank economies is not carried out subject to private property and profit and loss, and thus distorts the price system for the means of production. There is no price system for the production of money itself in central banking economies. Central banks can create money by taking advantage of the state’s violation of private property rights when it comes to money. We are all physically coerced into paying taxes in the Federal Reserve System’s monopoly paper. This results in money production no longer being subject to profit and loss in economic competition. The price system for money itself breaks down. This is why there are always problems with monetary policy, and why economists waste years trying to find a magical key that works.

    It’s a hard lesson that Friedman accepted in his later life, after years of trying to find the magical key.

    If money production were run in the free market, you probably would have been a professor of something else. It is precisely because academics that came and went before you decided to intellectually capitulate as well, and fail to change people’s ideas for the better, that you are here now arguing as if central banks are allegedly inevitable, and that you just want to minimize their damage, rather than abolishing them.

    Is it a fear of a world without centralized monetary management?

    Would you say that because theft exists, let’s minimize the damage by targeting 5% increase in theft each year? No? Then why do that with inflation tax? If something is bad, then work towards its destruction.

    Imagine if most other economists called for the abolition of the Fed. Should we THEN be an “independent” thinker and join with the majority? What are you waiting for, really? You already have tenure. You can’t get fired, short of stealing or murder. Why aren’t you using your power and influence to not just “minimize” the damage the Fed does, but to abolish it outright? Central banks are a relatively new institution in human history. It’s not like abolishing the state.

    Is it a matter of fear of being labeled a crank by your peers? Of hearing snickers as you walk down the hallways? Of the Fed not taking you seriously? Who gives a flying rat’s a$$ what your peers think? They’re too dimwitted to know what’s right anyway. They can no longer hamper your career.

    Yes, you’ll have to say good-bye to decades of intellectual investment, but Friedman did it, Keynes did it, so it’s not like you’d be the first economist to do it. Yes, it also means you’ll be spoken of in the same sentence along with the Austrians, of whom your peers love to ridicule because they can’t refute the ideas, exactly like high school bullies ridiculed the nerds because the nerds were smarter than they, and the bullies didn’t know how else to compete.

    Walk the light. Don’t just look at it. If you do start to advocate for the first best solution of abolishing the Fed, just like Friedman did in his later years, and you devote your power and energy towards it, I promise to never visit this blog again. How’s that for an incentive?

  29. Gravatar of Major_Freedom Major_Freedom
    26. June 2012 at 11:20

    ssumner:

    “I guess you didn’t know the Economist is owned by the Rothcild group?”

    Congratulations on the most idiotic comment of the week (excluding MF of course.)’

    I suspected it was a relevant comment as soon as I saw this reaction.

  30. Gravatar of J.V. Dubois J.V. Dubois
    26. June 2012 at 11:42

    This is interesting article, but I do not share yours or Larses confidence that there was always everything bad with Euro. I do not claim that I know what is good, but nevertheless there are some things to consider:

    1) Euro is and was powerful signalizing tool for all other kinds of integration. Using Nick’s terminology, it is a major “noncausal” that serves both as a reason and as a goal of further integration of markets and for political reforms. Most eastern European countries were able to make reforms just for this reason. Look at what Estionia is willing to sacrifice just to be in the Eurozone. You may think that there could be a better goal, but we have to do with what we have.

    2) I still think that political union of some sort is inevitable to establish more integrated markets. Otherwise local elites can use their power to subvert rules and institutions, they can cheat on partners undermining pacts and agreements. “Free movement of labor, capital and goods in EU” can be a strong idea behind which people can align. But then there needs to be some political authority that judges which from dozens of countries behave according to rules and which cheat. Without good institutional foundation, without system where people from all governed countries can be represented this in my opinion cannot stand.

    3) You see a world where political expansion of European Project will inevitably lead to more corruption and inefficiency carried over from badly governed members. Funny that I can see all sorts of bad things happening without this. Funny that you mentioned Gypsies – as I fully agree that they are handled terribly and that this is possibly biggest stain on countries that aspire to become part of civilized world. But in my eyes you greatly underestimate a possibility that things could be much worse if it would be each country for itself where they could do whatever they want without repercussions.

    Mrs Kim Lane Scheppele appears from time to time as host on Krugman’s blog covering Hungarian situation spiraling out of control – country that has its own currency and that should be by your logic free to exit from crisis.

    So in short the reality is far more complicated then theory. In a way this crisis was quite a good test for the whole Europe. In the end the decision to create a political and fiscal union is logically a political one.

  31. Gravatar of Orionorbit Orionorbit
    26. June 2012 at 13:12

    Scott, as far as I can tell its not that you and Munchau disagree head on, but you are considering all possible solutions to the problem, while he’s only considering those that are politically feasible, even remotely. I agree that ngdp targeting would be quite helpful as long as the ECB targets euro wide ngdp growth instead of just German GDP growth.

    Also I don’t see a problem with differences in retirement ages provided that pensions are funded, in fact if pensions are fully funded I don’t get the point with mandating a retirement age at all, people could simply retire as soon as they are happy with the pension rights they have accumulated.

    Finally, in case you havent noticed, Wren-Lewis talks favorably about targeting earnings growth alongside inflation.

  32. Gravatar of Mike Sax Mike Sax
    26. June 2012 at 13:20

    My theory is that if the euro could be saved Keynes is the one who could have done it. The Euro project had the wrong monetary ideas to start with. Something like the Bretton Woods system could have worked.

    The problem is that Greece and the other so-called “PIGS” are felt to be the ones who have to take all the pain of adjustment. Essentially this is the kind of deflationary policy that Keynes wanted to get away from-it was how Britian for instance dealt with the aftermath of the Napoleanic wars-painful deflation. That was the gold standard era but the same ogic is being applied here.

    When Hollande and others-including Obama himself-demand more growth oriented policies-now even Germany has to pretend to be for growth, though they try to convince people that “growth” and “price stability” are one in the same-they’re on the right track.

    “In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.”

    “But the United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, balked at Keynes’ plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country”

    http://en.wikipedia.org/wiki/Bretton_Woods_system

    Obviously now Germamy has thought-they are showing signs lately of maybe thinking twice-thinks that the problem is only on the deficit countries.

  33. Gravatar of Mike Sax Mike Sax
    26. June 2012 at 13:30

    In any case I think if you don’t like more fiscal, banking, and political union, etc. then the only other choice is ending the euro. Yet I doubt that this is a net gain for anyone including Germany.

    You seem to always have only sympathy for them but they were “the sick man of Europe’ prior to the euro and actually for all their self righteousness they only got on the euro themselves by fudging the fiscal deficits rules-as did France.
    Again that’s why I see all this talk about fiscal deficits as a red hering. Many of the countries in trouble didn’t have deficits coming into the crisis-like Spain, Ireland…

    I see it as a morality play basically. And evidently you’ve had the Germans explicitly say8ng the were the “good worker ants who saved” and now screw those who didn’t. As if even if that were true it would matter. If the house burns down with you in it what help is it to know it wasn’t your falut it was your rommates fault?

  34. Gravatar of Mike Sax Mike Sax
    26. June 2012 at 13:34

    On the other hand the oone thing I would agree with you on is that there just isn’t the level of cultural ties in the euro countries like you have between states.

    There’s a sense that the euro project seems somewhat unnatural to the average European who has indentitfed himsslf as part of a distinct naton for centures. It was much easier for the states who shared culture, history, and very importantly language.

  35. Gravatar of Mike Sax Mike Sax
    26. June 2012 at 13:37

    “Did Europe ever have so many problems for so long before the rapid centralization that took place in the latter half of last century?”

    Right they had no serious problems till then other than WWI and WWII, the Napoleonic Wars, Religous Wars, the 100 year wars.

    No. Everything was dandy in Europe until that darn euro idea.

  36. Gravatar of dwb dwb
    26. June 2012 at 15:18

    aaaaand just when i think there is no one who makes more stupid remarks that MF:

    http://www.reuters.com/article/2012/06/26/us-usa-fed-fisher-idUSBRE85P1AU20120626

    at least he admits there is hope:

    “I would argue against it unless something comes up that I don’t understand,” Fisher said.

    finally, then, he might shut up!

  37. Gravatar of Benny Lava Benny Lava
    26. June 2012 at 15:21

    I would just like to add that much of the transfer of money from the North to the South is in the form of the military. Just look at the preponderance of Southern military bases. Look too at Southern support for the military (Ron Paul was booed in South Carolina for invoking the Golden Rule). Retirement states like Florida are not big transfer states. Places like Mississippi, Missouri, Alabama, are. Also Alaska. Keep that in mind when remembering Sarah Palin talking about Russia, scrambling jets, and attacking Iran.

    So maybe the solution for the EU is a big EU military with most of the bases stationed in Spain, Portugal, Greece, Ireland, and Italy!

  38. Gravatar of Gabe Gabe
    26. June 2012 at 17:35

    http://en.wikipedia.org/wiki/Economist_Group

    “The Economist Group but does not have a controlling interest. The bulk of the remaining shares are held by individual shareholders including the Cadbury, Rothschild, Schroder and other family interests as well as a number of staff and former staff shareholders. ”

    Rothschild have been in favor of increasing the structures of global governance for quite a while. It is no surprise when the Economist comes out in favor of global carbon taxing schemes or when they say things like: “the burden of financing the eurpoe wide deposit insurance scheme will fall on banks, not taxpayers.”

    I was just pointing it out so you won’t be fooled by them the next time they support some new war trumped up against a country that doesn’t want to use the Dollar or the Euro.

  39. Gravatar of Jim Glass Jim Glass
    26. June 2012 at 19:02

    So maybe the solution for the EU is a big EU military with most of the bases stationed in Spain, Portugal, Greece, Ireland, and Italy!

    I’m not sure the Germans would want to arm them at this point.

  40. Gravatar of mbk mbk
    26. June 2012 at 20:59

    Johnleemk, on price comparisons, I am just trying to say I did not do full statistics. But I looked carefully at specific items and asked around too. Besides the obvious, rents and cars (in both, Vienna about half to one-third of SG (!)), the comparison was roughly as follows, taking SG prices as base and Vienna prices as the variable:

    - food in supermarket -10 to -30% (dairies easily 30% cheaper in Vienna, alcohol and coffee up to 70% cheaper, odd esp. the loose coffee prices)
    - electronics superstore 0% to -20% (I know this because I looked closely at cameras I was interested in and for years I had to disappoint my Austrian brother in law in that bringing stuff in from SG makes zero financial sense. I also looked at specific washing machine models we recently considered, Miele, Bosch, Samsung; finally, memory cards)
    - big box wholesale superstore (dishes, tools, toys etc) hard to tell across the board but somewhere 0 to -30%, especially odd when made in China BBQ sets seem much cheaper in Vienna than in SG but here I haven’t directly compared models
    - shopping mall, T-shirts and other clothing, my wife claims cheaper, I’d say, certainly not worse
    - local food in popular suburban restaurant (this we compared intentionally) -10% to -20% even though portions are much larger in Vienna. That is if you ignore alcohol, much cheaper still in Vienna if you include it. Excludes hawker centre food of course, talking about chain store restaurants in SG vs “Heuriger” in Vienna.
    - taxis +30% in Vienna, the only item where SG clearly wins along with
    - gas at the pump +18% (I calculated precisely here. Of course half of this is taxes in Austria. And road taxes, road pricing etc are far cheaper in Austria).

    Is all of this due to the Euro, well no of course, but the single market very certainly has a lot to do with it and the Euro has added to this a massive reduction in financial fees and currency hedging needs. This translates to additional savings. Singapore by contrast is exceedingly free trade and low-tax to no-tax. But it is a very small market and this has intrinsic disadvantages, and my price comparison shows how economies of scale in EU seem to trump tax advantages in SG, in retail. No coincidence, creating a larger market has been the overriding reason for SG’s welcoming immigration policies in the past.

    I’d go out on a limb and add some more anecdotal observations. Contrary to what many say here, I heard comments in Austria that the young generation indeed does not think much of national borders anymore. I personally was oddly relieved when crossing from holidays in Croatia (non Euro) to Slovenia (Euro) just because you get this “home” feeling, to re-enter Schengen and Eurozones (note, technically Croatia now also applies Schengen). Yes, common currency can have a symbolic meaning like a flag. Most press discussed here comes from UK/US sources. Most commenters too are US/UK or at least Commonwealth based. Of course to most of the above the Euro feels alien – because they don’t use it daily.

