The Eurozone NGDP Catastrophe

Suddenly we have everyone from Charles Evans to Mark Carney talking about NGDPLT.  Now that the idea is no longer confined within the tiny market monetarist community, perhaps it’s a good time to re-examine how policymakers stack up using this benchmark.

The US experience is well known.  Our NGDP is up 9.59% from 2008:2 to 2012:3.  If it keeps chugging along at 1% per quarter it will be up 12.9% by 2013:2, a period of five years.  Recently I decided to take a look at the European numbers, but I never seem to be able to find NGDP numbers for the eurozone.  Fortunately one of my best students ever (Garrett MacDonald) sent me the data.  I knew it would be bad, but I expected bad like the US, not bad like Japan.

Eurozone NGDP is up only 2.47% since 2008:2.  The ECB expects contraction in 2013.  I could not find NGDP forecasts, but the deflator has been rising about 1.1% per year over the past nine quarters.  So NGDP growth will probably be very low.  A reasonable guesstimate is that three quarters from now the eurozone NGDP is likely to be up about 3% from 2008:2.

If you think that the 12.9% number for the US 5 year NGDP growth rate is horrible, how can we even begin to describe 3% NGDP growth over 5 years?  Even accounting for the fact that American trend NGDP growth is a bit higher (4.7% per year over the 8 years before 2008:2, whereas in the eurozone the previous 8 years saw 4.1% annual NGDP growth), these numbers are simply astonishing.

Even more appalling is the reaction of the economics community to this NGDP catastrophe.  Consider the following two hypotheses:

A.  The eurozone crisis was caused by a lack of competitiveness in the peripheral countries, banking distress, and huge public debt problems.

B.  The eurozone problem was caused by ultra-tight money at the ECB, which caused NGDP growth to fall 18.5% below trend.

Suppose you polled economists at January’s AEA meeting.  Which one would get 98% of the votes?

Now let’s compare the two hypotheses.  Suppose tight money was the cause, hypothesis B.  What does economic theory suggest would happen if a central bank ran a tight money policy that reduced NGDP growth 19% below trend?  The answer is simple; high unemployment, lack of competitiveness, banking distress and debt problems.