    I know full well Scott’s blog is about the importance of monetary policy and I have learned a lot about monetary policy here. I just don’t understand how and why all this implies that the Euro is a bad idea. If monetary union can work for the large and diverse US, why not for Europe? The talk of cultural differences and lacking labor mobility is a red herring. There’s plenty of mobility within Europe, and even from without the EU as the many millions of Algerians in France and the Turks in Germany attest. Greeks and Spaniards have gone to work in Germany for decades. I mean, right now Austria is full of East German waiters, Slovakian home personnel, Polish construction engineers, and that’s just stuff I heard from horse’s mouth, anecdotically, this very month. When I read the comments on this blog on the Eurozone’s woes I seem to enter a parallel universe where Europe is made to look like the Cold War situation of the 60′s with suddenly open borders but no further changes. Some things have changed and many have improved, vastly, thanks to the EU and the Euro too.

    J.V. Dubois, agree wholeheartedly. The Euro and internal market does also have to be understood as an ongoing project. It is more a tool for further integration than it is a result of integration. And Hungary is a warning example of what can happen with an independent currency and loads of independent national feelings and policies, even within Europe.

    Mike Sax, something like Bretton Woods for Europe was tried in the eighties – limiting exchange rate fluctuations – and went so badly that it hastened the creation of the Euro.

  41. Gravatar of Saturos Saturos
    27. June 2012 at 00:56

    Last night I listened to Russ Roberts’ interview with Milton Friedman on EconTalk, just before he died. It was disappointing to say the least. Well at least the first part was, the last part actually made me tear up a little. But I had cultivated a myth of Milton Friedman based on reading Scott, as being a sort of proto-Market Monetarist. I felt sure that 21st century Milton would have essentially the same views as Scott. But that wasn’t so. Instead what I found was a Friedman who clearly insisted that the main takeaway from a lifetime’s work on money was that there should be strict adherence to a k% money growth rule. Indeed he went so far as to suggest that the base ought to be frozen, and money growth restricted to growth in the higher aggregates. He did want to replace the Fed with a computer – but that computer would simply implement his k% rule. No mention was made of the fact that targeting the money supply alone would not guarantee price or nominal income stability. Russ asked him why it was that central banks insisted on talking about interest rates instead of the money supply. Milton replied with a number of points: first, that the Great Moderation could be explained by a near approximation to his k% rule; second, that bankers thought naturally in terms of interest rates and could not naturally lend their thoughts to the aggregate quantity of money which was not individually their concern, therefore the Fed naturally catered to that prejudice in its communications; but third, he insisted that movements in interest rates were merely the result of adjusting the growth of the money stock to prevent it from over or undershooting the k% growth rate. He then got himself confused over a simple point of monetary policy. I quote:

    The Fed says the short term interest rate should be 4.5%. How do they keep it there? By buying and selling securities on the open market. Now, you’re Mr. Bernanke, you’re Mr. Greenspan, you’re watching there, and with the current short term interest rate you find that the quantity of money is starting to creep up more rapidly than you really want. Well then you will tend to be favorable to raising to a higher rate of interest. At that higher rate of interest the demand for money is less, and, er, so the supply of money, under that phenomenon, instead of having to sell, uh, government bonds to keep it there, they have to buy government bonds to keep it there. Or vice versa. Maybe I’m getting it mixed up. But in any event, the short term interest rate is a tool with which you can control the quantity of money.

    And when Russ asks him about what he expects for monetary performance going into the future, he repeats exactly what is traditionally associated with him: that there is far more upside risks on prices than downside; that governments want to spend money without explicit taxes and hence can’t keep their hands off the printing press, that the main source of irresponsibility would be to inflate. If there was any virtue to the gold standard, he suggested, it was in its ability to keep the quantity of money stable!

    I don’t think it’ll happen [freezing the base], unless there’s another catastrophe like the Great Depression. Under those circumstances you might have it, but other than that it’s not gonna happen. And I think the real danger of this [the Great Moderation] breaking down – there’s no danger of this breaking down into a Great Depression. The real danger is that it’ll break up, into an inflation. When I see in the papers, in the Federal reserve reports, that the inflation anticipations for ten, twenty years is on the order of 2% a year, I find it very hard to believe it. Sooner or later, the government’s going to get out of hand.

    Once again the main takeaway to people studying up on Friedman’s point of view would be that you ought to clamp down on the quantity of money at all times and make sure you don’t allow prices to rise, lest governments exploit the people with the inflation tax. A wise central banker, such as for instance Richard Fisher, should take the gospel of Freedom to heart and keep greedy governments in check by refusing to increase the quantity of money. If governments crash the economy with their misguided policies, the last think you want to do is let them get away with inflating their way out. Central banks should be the guardians of price stability, saying “No!” to Keynesian inflationistas. Otherwise you’ll just end up with the 70′s (which Friedman calls “stagflation”) with high inflation and high unemployment. Never be an accessory to government meddling, never let governments push up prices to cover their own mishandling. Friedman discusses the case of the independent central bankers of New Zealand, mentions the idea of inflation targeting – but never actually supports the notion that you should target the nominal aggregate directly instead of the instrument. He even managed to talk about his work on the Great Contraction without explicitly mentioning that it had to do with there being to little money – again, mentioning later on that he’d like to freeze the base. If pressed he’d probably say that actively contracting the base was another instance of meddling – the main thing being to leave the money supply on autopilot. Again, a machine programmed with the k% rule would be the best example of “doing nothing”, and doing nothing is doing best.

    I think it’s no wonder that today’s economists and policymakers have no inspiration for responsible monetary policy. Just sad.

    http://www.econtalk.org/archives/2006/08/milton_friedman.html

  42. Gravatar of Peter A Peter A
    27. June 2012 at 01:11

    “Contrary to what many say here, I heard comments in Austria that the young generation indeed does not think much of national borders anymore.”

    Not true, in my experience. I am always amazed how many Viennese have never even been to Bratislava. Austrians tend to take week-end trips to other parts of Austria. It may be the language barrier, but I just don’t see a lot of Austrians venturing into the surrounding Slavic hinterland (where I spend a lot of time).

  43. Gravatar of Orionorbit Orionorbit
    27. June 2012 at 03:48

    Mbk your numbers are flawed to say the least and so are your figures on labor mobility. Austria is a special case and too small to matter, if it were a German federal state it would be one of medium caliber in all respects.

    You are however right that the younger generations of Europeans, particularly educated ones are as pro eu as one can be under the present circumstances.

  44. Gravatar of Major_Freedom Major_Freedom
    27. June 2012 at 03:56

    dwb:

    aaaaand just when i think there is no one who makes more stupid remarks that MF

    You have an interesting way of referring to my refutation of your claims.

  45. Gravatar of Yichuan Wang Yichuan Wang
    27. June 2012 at 04:02

    I’ve been meaning to comment on this post for a while now, as Nick Rowe recently had an interesting discussion on productivity (growth) differentials and currency unions here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/06/permanent-productivity-differentials-and-optimal-currency-areas.html.

    @Scott,

    I think your point on monetary policy is important, but I don’t think it really solves the “fraying around the edges” graphically demonstrated by Evan (in the past, can’t find the link over the Great Firewall), and elaborated in the context of productivity differentials by me here: http://synthenomics.blogspot.com/2012/06/currency-union-by-any-other-name.html.

    Fundamentally, although monetary policy can be a rising tide that lifts all boats, I fail to see how it can effectively smooth out NGDP growth differentials among the European states. For that, a fiscal union with transfer payments seems necessary.

    @mbk, I don’t know too much about the “on the ground” situation in Europe right now, but the statistics on labor mobility in Europe doesn’t really lie. For some authors, look up Klaus F. Zimmerman, Maurice Obstfeld and Giovanni Peri. I remember doing a school research project on prospects for European federalism and those authors featured prominently. Although your points on nominal rigidities are well taken. It’s the key to the story; Germany needs to tolerate above trend NGDP growth to allow the periphery to avoid the pain of readjustment while still, to a certain extent, becoming more competitive vis a vis Germany.

  46. Gravatar of Saturos Saturos
    27. June 2012 at 04:30

    “I consider inflation an evil spirit that rots the core of economic prosperity and must never, ever be countenanced.”
    - Richard Fisher, 2009

    I now understand how it is possible for an avowed fan of Milton Friedman to takeaway that understanding of matters.

    Lars, thanks for the response.

  47. Gravatar of Saturos Saturos
    27. June 2012 at 04:31

    He was in Japan when he said that.

  48. Gravatar of Saturos Saturos
    27. June 2012 at 04:34

    Though you would think that Japanese NGDP expectations would have adjusted to the new deflationary path, and wages and prices set accordingly. But I guess there is still money illusion for workers, and a higher floor on real interest rates.

  49. Gravatar of mbk mbk
    27. June 2012 at 04:41

    Orionorbit, I live and shop in Singapore and I just lived and shopped in Austria for a month, which I know well in any case. My numbers may be anecdotal but you’re telling me I can’t read price labels I was specifically looking for, well, OK, your opinion. On labor mobility the only numbers I quoted were millions of Turks in Germany and millions of Algerians in France, that’s no secret, and those numbers won’t be hard to find if you care to look them up.

    Yichuan Wong, it is true that labor mobility is generally lower in Europe than in the US, but that is true even within-country and has to do with things that bind people to their homes in Europe: rent controlled appartments that would multiply in price if given up, stronger family ties and a generally higher level of say, provinciality. So my exaggerated point is if the Euro is too much for Europe then the D-Mark was too much for Germany too – the Bavarian moving to Berlin for work is also rarer than the New Yorker moving to California. (I have no numbers on this but I’ve been around).

    That being said countries like Austria and Switzerland have anywhere from 15 to 20% foreign national residents. That is much, much higher than the US (about 3% “aliens” if memory serves). I’d be interested if someone has numbers on “foreign state” residents in the US, it must be higher than 20% but 20% is no slouch because you can assume that all of these moved for labor reasons.

  50. Gravatar of OGT OGT
    27. June 2012 at 05:03

    To follow on Yichuan’s point, here’s a great graph applying a simple Taylor rule to the Euro zone, via David Beckworth. It shows that the short term rate looks ‘right’ for the bulk of the EU, always, always wrong for the periphery. Just in different directions.

    http://macromarketmusings.blogspot.com/2011/06/ecb-monetary-policy-mess-in-one-picture.html

  51. Gravatar of Yichuan Wang Yichuan Wang
    27. June 2012 at 05:30

    @OGT

    I think the taylor rule argument is rather powerful, but an interesting point pops up in modeling when we consider “who does monetary policy work for?” If there’s three countries, at 3, 5, and 7 percent NGDP growth, and the target is five percent, as weighted by a certain set of coefficients, what are the weighting coefficients? One can easily see that it could be the central bank only cares about the second country, or maybe the central bank gives equal weight to all three, or maybe equally weights the first and third and nothing for the second. While the graphs do tell a good narrative of a central bank focusing in on Germany, I’m not sure how one would econometrically test it in a rigorous fashion.

  52. Gravatar of mbk mbk
    27. June 2012 at 05:36

    Peter A, true, not many Viennese ever go to Bratislava. The working class goes to Hungary for Balaton lake and food, to Croatia and Italy’s Adriatic coast, and the pilgrimages to Mallorca, Spain’s beaches in summer are also legendary. In times past quite a few people, especially farmers looking for part time jobs off season, would go to work seasonally in Germany. Now it seems like it is the other way round. Students often do summer jobs in Switzerland or the Nordic countries. But granted, Bratislava isn’t very popular. On the other hand the number of workers from the East in Austria just sticks out, anecdotally I don’t think I had more than one or two native Austrians as a waiter over a whole month there.

  53. Gravatar of OGT OGT
    27. June 2012 at 05:42

    Also, good point on adverse selection, that problem already exists to some extent with the EU ‘regional funds.’ One advantage (?) of the US fiscal transfer system is its relative opaqueness, few people in MA or CA realize how much they’re transferring to MS, AL and NM.

    Some politicians like the late Patrick Moynihan have tried to make more of an issue with some success. Scott Brown was very explicit in opposing Obamacare because it would reward healthcare backwaters like MS and TX by transferring money away from ‘responsible’ states like MA.

  54. Gravatar of Major_Freedom Major_Freedom
    27. June 2012 at 05:46

    mbk:

    and has to do with things that bind people to their homes in Europe: rent controlled appartments that would multiply in price if given up

    Just to add, rent control actually has the long term effect of raising the price of rent and decreasing the supply of rent available spaces from what it otherwise would have been.

    If the rent control is abolished, then, of course, the price of rent will soon go up. But the increase in the price of rent will generate an increase in profitability of producing rent available spaces. This will attract investment, which will then increase the production and hence the supply of rent available spaces, which will then lead to prices falling back down.

    It will also improve the quality, as the “slumlords” will be able to afford improvements that they could not afford before due to their revenues being capped by law.

    To the extent then that families are no longer tied to their homes due to rent control due to the controls being lifted, labor mobility will increase.

    Because this ties in with OCA, it cannot be held that one can take existing labor mobility as a given, and then believe one can design an OCA, so as to say something like “Europe is not an OCA, but the US is, so a monopoly currency is justified in the US, but not in Europe.” It is taking the money printing panacea too far.

  55. Gravatar of J.V. Dubois J.V. Dubois
    27. June 2012 at 05:55

    I left a comment in Yichuans blog, but for the reference I will sum it up here: I think that Yichuan confuses capital inflows and fiscal policy. If there is difference in productivity growth between groups of people (either living in different countries or living withing the same country etc.) then capital should be invested into those areas that are more promising, until the technology, institutions or whatever makes it impossible to maintain this higher growth.

    And indeed this is what happended up until now – European periphery grew much faster in real terms then Germany. Having one currency Yichuan correctly points that this means that they had to have higher NGDP growth which is true. Maybe they lack good institutions or people able to handle cutting edge technology and this productivity growth would cap at let’s say 70% of the productivity of Germany where the growth it would level up with the one in Germany. So what, nothing happens. There is nothing wrong with this, all countries have their own and simila regional or sectorial story.

    So this is all about Asymetric SHOCKs ans how we are able to deal with it. This is where correct monetary policy can help us immensely. The sad thing is that we now have simultaneous supply-and demand shocks intertwined. It is very hard to differentiate between them, germans do not want to come on vacations as they used to because they fear of Euro breakup and Greek beaches are empty and they face grim future speeding up the breakup as a result. They may now spend years restructuring the supply side of their economy only to find out that when “confidence” comes back northerners will again demand more recreation services and less of whatever they restructured into.

  56. Gravatar of Mike Sax Mike Sax
    27. June 2012 at 06:03

    “It’s the key to the story; Germany needs to tolerate above trend NGDP growth to allow the periphery to avoid the pain of readjustment while still, to a certain extent, becoming more competitive vis a vis Germany.”

    Yes Yichuan, this is why I said the euro zone should follow Bretton Woods-this is how that was designed where not all of the adjustment was made by the deficit country.

    Until now the ideology they’ve used was more like the logicl of the old gold standard where the deficit countries had to painfully delfate their economies.

    There are new signs-in today’s New York Times pg. A4 for example that Europe may finally be resisiting Germany’s demands a little.

  57. Gravatar of Mike Sax Mike Sax
    27. June 2012 at 06:04

    “was just pointing it out so you won’t be fooled by them the next time they support some new war trumped up against a country that doesn’t want to use the Dollar or the Euro.”

    Thanks Gabe-hyuk hyuk. Appreciate you letting everyone know.

  58. Gravatar of OGT OGT
    27. June 2012 at 06:07

    Yichuan- Germany and France are by far the biggest economies in the Euro zone. So if you look at aggregate data weighted by GDP, it ends up that you’re mostly looking at France and Germany. I suspect what the ECB does is pretend it’s all one big happy OCA and look at aggregate data. (Then they do whatever the Bundesbank tells them too).

    Here’s a post on EU industrial production indexes from FT Alphaville. They show that Ireland could literally slip below the waves without affecting the weighted PMI:

    http://ftalphaville.ft.com/blog/2012/05/24/1014491/the-weight-of-the-eurozone-pmis/

  59. Gravatar of Mike Sax Mike Sax
    27. June 2012 at 06:12

    By the way Yichuan I know others have already said it but I just visited your blog for the first time and it’s really excellent!

  60. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 06:33

    This is a topic I could write about all day. First, allow me to go back to the original Simon Johnson post on this subject.

    Johnson said the following:

    “This amounted to a very big bet that their economies would converge in productivity – that the Greeks (and others in what we now call the “periphery”) would, in effect, become more like the Germans.”

    “In fact, the opposite happened. The gap between German and Greek (and other peripheral country) productivity increased, rather than decreased, over the last decade.”

    This is unforgivable sloppiness on the part of Simon Johnson. In many peripheral euro countries, or countries pegged to the euro, where there was huge capital inflows, namely Bulgaria, Estonia, Greece, Ireland, Latvia, Lithuania and Spain, productivity (GDP per hour worked) actually grew faster than in Germany over 1999-2007 (in some cases much faster). What Johnson obviously meant to say is that unit labor costs (ULC) did not grow as fast in Germany. That’s partly because of German wage supression and partly just an empirical regularity.

    Current account generated investment booms normally raise the relative cost of labor. The problem however is when monetary policy swings from relative laxity to relative tightness the drop in aggregate demand hits those countries/states with capital inflows the hardest. See for example the Southwest and Florida in the case of the US.

    This distinction between productivity and ULC is important. If permanent differences in productivity mattered in currency unions then the US should not even exist, as Krugman noted. Productivity in Delaware is roughly double that of Mississippi. It is 50% higher in New York than in Michigan.

    But asymmetric shocks can produce temporary differences in ULC, as they have between the core and periphery in the eurozone (and the BELLs) and in the core and periphery in the dollarzone. The main reason why the US has not had the same kind of crises as the eurozone is fiscal transfers. Florida would be our Spain right now if it weren’t for the flow of Treasury funds. It’s got absolutely nothing to do with permanent productivity differences. It has to do with temporary differences in ULC.

  61. Gravatar of ssumner ssumner
    27. June 2012 at 06:34

    mbk, You throw all sorts of information out there that I completely agree with, but none of which has to do with the euro crisis. If my house burns down it doesn’t make me feel better to hear than an earthquake in Peru killed 10,000 people, so I’m lucky by comparison. The house wouldn’t have burned down if people had been more careful with matches. The euro crisis is completely unnecessary.

    You said:

    “And that is when everyone agrees the Euro is still massively overvalued. Of course in the US retail prices are cheaper still. And why is that so? Massive economies of scale in a single market, a single currency.”

    Yes to single market, no to single currency. The countries in the single market but not in the single currency show absolutely no ill effects. Copenhagen and Stockholm and Zurich and Oslo are every bit as rich as Vienna. The gains from a single currency are so tiny that they don’t even show up in the GDP accounts. Meanwhile the cost is a massive crisis that may push Europe into other misguided policies that really will reduce long term growth.

    Doug, You said;

    “If the EZ followed the market monetarist and targeted 5% NGDP system wide, we would expect to see 4% real growth and 6% inflation in Germany, with 0% NGDP in Southern Europe.”

    How can I put this politely: No.

    Saturos, I certainly agree the euro could work with sound policies in other areas, like 5% NGDP targeting and modest national debts. The reason I seem so pessimistic is that we don’t have sound policies in other areas. And even if it “worked” it would still be suboptimal, as the eurozone isn’t a OCA, as Bagehot point out 150 years ago. You asked:

    “Don’t you think that there was some merit to the idea that the existence of the Euro would itself promote the labor mobility that is needed to make it work?”

    Not at all–labor mobility depends on cultural factors, regulations, etc. If a Greek is trying to decide between moving to Finland or Sweden, he goes where the jobs are, not where the euro is.

    Johnleemk, I agree, I’ve been to both Vianna and Singapore, and my impression is that prices are higher in Vienna, except cars of course.

    JV, I completely disagree with your political analysis. There is no evidence that grouping countries together politically results in better policies, I believe it’s exactly the reverse. Of course I’m all for economic integration. it’s also important that you not mischaracterize my views, as when you said;

    “Mrs Kim Lane Scheppele appears from time to time as host on Krugman’s blog covering Hungarian situation spiraling out of control – country that has its own currency and that should be by your logic free to exit from crisis.”

    I’ve never claimed that countries that are not in the euro can never have economic problems. Greece had problems before it joned the euro, it’s just that they were less severe.

    Orionorbit, Thanks for the tip on Wren Lewis, I don’t consider political union to be more politically feasible than NGDP targeting or euro breakup. Indeed I think it’s more likely that Greece will leave the euro, than allow itself to be ruled over by Germans.

    And even if those are the only remotely feasible options, I’d still oppose them. I’d rather do nothing.

    Mike Sax, You said;

    “You seem to always have only sympathy for them but they were “the sick man of Europe’”

    This is rather silly of you, as I’ve made this point more frequently then almost any other blogger–indeed you probably learned this from me. The Germans wouldn’t like my proposal at all.

    Benny, But those military bases don’t really help the southern states very much, which is my point.

    Saturos, That is sad, but no one should be judged by what they say when they are extremely old and near death. It’s obvious that his brain wasn’t working at that point, as he wasn’t even able to explain the liquidity effect to Russ. Look at my “Case Closed” post and you’ll see a much better Friedman from about 10 years back—very market monetarist.

    Yichuan, You said;

    “Fundamentally, although monetary policy can be a rising tide that lifts all boats, I fail to see how it can effectively smooth out NGDP growth differentials among the European states. For that, a fiscal union with transfer payments seems necessary.”

    I think you misunderstood me, I certainly agree that it can’t produce uniform growth. But that’s not the main problem, the main problem is eurozone-wide NGDP growth has collapsed in recent years–that problem can be fixed. And if you don’t fix that problem, then even a fiscal union won’t be enough.

    I agree with Nick that differences in productivity are not the problem.

  62. Gravatar of ssumner ssumner
    27. June 2012 at 06:39

    OGT, Hard to believe that Italy and France had roughly equal GDPs a few years back.

    Mark, Good point.

  63. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 06:43

    Second, it’s taken as gospel that the eurozone was hit harder by asymmetric shocks this recession than the US. This is not at all true.

    If one compares real GDP in 2009 versus trend growth from 1997-2007 one will find all the Eurozone-16 members were 6-10% below trend except Cyprus(5%), Finland(14%), Ireland (21%) Luxembourg(11%) and Malta (3%). Those nations account for little more than 3% of the eurozone’s output. The difference between Spain and Germany’s performance by this measure is trivial (10% versus 7%).

    Do a similar comparison for the US and what you find is far greater dispersion in growth relative to trend. The following states were over 11% below trend: Arizona (16%), Florida (14%), Georgia (11%), Idaho (12%), Michigan (12%), and Nevada (18%). All told they account for roughly 15% of US GDP. The following states were less than 7% below trend: Alabama (7%), Alaska (-8%), Arkansas (4%), Colorado (6%), DC (3%), Hawaii (6%), Kansas (6%), Kentucky (5%), Louisiana (-2%), Maine (6%), Maryland (6%), Massachusetts (7%), Mississippi (3%), Montana (5%), Missouri (6%), Nebraska (5%), New Mexico (6%), North Dakota (-4%), Oklahoma (-8%), Pennsylvania (5%), South Dakota (0%), Vermont (6%), Virginia (7%), Washington (6%), West Virginia (-1%) and Wyoming (-12%). All told these states account for roughly 13% of US GDP.

    So states accounting for 28% of US GDP were outside of the 7-11% below trend range versus countries accounting for 3% of Eurozone-16 GDP that were outside the 6-10% range. More substantial statistical analysis of the relative degree of dispersion involving weighting shows similar results.

    It’s taken as gospel that the US is a better OCA than the eurozone. But is this really true?

  64. Gravatar of Rob Rob
    27. June 2012 at 06:43

    I find myself wondering whether a “messy” break up of the Euro could be avoided, or at least tidied up, if this was the focus of discussions and negotiations, instead of what we see. Part of me feels that a dissolution doesn’t have to be so unthinkably messy. Another part of me feels as if Europe is an argument looking for a stage anyways, and if they aren’t squabbling over various “unions,” then they’ll be squabbling over the trade war du jour.

  65. Gravatar of W. Peden W. Peden
    27. June 2012 at 06:50

    I wonder if Friedman was inspired to go back to the k% rule on the basis that the velocity of M2 had stabilised after the instability of the early 1990s to about 2001, which was what had made him abandon it in the first place. Until the Great Recession, M2 looked like hovering around about 1.9, then resumed its unpredictable course, this time with a secular fall as opposed to the secular explosive rise of the 1990s.

  66. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 06:57

    Third,
    I think it is incorrect to generalize this as merely “southern” in nature. The nations most affected by the current account reversals were in fact not the the GIIPS (which also includes a “northern” nation) but the BELLS (Bulgaria, Estonia, Latvia and Lithuania). It is true those nations were not on the euro during the crisis but they were pegged to the euro, and they may not be suffering from sovereign debt crises, but I would argue the macroeconomic shock was perhaps even more severe. They are on the road to recovery but Latvia, for example, is not forecast by the IMF to get back to previous peak GDP until 2017.

    It is important to underscore the fact that although the imbalances are viewed to be symptomatic of excess consumption rather than of productive investment this is more a perception than a reality. Most of the flow of capital to these nations did in fact result in productive investment. The problem is nominal in nature, not real. In my opinion a good dose of aggregate demand simulus to the eurozone would cure most of the current macroeconomic imbalances.

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:01

    Fourth, the value of an automatic fiscal transfer mechanism is to see it as a form of insurance against the worst asymmetries when the monetary authority makes “mistakes.”

    Prior to the crisis nominal GDP was growing more or less at a constant 4.3% annual rate in the eurozone. The economy may have been running a little hot on the periphery and a little cold in the core, but in aggregate things were pretty good with inflation close to the implicit target and the estimated output gaps by nation, whether positive or negative, of inconsequential magnitude. Now however, nominal GDP is some 12% below trend and the only nation that anyone can reasonably argue is performing alright is Germany. Consequently all of the economic performance variance is on the downside. Ireland for example is still some 20% below peak real GDP after four years.

    Were nominal GDP brought back to trend by the ECB I suspect the old “not too hot, not too cold” situation would be restored. But given that the mistake has been made, the costs for the inhabitants of the GIIPS and BELLs are proving to be enourmous, and the situation is proving to be economically and politically destabilizing for the eurozone as a whole.

  68. Gravatar of TallDave TallDave
    27. June 2012 at 07:03

    Didn’t Hayek write a book about this once? :)

  69. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:12

    Fifth, when the euro was formed, its fiscal architecture was embodied in the Stability and Growth Pact (SGP). That fiscal architecture was all about containing deficits, and said nothing about using fiscal policy to control aggregate demand. To most economists, this was a complete shock. Much of the academic work on Optimal Currency Areas leading up to the formation of the euro had stressed the crucial role that countercyclical policy could play in reducing the consequences of asymmetric shocks in a monetary union. The SGP simply ignored all of that work.

    Sweden did not:

    “Membership in the monetary union means a change in the stabilisation policy regime because domestic monetary policy disappears as an instrument to stabilise the economy. Instead, Sweden will become a participant in a common European monetary and exchange rate policy. The opportunity to counteract macroeconomic shocks that specifically affect the Swedish economy with the help of changes in the interest rate level is then lost. Neither can exchange rate adjustments vis-à-vis euro countries take place as a response to such country-specific shocks.”

    http://www.sweden.gov.se/content/1/c6/01/53/37/b0b2c822.pdf

    Sweden wisely heeded the warnings of most economists and stayed out of the eurozone.

  70. Gravatar of TallDave TallDave
    27. June 2012 at 07:18

    It’s taken as gospel that the US is a better OCA than the eurozone. But is this really true?

    Well, the EU is certainly much poorer (31K PPP GDP per capita vs. 48K). I know, I know, they started out that way, but for the same reason looking at growth trends is also problematic (due to catch-up growth).

    I think it’s interesting to ask, though, what would happen in the U.S. if we absorbed a northern province of Mexico (15K) — unemployment would obviously skyrocket in our newest state because the U.S. minimum wage is way too high for their productivity…

  71. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:23

    Sixth, Here’s what German Finance Minister Schäuble said to Der Spiegel when asked about this issue a couple of days ago.

    “SPIEGEL: What would a fiscal union have to look like so that Germany could accept euro bonds?

    Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: “Should we spend more money on families or on road construction?”

    SPIEGEL: And you seriously believe that this could work?

    Schäuble: It’s been working for a long time in competition policy. When the current Italian prime minister, Mario Monti, was the EU competition commissioner, he successfully tangled with major international corporations like Microsoft. A European finance minister would, should it become necessary, be forced to take on Italy, for example.”

    http://www.spiegel.de/international/europe/finance-minister-schaeuble-euro-crisis-means-eu-structures-must-change-a-840640.html

    Optimum currency area (OCA) theory represents a systematic way of deciding whether it makes sense for a geographical region to share a common currency. One often cited criteria for a successful currency union is a risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to regions which have been adversely affected by asymmetric shocks. The European Union budget represents only about 1% of GDP so meaningful fiscal transfers are negligible in practice. Furthermore, Europe had a no bail-out clause in the Stability and Growth Pact, meaning that fiscal transfers were not allowed even in the event of a crisis.

    A fiscal union without an automatic fiscal transfer system is not a fiscal union at all. What Schäuble is proposing sounds more like a fiscal dictatorshipto me

    The interviewer’s question “And you seriously believe that this could work?” needs further translation. What he really meant to say was “Are you out of your ever loving mind?!?”

    And note that it is Italy that the EU may “be forced to take on.” Some union, it sounds more like another Reich in the making to me. This is not looking good.

    P.S. There’s a nice map of what Der Spiegel thinks will be the negative impact of a eurozone breakup. I don’t know how accurate it is but people who think that a breakup is preferable to trying to save the euro need to take a look and think more seriously about this issue.

  72. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:26

    TallDave,
    You’re completely missing the point that this has absolutely nothing to do with differences in productivity. It has to do with asymmetric shocks.

  73. Gravatar of TallDave TallDave
    27. June 2012 at 07:34

    Mark,

    Actually, that *was* my point: look at how you’re measuring the effect of assymetric shocks — you’re looking at growth trends, which measure productivity changes. This is similar to the problem with the argument “China must have a great economy because they’ve had so much growth” when in fact they are still highly dysfunctional by OECD standards (but have vastly improved from their initial state as a Communist basket case).

  74. Gravatar of Orionorbit Orionorbit
    27. June 2012 at 07:36

    Mark s, I was a student in one of the big Swedish universities when the euro referendum took place and economists where overwhelmingly in favor of euro membership. The idea that Sweden followed their good technocratic advise is just inaccurate to say the least. The truth is that Sweden was “saved” from euro membership because of a bunch of left wing radicals that didn’t trust the ECBs capacity to conduct monetary policy independent of financial interests and managed to convince the electorate that this were the case. Whether they were right or wrong I leave it up to you to interpret, but do not give credit where credit is not due.

  75. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:39

    Now, I’ve noticed that mbk has brought up the issue of labor mobility and has gotten some undeserved grief for it. Mobility is greater in Europe and less in the US than most people probably realize. It depends on how you measure it and comparable statistics are hard to come by. But in the EU-27 as a whole, as of 2006, over 9% of the working age population were foreign born. It was about 15% in Austria, 14% in Spain and 12% in France. See Table A3:

    http://www.iza.org/en/webcontent/publications/reports/report_pdfs/iza_report_19.pdf

  76. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:43

    TallDave,
    An asymmetric shock is a variation in deviation from trend by definition. (And it seems to me one of the primary concerns of the Money Illusion is precisely deviations from trend in NGDP growth.) If you have a problem with this as a criteria then you have a problem with the relatively large body of research on OCA.

  77. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 07:47

    Orionorbit,
    I might be glossing over the political facts a little but your account is rather anecdotal. Perhaps you could provide some verifiable evidence in favor of your statement?

  78. Gravatar of TallDave TallDave
    27. June 2012 at 07:50

    That may be so, but when you try to apply that to questions like It’s taken as gospel that the US is a better OCA than the eurozone. But is this really true? (generally supported by that same body of research you mention) you have to start considering the context of those trends. For instance, having 50% higher living standards implies greater variability because living standards get stickier at lower levels.

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 08:00

    TallDave,
    “For instance, having 50% higher living standards implies greater variability because living standards get stickier at lower levels.”

    I have seen no empirical evidence that supports that claim.

  80. Gravatar of Major_Freedom Major_Freedom
    27. June 2012 at 08:10

    It’s rather fascinating reading all this chit chat about the US and Europe, with not one mention of economic calculation or the price system.

    I just read the usual empty buzz words like “shocks”, “asymmetry”, “fiscal architecture”, and did I say “shocks”?

    ——

    Yichuan, You said;

    “Fundamentally, although monetary policy can be a rising tide that lifts all boats, I fail to see how it can effectively smooth out NGDP growth differentials among the European states. For that, a fiscal union with transfer payments seems necessary.”

    I think you misunderstood me, I certainly agree that it can’t produce uniform growth.

    And yet you continue to make arguments that presuppose that to be the case.

    But that’s not the main problem, the main problem is eurozone-wide NGDP growth has collapsed in recent years–that problem can be fixed. And if you don’t fix that problem, then even a fiscal union won’t be enough.

    Why would it matter for Greeks in Athens that spending by Belgians in Brussels decreased and spending by Polish in Warsaw equivalently increased? What does arbitrary border geographical area “spending” have to do with sustainable investment and consumption in the world market?

    If NGDP falling in a particular country doesn’t represent a problem for the European market, then why should NGDP falling in Europe represent a problem for the world market? If it doesn’t represent a problem for the world market, but only a problem for the European market, then why not let’s call for NGDP targeting at the individual country level so that each country never decreases spending? Better yet, why not each city having 5% NGDP targeting? Each firm? Each individual?

    NGDP theory is internally inconsistent. It ad hoc and totally arbitrarily claims NGDP falling is OK, as long as it is on a scale smaller than some arbitrary geographical borders you insist 5% NGDP should take place, as if economic science, and economic calculation, suddenly changes as soon as you take a step from one OCA imaginary conception to another OCA imaginary conception, where there is always a yearning for a more universal concept.

    Problems in the geographical territory “Greece” that accompany falling NGDP in “Greece”? We shouldn’t care, because we’re really concerned with the NGDP of the geographical territory “Europe”, which becomes “the real problem.”

    Problems in the geographical territory “Nevada” that accompany falling NGDP in “Nevada”? We shouldn’t care, because we’re really concerned with the NGDP of the geographical territory “US”, which becomes “the real problem.”

    It’s amazing how there can be problems in the states, that are independent from country problems, despite the fact that the country is made up of states. Haha, no you can’t say country problems don’t exist if one state’s problems are made up for, or more than made for, by other states. That would be committing the error of making interpersonal utility comparisons. If in a house one person loses their job, but another gains a job, there is no sense in which there is an absence of a “net loss.” There is one loss for one individual, and there is another mutually exclusive and separate gain for another individual.

    ——-

    The fact that the concept of economic calculation is nowhere to be found in NGDP targeting theory should be sufficient for everyone to know it is not economics, but rather just another central planning toilet paper money strategy. It stays well clear of individual economic calculation, and treats individuals as nothing but the means to the end that is some geographical territory’s employment and output statistics, therefore in the process destroying the price system’s coordinating mechanism that makes employment and output sustainable.

  81. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 08:20

    With respect to US mobility the nearest comparable data we have is for place of birth for the entire population. This is biased because it includes the young (who are likely to live in the state of their birth) and the old (who are less likely). Since there are slightly more young than old it may be biased sghtly downward relative to the EU data. However,I have seen comparable data to the EU data (can’t find it now) and if my memory serves me correctly the differences are extremely small.

    For the US as a whole in 2010 just under 59% were born in the state in which they live. This is as high as 79% in Louisiana, 77% in Michigan and 74% in Pennsylvania:

    http://www.census.gov/prod/2011pubs/acsbr10-07.pdf

    Interestingly, of those born in the US, only 12% of New Yorkers, 17% of those from Louisiana and Michigan and 18% of Californians were born outside of their state.

    A breakdown by age also implies that almost all the moves from state to state occur before the age of 25.

  82. Gravatar of Dilip Dilip
    27. June 2012 at 08:29

    This NYT piece wants Germany to leave the Euro:
    http://www.nytimes.com/2012/06/27/opinion/to-save-the-euro-germany-must-leave-it.html?smid=pl-share

    Yes. Germany.

  83. Gravatar of Orionorbit Orionorbit
    27. June 2012 at 08:34

    Mark s, not possible to look up info in English from my iPad, but pro eur were: S, M, FP, and CD (i.e. the parties economists vote for) and anti euro were V, G, C, SD ie the parties on the extermes, except C of course. A quick google search yielded this, I hope it helps:

    http://www.economist.com/node/2072849

    There are of course plenty of polls about who voted yes and why, showing what I wrote but all in Swedish. I also got the date wrong, in 2003 I had not yet enrolled in the university and had been living in Sweden for less than three months.

  84. Gravatar of RebelEconomist RebelEconomist
    27. June 2012 at 08:34

    @Mark Sadowski, “The SGP simply ignored all of that work”

    Not really. The SGP – or the “stability pact” as it was called before the politicians began to water it down – did not limit countries’ ability to use fiscal policy to offset shocks; it just set a floor on the range of fiscal balances that could be used. Countries could, and ideally should, have run large fiscal surpluses during the boom years, especially the PIIGS which received the windfall of a large reduction in debt yield spreads. Of course, Germany lost moral authority when they bust the SGP deficit limit themselves, but the PIIGS, especially the most indebted ones, should have run surpluses for their own good.

    The fact that the PIIGS did not provides another example of the cynical short-term motivation of politicians, which is why devices like the SGP and central bank independence are needed. And it explains why I am wary of NGDP targeting, which politicians can be relied upon to grasp as an excuse to back out of the commitments they once made in an attempt to influence expectations and get something for nothing, but now mandate them to take politically costly action. The BIS is one of the few economic policy institutions left to appreciate how political economy works in practice.

  85. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 08:50

    @Orionorbit,
    Thanks, I’ll take a look.

    @RebelEconomist,
    “Countries could, and ideally should, have run large fiscal surpluses during the boom years, especially the PIIGS which received the windfall of a large reduction in debt yield spreads.”

    This, quite frankly is naive. First of all I don’t recall anyone ever suggesting such a strategy before the crisis, and there certainly is no mention of such a strategy in the research literature on OCA. Secondly, it assumes that any shocks that occur will be small enough to be dealt with in this fashion (so much for that idea).

    As for the BIS, I consider it a political institution. If the policy recommendations they make ever passes for good economics we’ll be in a world of trouble.

  86. Gravatar of TallDave TallDave
    27. June 2012 at 08:57

    I have seen no empirical evidence that supports that claim.

    I’m guessing you haven’t looked, then. http://www.urban.org/publications/411688.html

    First of all I don’t recall anyone ever suggesting such a strategy before the crisis

    Yes, the pseudo-Keynesians loudly demand fiscal stimulus during economic weakness, but (contra Keynes) you never hear them asking for fiscal surpluses in the good times.

  87. Gravatar of mbk mbk
    27. June 2012 at 08:59

    Scott, my little factoids were all to illustrate that the simple massive size of a market and ease of internal financial transactions (EU, according to me) can apparently trump much sounder economic policies (Singapore, according to you) when it comes to making products cheaper, making economies more efficient, etc. I elaborated on prices because no one believed me. I don’t know when you did your price comparisons Singapore-Austria, I did it this very month of June 2012 and have a decade plus of lived experience with both, as you know. Just as a note.

    “The countries in the single market but not in the single currency show absolutely no ill effects. Copenhagen and Stockholm and Zurich and Oslo are every bit as rich as Vienna.” Please!! How about Polen’s 10% unemployment rate? How about Hungary’s 11%? compared to Austria’s 3.9%? The Baltic states? How about even the UK which did exactly identically to Italy in its economic evolution since 2008 as I mentioned a few blog posts back? You said then they’d be far worse off if they had been in the Euro but I find all of this utterly unconvincing. None of these statements on the salvation through one’s own printing press make sense without actually considering all EU countries, with the Euro and without, and then compare if there really is a consistent trend in impact of the crisis.

    Mark, thanks for helping out with data on labor mobility. Last time I waded into these waters one of the very few arguments against why the Euro couldn’t work in Europe but the USD could work in the US was in fact the labor market argument and I didn’t buy it. But I had no data. And, the ULC argument sounds much more convincing to me, it is also the explanation for the improvement of Germany over the 2000′s. Incidentally Germany’s example also shows that ‘internal devaluation’ can and did work – that’s why the Germans believe it can work for others too – but I suppose that would be unmentionable around these pages here!

  88. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 09:35

    @TallDave,
    That study is about as irrelevant as it gets. It discusses trends in US family income variability. You claimed that nations with higher living standards have lower variability in GDP.

    You are comparing avocados with pomegranates.

    @mbk,
    You’re welcome. I think the data supports your perception (and mine).

    On the other hand, what Germany succeeded in doing is quite unusual. Also, I don’t think the situation was at all as dire. I am not a big fan of the concept of “internal devaluation.” As currently practiced it is the monetary equivalent of phlebotomy.

  89. Gravatar of Rob Rob
    27. June 2012 at 09:37

    Dillip, w/re: Germany leaving the Euro, to me that raises a point that if this were a rational discussion then a lot of options would be explored that are just silly in the current scenario. For example, it seems to me that if the PIGS had their own common currency you’d see a lot more growth AND structural reform. But now we’re not being logical. We’re just thinking.

  90. Gravatar of RebelEconomist RebelEconomist
    27. June 2012 at 09:38

    @Mark Sadowski,

    I am interested to know why you consider it naive to think that countries could run fiscal surpluses. If your reason is political reality, you are probably right, but I do not think that that should stop economists advising politicians to do the right thing. Even a 3% deficit limit allows a 6% swing about a cyclically balanced budget. I cannot recall what was said officially about countries’ budget balances during the boom years, but Italy and Greece were implicitly required to run surpluses because they were way in breach of the SGP 60% debt limit.

    My impression of the BIS is completely different from yours; I would say it is an institution where central bankers from other countries can go to work (eg Steve Cecchetti) and express their views without worrying about upsetting their government. You have to admit that the BIS were notably and rightly vocal in warning about the dangers of the boom.

  91. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 09:39

    “lower variability” should read “greater variability”

  92. Gravatar of TallDave TallDave
    27. June 2012 at 09:52

    living standards get stickier at lower levels

    Of course, in some sense this is just stating the obvious — the small business income of higher earners is much more variable than wage/salary income, and the welfare state exists to provide a floor. So in considering the asymmetricality of shocks in OCA regions, you have to also consider the relative levels of entrepreneurship, how welfare benefits compare to median income, geographic variability, etc. I don’t think one can simply say “greater asymmetry in shocks, less ideal OCA.”

    And aside from trends, the base numbers do still matter a lot too, which is why I brought up the example of absorbing a Mexican province and the challenges that might ensue. The PPP GDP per capita variation across the eurozone is quite a bit larger than that across U.S. states — there are no U.S. states as poor as Portugal or Greece, let alone Estonia.

    http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP

    http://en.wikipedia.org/wiki/List_of_sovereign_states_in_Europe_by_GDP_%28PPP%29_per_capita

  93. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 09:53

    @RebelEconomist,
    “I am interested to know why you consider it naive to think that countries could run fiscal surpluses.”

    Now, you’re putting words in my mouth. I said it was naive to think the strategy you advocated could work. Spain and Ireland did run health surpluses for years and dramatically shrank their public debt and yet are still facing a sovereign debt crisis. And Italy ran primary surpluses and also shrank its debt level substantially in the decade leading up to this. None of this mattered in the least.

    The SGP is a political creation that ignored all the economic evidence. Now it is bearing the inevitable rotten fruit.

    The BIS has been, and continues to be wrong about almost everything. If they are right about anything it is purely an accident equivalent to a stopped watch.

  94. Gravatar of TallDave TallDave
    27. June 2012 at 09:57

    Mark,

    It says PPP GDP per capita and variability both increased. You can find similar studies for other countries. I doubt you will find many countries where PPP GDP per capita increased while income variability decreased.

  95. Gravatar of dwb dwb
    27. June 2012 at 09:58


    public debt and yet are still facing a sovereign debt crisis monetary policy crisis.

    there is no economic rationale for a 60% SGP limit. there might be a social policy reason, but this would be more appropriately expressed as govex as a % of GDP.

  96. Gravatar of TallDave TallDave
    27. June 2012 at 10:02

    You claimed that nations with higher living standards have [higher] variability in GDP.

    Actually, what I claimed was that people within wealthier OCAs have higher variability than people in poorer OCAs. The distinction is important — the U.S. is both a country and an OCA, it can’t have variability with itself!

  97. Gravatar of Orionorbit Orionorbit
    27. June 2012 at 10:11

    @rebel economist, your post betray a profound misunderstanding of all things European.

    1. You completely misinterpret the legislative intend behind the passage of Fiscal pact/ stability and growth pact and more importantly you overestimate the scope of their application. The pets are irrelevant, click bellow for an explanation

    http://blog.hjeconomics.dk/2012/02/01/that-strange-feeling-of-deja-vu-eus-new-fiscal-compact/

    2. The very idea behind Germany blackmailing with resurrecting the DM makes me wonder if you have ever talked to an actual European, not to mention the flaws in your reasoning pointed out by Scott in the other topic. Even if the DM was material in BRD economic success, it was a currency of BRD which is completely different than today’s Germany. More importantly, and I can’t say this loud enough, nobody in Europe blackmails anyone about anything. Blackmails are anti European and out of the question in the first place. If any form of blackmail could take place, it would be in the form of everyone except E AAA countries telling the Germans, “what? You don’t want a fiscal union? All righty then, we will simply have our guys at the ECB board outvote you and buy up every single piece of government paper and European banks paper that is not German, and then send you the bill, feel free to pay it with DM after you quit, Suckers!!!”. The reason Monti-Hollande-Rajoy don’t do anything of the sort is that Europe is about consensus and if we start blackmailing each other we might as well scrap the whole damn eu project and revitalize our economies through military buildup.

  98. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 10:16

    TallDave,
    “Of course, in some sense this is just stating the obvious — the small business income of higher earners is much more variable than wage/salary income, and the welfare state exists to provide a floor. So in considering the asymmetricality of shocks in OCA regions, you have to also consider the relative levels of entrepreneurship, how welfare benefits compare to median income, geographic variability, etc. I don’t think one can simply say “greater asymmetry in shocks, less ideal OCA.””

    This is all hypothetical nonsense without any evidence to support it at all. You’re right, however, that entrepreneurial income is more variable. But you’re absolutely wrong about where it plays a larger role. It’s actually the poorer countries in the EU (reece, Italy) where it is far more important. And it is the poorer countries in Europe that have the smaller welfare states. Greece, Portugal Spain and euro pegged members like the BELLs all have relatively small government sectors. It is the welathier members like Germany that have cradle to grave socialism.

    “And aside from trends, the base numbers do still matter a lot too, which is why I brought up the example of absorbing a Mexican province and the challenges that might ensue. The PPP GDP per capita variation across the eurozone is quite a bit larger than that across U.S. states — there are no U.S. states as poor as Portugal or Greece, let alone Estonia.”

    This is absolutely false. I have all the data right in front of me (Eviews and Excel). The standard deviation of GDP per capita in the eurozone is actually less than in the US. It’s true there are no countries with GDP per capita as low as Estonia, but other than Luxembourg (which essentially is their DC) there are no countries in the eurozone with a GDP per capita even 60% as high as the state of Delaware. Variation in GDP per capita is lower, not greater, in the eurozone.

  99. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 10:23

    TallDave,
    “I doubt you will find many countries where PPP GDP per capita increased while income variability decreased.”

    It is still irrelevant. We are talking about states and countries not individuals or households. There are no studies that show this because it simply isn’t true.

  100. Gravatar of RebelEconomist RebelEconomist
    27. June 2012 at 10:25

    @Mark Sadowski, Oh, I see what you mean. So, because limited fiscal policy could not the whole job of accommodating the boom/bust shock, the only alternative is to drop the limits? There was nothing preventing the Irish and the Spanish from augmenting fiscal restraint with measures directly addressing the property boom, such as loan to value or debt to income ratios.

    @dwb, of course there was an economic rationale for the 60% debt ratio, and its prescience is now abundantly clear. The rationale was that large government debt would give governments reason to pressure the ECB to foster higher inflation. When this is understood, it becomes clear that the debt limit is the one that really matters; the deficit limit is about direction of travel.

  101. Gravatar of RebelEconomist RebelEconomist
    27. June 2012 at 10:42

    @orionorbit, I have no idea what you are getting at (“pets”?), but despite being British I like to think I know something about Europe. And, in that spirit, I shall now go offline to watch two PIIGS play football.

  102. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 10:46

    @belEconomist,
    “Oh, I see what you mean. So, because limited fiscal policy could not the whole job of accommodating the boom/bust shock, the only alternative is to drop the limits?”

    No, you do not. (I take it English is not your first language?) The alternative is an automatic fiscal transfer mechanism, as discussed in mh of the OCA literature.

    “There was nothing preventing the Irish and the Spanish from augmenting fiscal restraint with measures directly addressing the property boom, such as loan to value or debt to income ratios.”

    And there was nothing in the SGP that even hinted that this might be necessary. The SGP made no provisions at all for what everyone with the least modicum of historical sense predicted would eventually happen.

  103. Gravatar of Jim Glass Jim Glass
    27. June 2012 at 10:51

    One take on why a banking union can’t work:

    http://soberlook.com/2012/06/eurozones-banking-union-will-not-be.html

  104. Gravatar of dwb dwb
    27. June 2012 at 10:52

    @RebelEconimist:

    Japan has neither small debt nor high inflation. The SGP was never credible. Frankel has some excellent research on the SGP going back to the early 1990s it that you might want to read. prescient stuff, hes a smart guy.

    http://www.hks.harvard.edu/fs/jfrankel/MaastrichtFiscalRulesEP1993.pdf


    The tests of will that are most relevant to Optimum Currency Area question are thus really tests of national willingness to give up independent will.

    basically: the SGP was a test of “virtue” and willingness to join a political union. no economic rationale there.

    and 20 years later, here we are. no bailouts and the SGP repeatedly violated. financial contagion and inaccurate monetary policy response. huh, hoocoodanode.

    And the real test is the willingness to cement a broader political union.

  105. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. June 2012 at 11:20

    With respect to which states benefited most from automatic fiscal transfers it’s worth reflecting on the distribution of shocks to Gross State Product (GSP) during 2007-9 that I posted on the 27th of June 2012 at 06:43.

    While it is true, with the exception of Nevada, that the states which suffered larger economic shocks were all poorer than average, of the ten states with the lowest productivity (GDP per hour, and my own computations, but not substantially different from GSP per capita rankings) I notice right now that eight of those states are among those states that suffered significantly smaller shocks. Thus it is not clear that it was in fact the poorer states that benefited most from automatic fiscal transfers during the initial contraction.

  106. Gravatar of Jim Glass Jim Glass
    27. June 2012 at 11:44

    the pseudo-Keynesians loudly demand fiscal stimulus during economic weakness, but (contra Keynes) you never hear them asking for fiscal surpluses in the good times.

    Well, Krugman notably told the Asia Times, back during the Bush years, that the USA had the finances of a banana republic because “We should be getting 28% of GDP in revenue. We are only collecting 17%.” That 28% would have produced a heck of a surplus.

    Of course, he’s never said anything of the kind here in the USA in his own column. One imagines that’s because tying a 65% tax increase to the Obama/Democratic agenda would instantly result in him being cast deep into the wilderness by the Democratic/liberal establishment, and he much prefers being popular and influential among them.

    The thing is, he was absolutely right about that number given the govt’s spending obligations (which have only increased since then).

    It seems that while he describes himself as a teller of hard truths he doesn’t have the stuff to tell what he knows to be the truth about this one — even though he is well insulated against the cost of blowback by his Nobel, tenure at Princeton, publishing outlets, textbook sales, ample bank accounts and all the rest.

    Multiply by all the other Keynesian big spenders, whose weekly pay and ability to cover their rent depends on remaining in good standing with the left.

  107. Gravatar of J.V. Dubois J.V. Dubois
    27. June 2012 at 12:11

    Scott: Let me explain my position differently. To start, I explained your article as saying that even if Eurozone survives this for some reason the best course of action would be its dissolution as it would create permanent drag upon economic growth. Am I right?

    If so, then I wonder why is it that there is no economist holding this position saying something like “Listen Greeks. Since you already face a high risk of leaving Eurozone and reintroduicng Drachma, why not go extra steps? We run your country through our calculations and it seems that there are 3 optimal currency areas in your country: City State of Athend, Crete and the Rest of Greece. You would do yourself a favor splitting your currency into three separate subcurrencies while leaving everything else the same”

    Or there are no economists that would advise the same to USA saying “Sure, one-time costs would be high, but spliting USA into 4 separate currency regions that are more optimal would enhance the growth.”

    Or think about German reunification in 1990. It was similarly bold move, integrating backwards country with completely different set of institutions and absolutely deformed economic relationships. In 2009 – after 30 almost years , without any global crises and after large transfers the estimate for GDP per capita in Eastern Germany is 86% of the GDP of EU. As comparison, countries that had similar starting position have 90% (Slovenia), 80% (Czech Republic) with other countries like Poland and Slovakie quickly following. In matter of few years these countries will surpass former East germany in its economic progress. So surely, economic integration of East Germany had to be a failure from economic point of view, right? But would you with clear concience suggest Germans to cut it loose again?

    So think again about all reasons why you really think saying that Euro is nuts. And I would bet that there would be noneconomic reasons like seeing currency as one of the symbol of state, nation and governance. It is a powerfull political symbol which has greater value then just strict economic calculation in terms of OCA would suggest. So is it that hard to extend this line of thinking to EURo? Of course one can have strong feelings that political reasons need to be subordinate to economic ones. But then why to stop with Euro and not continue with other currencies?

  108. Gravatar of European Whining « azmytheconomics European Whining « azmytheconomics
    27. June 2012 at 12:51

    [...] Reading: Sumner on the Failed Euro Share this:TwitterFacebookLike this:LikeBe the first to like this. from → Europe, [...]

  109. Gravatar of Benny Lava Benny Lava
    27. June 2012 at 15:36

    Scott,

    You say “Benny, But those military bases don’t really help the southern states very much, which is my point.”

    They don’t? Don’t they prevent places like Mississippi from becoming like Puerto Rico?

  110. Gravatar of mbk mbk
    27. June 2012 at 20:05

    J.V. Dubois,

    exactly my line of thought, and in addition to this there are the actual, real cost savings for businesses within a large market and a single currency – the simple benefit of being large, whatever other costs there may be.

  111. Gravatar of ssumner ssumner
    28. June 2012 at 06:24

    Mark, Good points, It’s possible that the lack of fiscal integration is the key problem.

    mbk, You completely misunderstood my comment. I was claiming that the single currency doesn’t produce much in the way of efficiency gains. Countries that were similar to Austria before the euro was adopted, are still similar in terms of GDP/person. If you say Italy and Britain have done about the same—that supports my point. Although in fact Britain has done better since the euro was first adopted. The euro brought no significant micro efficiency gains to Italy, that’s my point.

    So your rebuttal is responding to a claim I never made.

    JV, I doubt the eurozone would create a permanent drag on growth. In my view the problem with the eurozone is that it is a fragile system that is susceptable to crisis and instability. Here’s what I belive:

    1. Europe would clearly be better off if they had kept the monetary system of the 1990s. That seems beyond dispute.

    2. At this point in time monetary stimulus would probably be better than breakup.

    3. At this point in time breakup would probably be better than banking/fiscal/political union.

    Benny, No, I don’t think they had much effect at all on per capita GDP. Arkansas is a net contributor to the Federal government, according to the graph everyone’s citing. They’d still be about the same if they had a bunch of bases.

    The government spent billions on nuclear weapons sites in North Dakota—do you think that made North Dajkota richer? The only way the average North Dakotan benefits is via farm subsidies.

  112. Gravatar of J.V. Dubois J.V. Dubois
    28. June 2012 at 07:51

    Scott: Ok, so do I understand it correctly that you say that because Euro brought greater susceptibility of member countries to asymmetric shocks that is why it is a failure? But then there surely have to be some currencies that have similar effects elsewhere in the world. So if it is now obvious that Eurozone was a failure why was not German reunification a failure or why is not continuation of US dollarzone a failure? Maybe the answer has something to do with political reasons along the lines “Because the citizens wish to have the same currency and they are willing to pay the price in form of this risk and its impact”?

    But then it seems to that there is a circular logic here. Because Eurozone countries show inability to deal with asymmetric shocks, Euro is a failure. Then by this definition if in some distant future US states will be similarly gridlocked and unwilling to offset large asymmetric shocks, then we can tell the same – “In face of political unwillingness to cooperate we can declare that starting at year YYYY the dollar became a failure”

    Just a not – I wholeheartedly agree that ECB has a lot to do with this mess, and that the risks of breakup in Europe are now great along with all the nasty consequences. But I still think that there is a lot of hindsight by saying in condemning tone “It was always clear that Eurozone is a very bad idea” without saying why.

    Is it because nobody bothered to laid out plans how to deal with asymmetric shocks? If so, does it mean that if ECB would have different mandate and that if there was a special transfer system constructed that was aimed to help overcome these shocks – and all countries would agree to it that suddenly Euro becomes less bad or maybe even a good idea?

  113. Gravatar of TallDave TallDave
    28. June 2012 at 09:34

    Mark,

    It’s actually the poorer countries in the EU (reece, Italy) where it is far more important.

    Again, you’re missing the point — we’re comparing relative levels of entrepreneurship between OCA regions in order to ask which should have more variability, not between countries in the OCA regions — we’re asking which is the better OCA, remember? You seem to get confused on this point repeatedly; it’s also why income variability as a function of income for people matters — one of these OCAs has 50% higher income than the other!

    Variation in GDP per capita is lower, not greater, in the eurozone.

    Wrong, and trivial to prove. Look at the Wikipedia links again. Latvia is at $15K vs $42K for Austria and the Netherlands, that’s a ratio of 2.8. The richest U.S. state is Delaware at 70, the poorest is MS at 32 giving a ratio of 2.19. The issue of whether an OCA is viable has more to do with the ratio of poorest to richest.

    Your argument was little besides hypothetical nonsense — there’s no reason to look at variability the way you did and conclude “Aha, this OCA isn’t actually better.” Way too many flawed assumptions, as I’ve shown.

  114. Gravatar of TallDave TallDave
    28. June 2012 at 09:42

    Jim,

    Well, Krugman notably told the Asia Times, back during the Bush years, that the USA had the finances of a banana republic because “We should be getting 28% of GDP in revenue. We are only collecting 17%.” That 28% would have produced a heck of a surplus.

    It’s a fair point, but keep in mind a true Keynesian countercyclical policy is more or less indifferent to whether the policy is achieved via taxes or spending — and Krugman/etc. will pretty much never argue for nondefense spending cuts under any circumstances, and tax cuts very rarely. Scratch a “Keynesian” and you generally find a statist beneath.

  115. Gravatar of mbk mbk
    28. June 2012 at 10:14

    Scott, along the lines of also agreeing with J.V Dubois: I don’t think I misunderstood you that much but I do think you misunderstood my whole line of comments from the start. Your point was, the Euro was a bad idea and created mostly problems and no advantages: see, countries without the Euro are no worse off. My point was, countries without the Euro seem to be no better off either if you look at the whole bunch and not just the star performers and that is contrary to your position that owning one’s own central bank should provide large advantages in this crisis.

    In addition, and this is how I started out, I do see wholesale advantages in the “bigness” of the European common market and also the currency area that have borne fruit already – that’s why I cited the example of Austria, no stellar example of government efficiency and no stranger to corruption, and yet by my observation surprisingly economically efficient compared to hyper efficient and super clean Singapore (I know both of them well, that’s the only reason why I picked the pair). I put some of this down to the Euro because I have seen how Austria took did very well with it and became more efficient and retail prices are now comparatively cheap. No precise attribution, sure, but from my vantage point there was and is nothing that’s not to like in the Euro.

    Yes, now there’s a crisis but there was and is a point to the Euro, and as I and J.V Dubois have pointed out, there is a political integrating point too that is just as important as the economic one. As I said above: when re-entering the Eurozone, for me, there was / is a genuine “national flag” effect of the Euro that strikes not just me but also my Filipina (and economist) wife.

    “Mistakes have been made” there is no question, but countries do that all the time with their own national currencies too.

    One more thing: “1. Europe would clearly be better off if they had kept the monetary system of the 1990s. That seems beyond dispute.” This strikes me as very odd. The 90′s system was widely vilified as untenable at the time, and in my memory was a permanent cliffhanger of speculative attacks on the narrow currency bands, culminating in Soros’ famous attack on the pound. It as only seen as a crutch on the way to the Euro anyway and would have blown into 1000 pieces the first day of this current crisis. Caveat, I haven’t studied the details but I lived through that period in Europe and no one believed in it. The Euro was seen as a great relief from it. But please correct me if I overlooked something.

  116. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. June 2012 at 19:37

    @Scott,
    Thanks for letting me use your comment thread to share my opinions on this matter. I of course share your opinion that, first and foremost, the eurozone needs to be returned to NGDP growth trend.

    @TallDave,
    “[It’s actually the poorer countries in the EU ([G]reece, Italy) where it is far more important.]

    Again, you’re missing the point — we’re comparing relative levels of entrepreneurship between OCA regions in order to ask which should have more variability, not between countries in the OCA regions — we’re asking which is the better OCA, remember?”

    The inverse relationship between GDP per capita and entrepreneurship holds for more diverse groups of nations as well, and in fact the US is less entrepreneurial, not more, by most objective measures. The three measures most frequently used in making international comparisons of the relative importance of entrepreneurship are the incidence of self-employment, the number of enterprizes by size class and employment by size class. The US lags almost all OECD members for which we have data by those measures. For example in the rate of self employment the US (7.2%) ranked next to last ahead of Luxembourg (6.1%) in 2007. Greece ranked first at (35.9%). About 23% of US firms have ten or more employees compared to 3% for Greece. This more than any OECD member except Luxembourg (34%) and the Slovak Republic (47%). In 2006 in the US manufacturing sector firms with fewer than 20 employees accounted for only 11.1% of employment behind every OECD member except Luxembourg (9.6%) and Ireland (8.5%). In contrast 35.3% of employment in the manufacturing sector in Greece was in firms of that size.

    The question of whether entrepreneurial performance is superior in wealthier nations compared to poorer nations is a completely different issue. But on the whole, wealthier nations tend to be much more bureaucratic than poorer nations, and that is the matter at hand. (Have you ever read “The Organization Man”?)

    “You seem to get confused on this point repeatedly; it’s also why income variability as a function of income for people matters — one of these OCAs has 50% higher income than the other!”

    There’s an easy way to put this matter to rest. Simply compute the growth variability of the eurozone members and the US states prior to the recession. I’ve done that and it reveals that the standard deviation of growth over the period 1998-2007 averaged 1.52 among the eurozone and 2.02 among the US states. (For the eurozone and the US as a whole it was 0.99 and 1.22 respectively.) Within the US four states had unusually high growth variances: Alaska (3.74), Idaho (3.91), Louisiana (3.21) and Oregon (3.28). These states accounted for only about 3.4% of the US GDP in 2007 but pulled up the simple average of standard deviations. Oregon was not an outlier in terms of trend growth. Alaska and Lousiana were, and were well over 3 standard deviations away from the US mean deviation from trend in 2009. Idaho was less than one standard deviation from the US mean growth trend. But Idaho is trivial as its GDP represents less than 0.4% of the US GDP.

    Moreover I tested your hypothesis that growth variability is correlated to GDP/GSP per capita. The coefficient of determination for the eurozone was 0.02 meaning only 2% of the growth variation could be explained by income. For the dollarzone the coefficient of determination was only 0.18. For the pooled eurozone-dollarzone sample the coefficient of determination was only 0.16. The coefficient of income in the linear regression was not significantly different from zero in all three cases.

    In short, I stand by my analysis. I could normalize the deviations according to the individual state/country growth variabilities and the conclusion should not significantly change, if at all.

    “[Variation in GDP per capita is lower, not greater, in the eurozone.]

    Wrong, and trivial to prove. Look at the Wikipedia links again. Latvia is at $15K vs $42K for Austria and the Netherlands, that’s a ratio of 2.8. The richest U.S. state is Delaware at 70, the poorest is MS at 32 giving a ratio of 2.19. The issue of whether an OCA is viable has more to do with the ratio of poorest to richest.”

    My original analysis concerned the degree of shock assymmetry in the eurozone versus the dollarzone in 2007-2009. Latvia was not and is not in the eurozone. If one drops DC and Luxembourg, the standard deviation of GDP per capita relative to average GDP per capita is in fact less in the eurozone than in the dollarzone. This implicit result even astonished Krugman so you are not alone.

    “Your argument was little besides hypothetical nonsense — there’s no reason to look at variability the way you did and conclude “Aha, this OCA isn’t actually better.” Way too many flawed assumptions, as I’ve shown.”

    I welcome criticism because it serves to refine the analysis. But so far I don’t think you’ve at all succeeded in undermining my original argument that the initial recession shock asymmetry was dramatically greater in the US than in the eurozone.

  117. Gravatar of mbk mbk
    28. June 2012 at 20:57

    Mark,

    fascinating data. More and more off topic, one comment – the higher degree of corporatism in the US (flip side of the lower degree of self employment or ‘entrepreneurship’) compared to others is probably both the cause and the result of higher economic efficiency, division of labor etc. One’s marginal productivity is likely to be much higher in a corporation than in self employment (never mind internet libertarian lore that extols self employment). I think it’s in Frank & Bernanke’s (yes, that Bernanke) “Principles of Economics” that you can find this passage: “Does the Nepalese farmer DIY a lot because he is poor, or is he poor because he DIYs a lot?”.

  118. Gravatar of J.V. Dubois J.V. Dubois
    29. June 2012 at 02:03

    Mark: fascinating data, I reread all your post in this thread and they were all excellent. It just proved my hunch, that all ecnomists who call for abolishing Eurozone beacause of risks of asymetric shocks and other OCA arguments should be equally vocal with regards to other major currency regions like Dollarzone (that includes also “Reminibizone”) Yenzone etc.

    PS: as for the corporations, I also remember reading a study that confirms your data, especially that Greece is among the leaders in self-employed. The point was that people cannot read too much into it. These statistics are too prone to other factors circumstances. Size of corporations can be distorted by tax code (In France there is unusually large number of corporations with 49 employees precisely because they fall into different tax/reporting regime when they exceed 50 employees), structure of economy (most of the self-employed in Greece are farmers) or even less tangible strucutral reason – like the pricing of health insurance in USA for self-employed that handicaps self-employed.

  119. Gravatar of ssumner ssumner
    29. June 2012 at 08:22

    JV, you asked;

    “So if it is now obvious that Eurozone was a failure why was not German reunification a failure ”

    German reunification was a massive failure in terms of employment, which is the focus of my discussion. East German unemployment soared as their industry wasn’t competitive at the new exchange rate, and remained far higher than in the West for several decades. That’s a disaster for employment. Now for living stnadards things were far better, but that’s because the West Germans wrote a check for a trillion dollars and gave it to the East. If Germany gave Greece a trillion dollars then Greece would still have high unemployment, but living standards in Greece would be much higher. So the examples are very similar.

    mbk, You said;

    “My point was, countries without the Euro seem to be no better off either if you look at the whole bunch and not just the star performers and that is contrary to your position that owning one’s own central bank should provide large advantages in this crisis.”

    This makes no sense to me. The eurozone is a gigantic disaster area, with countries like Greece and Spain even running out of medicine. Unemployment way above 20%. The non-eurozone part of western Europe is so much better off it’s not even close. Even the worst example (Iceland) is doing much better.

    And here’s the worst part–it’s going to get even worse in the eurozone, the crisis is far from over. Indeed the aftereffects will last for decades, as steps taken to address the crisis will gradually reduce efficiency in the eurozone economies.

    I simply don’t believe the efficiency gains you mention for Austria. The countries that are structurally similar to Austria, but didn’t join the euro, are doing just as well in terms of economic efficiency.

  120. Gravatar of mbk mbk
    29. June 2012 at 10:26

    Scott, I don’t think it’s fair to limit the comparison to non Eurozone *Western* Europe, here there’s really just Denmark and Sweden that are somewhat representative. Both are doing comparably fine but you can just as well find comparable Eurozone countries of similar size and culture that are doing fine. There’s nothing “infinitely better” here. Compare Austria’s current 3.9% unemployment to Denmark’s 7.8% and Finland’s 7.6% to Sweden’s 7.8%. Then there’s the UK, whose economic trend performed no better than Italy’s during the crisis as we discussed before. Norway has oil so I wouldn’t consider it representative, and neither Switzerland which really lives on a lot of historically acquired rents (more power to them!).

    Once you take in ALL EU countries and compare with/without Euro, then you have, for every Ireland-bad, one Iceland-bad, for every Italy-so-so, one UK-so-so, for every Denmark-quite good, one Austria- quite to very good, for every Spain-outch, one Poland-outch (recent revision of unemployment: 13%, yes, not as high as Spain, but no miracle either). Yes, some non Eurozone countries like Iceland and Baltic states recovered faster but also initially fell far deeper than Eurozone average. And one more thing: I do remember Spanish unemployment rates of 20%+ back in the 1980s so for me it’s just a deja-vu. Sample paper on Spanish unemployment issues pulled at random: http://www.jstor.org/discover/10.2307/1344579?uid=3738992&uid=2129&uid=2&uid=70&uid=4&sid=21100882304691

    In summary, I just don’t see the patterns that you see in such clarity.

    Efficiency gains due to the Euro, darkly I remember the European Commission’s estimate before the crisis as 1% of EU GDP, mainly due to less hedging and banking fee losses. But of course I’d expect you to disagree with that!

  121. Gravatar of TallDave TallDave
    29. June 2012 at 12:21

    My original analysis concerned the degree of shock assymmetry in the eurozone versus the dollarzone in 2007-2009. Latvia was not and is not in the eurozone.

    But they were pegged, and you yourself cited them several times above, so it’s a bit too tendentious to toss them out on those grounds now!

    and in fact the US is less entrepreneurial

    Than the eurozone? Sorry, permit me to politely scoff. Any measure of entreprenuership that places Greece ahead of the U.S. is just totally out of touch with reality; it is not for no reason the business climate has been described as “Soviet” and the bulk of the Greek “self-employed” are unlikely to be registered business, and the large number of one-person businesses suggests it is very difficult to grow into the kind of successful small businesses that have the high income variability that was the original point here. Again, you have to be careful with detailed statistics; they can tell you useful things but they can easily be misinterpreted.

    Simply compute the growth variability of the eurozone members and the US states prior to the recession.

    I’m not sure what you’re trying to argue here. Your original point seemed to be “the greater variability in the response of U.S. states to the crisis vs. the EU suggests the former is not the superior OCA it is generally believed to be” which makes sense if true because that disparity has led to various internal crises in the EU. My response was the greater variability was to be expected in the U.S. because of differences in the OCAs that don’t reflect on their suitability as OCAs. Showing greater variability before the crisis tends to support my point: the U.S. is just naturally more variable because of income, entreprenuership, etc.

    Moreover I tested your hypothesis that growth variability is correlated to GDP/GSP per capita.

    Over what period? By individual, state/country, or OCA?

    You made some interesting points and good analysis, and I agree with most of the rest of your arguments and conclusions outside of this point, but imho you’ve had not the slightest success in using growth variability between OCA members in response to the crisis to argue the U.S. is not the OCA it is generally held up to be — even if we accepted the difference were meaningful, it’s not at all clear why we would care since Mississippi is not seeking to devalue relative to Wyoming.

    OTOH it might be interesting to look at the differences in unemployment, which seems to be as large if not a larger concern as growth…

  122. Gravatar of Floccina Floccina
    29. June 2012 at 13:18

    I think that even we would be better off with 4 or more regional central banks with competing currency. The opposite of the euro idea is that there is strength in diversity.

    I would like free banking even more but I see no way to get there now.

  123. Gravatar of Mike Sax Mike Sax
    29. June 2012 at 13:21

    Floochina I’m guessing you wouldn’t like Keynes idea of a world central bank?

  124. Gravatar of John B. John B.
    30. June 2012 at 12:08

    The problem with contemporary economists like Soros, Krugman or Stiglitz is that they are the only voices we can here in public. This is why there is no real consideration about what you say.

    I´m currently in Europe and I can observe the public debate is divided in two directions – or you are with Germans or you are with your poor south neighbors.

    I have written a thesis about differences between EU and US in foreign politics from the perspective of Constructive theory. My conclusion was that the differences between US and EU are bigger than many people (be it politicians, businessmen or whoever) due to the history and formation of the states. This means you cannot really help them since you can not understand them that well.

    As a Canadian, I´m scared about the impact of European bailout on our RE market. If I mix the fear of upcoming Obamacare and high indebtness, I can be pretty sure with my statement that European Union is taking us with them…

  125. Gravatar of ssumner ssumner
    30. June 2012 at 17:59

    mbk, You are trying to address so many issues at once that we are just going around in circles. If the issue is the efficieny of a single currency, then Denmark and the Baltics are out. If the issue is macroeconomic performance during the recession, then they are in, because they all have exchange rates pegged to the euro. But you are treating them like they are out.

    The euro crisis is very simple, Spain, Greece and the other countries that desperately need to devalue, are unable to do so. All the countries outside the eurozone that desperately needed to devalue did so. That’s why the sovereign debt crisis is concentrated in the eurozone. There’s a huge eurozone crisis right now, there is not a huge non-eurozone crisis in Europe. That’s the difference. It’s a crisis that didn’t have to happen–if the euro had not been created the crisis would be much smaller.

  126. Gravatar of mbk mbk
    1. July 2012 at 04:31

    Scott, until now you yourself have lauded various European countries for staying out of the Euro, now you’re telling me that in reality they weren’t out of the Euro because they had de facto pegs. Of course pegs can be broken, why else would anyone call it a “devaluation”?

    Either way, the very existence of pegs shows that countries dearly want unchanging, or little changing, exchange rates (in the extreme form = a single currency).

    I see the original sin in the European debt debacle not in the Euro itself but in the secondary assumption by lenders that the existence of the Euro now implied that all governments were equally low risk. This allowed some countries to load up on debt at rates they didn’t deserve. Now the market gives them the rates they deserve, still lower btw than what they paid prior to the Euro. But initially this was a foolish assumption by the lenders. In any normal economic situation the debtor would now go bankrupt and the lender would take the loss but of course we know this can’t be allowed to happen because of the scales involved. But it wasn’t the Euro per se, it was an in-principle unrelated piece of moral hazard that lenders assumed that Greece and Spain would never be left to fall. (if you go by the EMH you’d have to admit the market correctly foresaw the bailouts).

    I certainly do agree that this area is a very murky one but I’m sorry, I think if at all we’re both reasoning round in circles here.

  127. Gravatar of Negation of Ideology Negation of Ideology
    1. July 2012 at 06:43

    Mark -

    “Florida would be our Spain right now if it weren’t for the flow of Treasury funds.”

    I’m not sure I understand this point. Is Spain a common retirement location like Florida? If someone works for 30 years in Germany and retires in Spain, don’t they still receive their pension and German social security (or whatever it’s called over there)? It seems like you’d have German taxpayers paying taxes to send checks to former Germans living in Spain. I could see it more if you compared the poorer European countries to Mississippi or something.

    But I agree with your larger point. A national currency is a political and legal entity as well as an economic issue. That’s why I think the OCA is the one with the most political unity. If Europe isn’t politically united, then in my opinion it is not an OCA. I think we need to bring back the study of political economy – too many economists act as if politics and law don’t even exist. (I don’t mean Scott Sumner, of course!)

  128. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. July 2012 at 15:43

    Negation of Ideology,
    I think you may be getting tripped up on the same thing a lot of people are. The value of an automatic fiscal transfer mechanism is not in equalizing the standard of living across a currency area. If that were the case the US would be a total failure since GDP per capita in Delaware is over twice that of Mississippi.

    The value of an automatic fiscal transfer mechanism is in serving as a cushion for those parts of a currency area most adversely affected by an asymmetric shock. The reason why Florida and Spain are similar is not their relative poverty, but rather the fact that both had large inflows of private capital (coupled with housing “bubbles”) and when NGDP fell dramatically in their respective currency zones they were among the states/countries hardest hit with huge current account reversals and high unemployment due to excessively high unit labor costs.

    For comparison, as I mentioned earlier, Florida fell 14% below Gross State Product (GSP) trend growth from 2007-2009. Mississippi only fell 3% below trend. The initial shock to Mississippi was negligible. The initial shock to Florida was worse than in Spain (10%).

    Now, Spain is a retirement destination for some Germans just as Florida is for New Yorkers, so they actually have that in common. (And in fact too much may be made of retirement migration. I noted earlier that Census data implies that few people actually move from state to state after the age of 25.) Where they are different is in automatic fiscal transfers from the currency zone central government. The EU’s budget is a paltry 1% of EU GDP and fails to act as an economic buffer in the event of an asymmetric shock.

    When I mentioned Florida versus Spain I was thinking specifically of Krugman’s back of envelope calculations which he did in his blog here:

    “So as I read it, between falling tax payments without any corresponding fall in federal benefits, plus safety-net aid — not counting Medicaid, which would make the number even bigger — Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That’s a transfer, not a loan. And it’s very big.

    Oh, and we should also add both FDIC costs and Fannie/Freddie losses in Florida.

    Aid on that scale is inconceivable in Europe as currently constituted. That’s a big problem.”

    http://krugman.blogs.nytimes.com/2012/06/02/florida-versus-spain/

    Florida, which is a relatively large state, suffered a huge economic shock, by my calculations larger than every eurozone member save little Ireland. But falling Federal taxes and rising Federal benefits have served as an automatic fiscal transfer mechanism to buffer it from this shock in a way that simply does not currently occur in the eurozone.

    In fact, one can even make a case that it is poorer states, like Mississippi, that have aided richer states, like Nevada, through automatic fiscal transfers in this recession.

  129. Gravatar of ssumner ssumner
    1. July 2012 at 17:51

    mbk, I’m not contradicting myself, you simply aren’t understanding what I’m saying. I do laud countries for staying out of the euro, it gave them the option of devaluing. Some exercised that option, like Britain, Iceland and Sweden. Denmark and the Baltics did not. But they all had that option.

    Greece desperately needed to exercise that option, but it wasn’t able to devalue because it didn’t control its own currency.

    I don’t follow your comments about moral hazard at all—Greece did default, and the creditors will probably lose almost everything they lent Greece. You talk as if the creditors were bailed out.

  130. Gravatar of mbk mbk
    1. July 2012 at 19:00

    Scott, now I can agree with your much more complete statement. Some devalued, some didn’t, some wish they could have.

    But again, from the start I have pointed out (or tried to) that an independent currency with the option to devalue does not seem to make countries perform better or “infinitely” better (your words) in this crisis, *on average*. There are relative success stories within the Eurozone, there are relative success stories outside it. I pointed this out with my pairwise raw comparisons.

    The fact that non Euro countries did not all devalue also points at larger issues that trump fiddling with the exchange value, for instance if a country has large amounts of Euro denominated debts (household debt in Hungary for instance). And what “saved” Iceland is letting other countries bail out Icelandic banks’ depositors, what “doomed” Ireland is to have done so themselves etc; besides, look at the trough Iceland went through, one would sure hope they now recover a bit faster towards trend.

    All I am trying to say, using specific concrete examples, is this: the Euro didn’t automatically doom anyone, and an independent currency didn’t automatically save anyone.

    Greece, yes the lenders were wrong, my EMH comment was tongue in cheek.

  131. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. July 2012 at 21:24

    @Tall Dave,
    “But they were pegged, and you yourself cited them several times above, so it’s a bit too tendentious to toss them out on those grounds now!”

    Read the initial analysis of shock asymmetry at 27. June 2012 at 06:43. There’s no mention of the Baltic States.

    “Again, you have to be careful with detailed statistics; they can tell you useful things but they can easily be misinterpreted.”

    Most of economics as practiced these days is econometrics.

    “Showing greater variability before the crisis tends to support my point: the U.S. is just naturally more variable because of income, entreprenuership, etc.”

    There is greater variability but it is marginal and driven primarily by four relatively small states. Even normalizing for this variability would show a much greater dispersion in growth from trend within the US as compared to the eurozone over 2007-2009.

    “Over what period? By individual, state/country, or OCA?”

    How can one run a linear regression on a single point?!? Obviously it was on a state/country level.

    You clearly have your own personal definition of what constitutes an optimal currency area that has nothing to do with OCA theory as it is now known.

  132. Gravatar of Rien Huizer Rien Huizer
    2. July 2012 at 01:31

    Scott,

    “In my view the euro is fatally flawed, and Europe would be much better off with the monetary regime of the late 1990s.”

    Flawed, certainly. Fatally? depends on what sacrifices politicians are prepared to make (much of the fixing is politically costly for individual voters).

    But: “Europe would be much better off..” The dominant feature of late 1990s European public finance (and investment) was the credible coming of the EUR with its entry constraints. The markets were happy to play convergence games; industry and the public were preparing for something reasonably tangible.

    Now the EUR is here and the flaws have been exposed, going back is to the 1990s ia not possible. There are no resets in history..

    But the earlier attempts at European consolidation were not cheap either, and much easier to frustrate. The EUR is a pretty clever device, but not efficient and certainly not democratic. But maybe a currency-based unhappy integration is better (cheaper and more lilkely to succeed) than a military one.

    Incidentally, I just completed a long trip to Japan that took me to many smaller towns, as well as Osaka and there are telltale signs of diminishing personal affluence: few new cars (but maybe related to the tsunami), no residential construction to speak of. Openness to bargaining in stores and wares that appeal less than in comparable shopping environment in “Greater Germany”. However, not the spectre of boarded-up main street shopping areas. All in all, a pretty admirable country: reasonable prices for many goods, little litigation, well behaved, frugal consumers; regulators who see the importance of small shops as elements in an attractive innner city environment, etc. Large businesses that are getting increasingly divorced from the alliance with the MOF-politivcians nexus (politicians depend on favorable distribution of development finds by the MOF, in return politicians adopt policies favorable to the large business sector that accomodates the MOF mandarins whenever they return to the real world). Beautiful infrastructure everywhere. Impressive new Navy ships, and so on. Economy? What do you mean…

    More seriously: there has been a huge shift in the structure of imports, with especially agricultural inputs from abroad now important in processed foods (not as ingredients in supermarkets yet). Like Korea, a steady increase in foreign workers. Large consumer wallet shares now captured by (Japanese-branded) products made in China. Well possible that the accounting mechanisms have not really picked up that the legendary Japanese farming sector is undergoing a massive restructuring, which at this stage results in declining farm incomes but not lower consumer prices. I continue to think that most of what goes on in Japan is slow structural change (with associated supply side deflation; not to be treated by monetary policy)

  133. Gravatar of J.V. Dubois J.V. Dubois
    2. July 2012 at 03:45

    Scott: I think we have fundamental difference in how we see these things. I agree with you, that eurozone members face huge asymetric shock and that without Euro they could have been better. But this does not mean that Euro was a failure. They could also have been better if ECB would conduct more accommodative monetary policy and/or if there would be fiscal transfers in place.

    So if we identify ability to overcome asymetric shocks as the source of the problems, there are 3 things that are causing this: Euro and inability of countries to devalue, ECB and lack of fiscal tranfers. Now one can say europeans could have foreseen that ECB is being managed by madmen and that politicians are criminally incompetent and cannot agree on anything – therefore it is crystal clear that Euro is a culprit and that it was a very bad idea since the start. But one could comfortably say a very compelling story where the other two factors play prominent role. So did policymakers make an error creating Euro without having thought about asymetric shocks? Sure. But then the same blame lays upon our current leaders who refuse to do what has to be done.

    Using Krugman’s example – if Florida would not have received fiscal transfers during the aftermath of the crises because it would have been part of some titanic national political struggle, would you equally lay blame on Dollar as the cause of Florida’s ill, or would it be failed leaders that caused it? All I say is that the answer is not that clear.

  134. Gravatar of ssumner ssumner
    3. July 2012 at 07:32

    mbk, I think the euro doomed Greece, given their bad supply-side policies. I think if Greece was outside the euro they’d be doing far better now.

    I strongly disagree about Ireland, paying off the bank creditors was a huge mistake, which basically explains why their national debt skyrocketed. Deposit insurance is a side issue.

    It may have been unfair for Iceland to stiff Britain and Holland, but that has no bearing in Icelandic RGDP or employment, rather it affects consumption.

    I view the euro crisis as a gigantic problem, whereas problems in Britain and elsewhere are modest and manageable. To me you guys sound like the old joke:

    “Other than that Mrs. Lincoln, how did you enjoy the play.”

    Other than the current mega-crisis, the eurozone is doing fine. Maybe that’s unfair, but it’s my perception over here. Remember, the crisis is getting worse.

    Rien, Thanks for the info on Japan. That certainly is consistent with the real GDP data—slow growing but no disaster.

    I’ve talked to several people who live in Japan that insist that much of the infrastructure built in rural areas (as a subsitutute for monetary stimulus) is a complete waste, bridges that are almost never used, etc. I also wonder about their debt, given the current ratio of debt to taxes is almost off the charts higher than any other country in the world.

    Obviously the Japanese culture is better at doing certain things than our culture, and I’d expect visitors to notice those things, as you have.

    JV, I think you are thinking about this in the wrong way, almost like whether opponents of the euro are being fair to supporters. I for one didn’t think the ECB was run by madmen, and I didn’t expect the euro to be a disaster. But I’ve now discovered it is run by madmen, and hence that the euro is a disaster. It would not be a disaster with a sound ECB, but we don’t have that, ergo it is a disaster.

  135. Gravatar of mbk mbk
    3. July 2012 at 20:17

    Scott, I see that you now don’t consider Japan a disaster anymore as you had previously. I’ve maintained that for a long time. On the Eurozone I also feel differently although in some specifics you may “win on points”. All things considered, including political expedience, previous convergence etc, I just have a different outlook on the Eurozone’s present and future just as I did on Japan. Who knows, we’ll see what the future brings.

    Just two alternate views on the virtues of pegs vs devaluations
    http://blogs.cfr.org/geographics/2012/07/02/postcrisis/
    (Iceland vs Baltics, via Tyler Cowen)
    and
    http://voxeu.org/article/why-devaluation-isn-t-viable-option-greece-insights-small-open-economy
    (debts in foreign currency mean that devaluations would create many other problems – applies to Baltics, Greece, Hungary AFAIK).

  136. Gravatar of J.V. Dubois J.V. Dubois
    4. July 2012 at 05:31

    Scott: Hmm, then it seems to me that we actually do not have different view on this issue. Only I am not that strong about your conclusion, though. Try to think about it this way – if you want to take some lesson from this mess that you could apply to other currency areas what would it be? That central bank should be more accommodative? That there should be fiscal transfers to solve asymmetric shocks? Than that is the true lesson and reason for EURo failure. You can formulate it in this way:

    “You should never create any new or maintain any old common currency area unless you have this kind of monetary policy and this degree of fiscal transfers. Otherwise the project is in a very high risk of failure”

    It is like saying “Never drive unless you have buckled your seat-belt”. Then if accident happens you may argue if it was driving under this conditions that was a failure, or if it was not using seat-belt that was a failure. I would even say that blaming “driving” for an accident in a way diminishes responsibility of people who should have used seatbelts – and vice versa. One can think about it as of a moral hazard.

    PS: Anyways, thanks for posting this thread and for your responses to posts in this discussion. Even if it seems that we may have different opinions on this, I feel that I learned something valuable here, due in no small part to having acces to fantastic community that you have gathered around your blog. Thanks again.

  137. Gravatar of Rien Huizer Rien Huizer
    4. July 2012 at 06:00

    Scott,

    Not to bore you with more Japan, but the “true debt position” (or whatever would pass for relevant gvt debt elsewhere) has been made inaccessible for a long time. Headline gvt debt is probably overstating it, but by how much, only those that deserve to, know. Zaito.

  138. Gravatar of Negation of Ideology Negation of Ideology
    4. July 2012 at 07:26

    Speaking of Japan, The Economist says Japan has the highest wealth per capita in the world:

    http://www.economist.com/node/21557732

    The US is second per capita.

  139. Gravatar of ssumner ssumner
    5. July 2012 at 18:53

    mbk, I don’t recall changing my views on Japan.

    JV, I agree it’s a complicated issue.

    Rien, I agree.

    Negation, I’d guess smaller countries would top the list, if included.

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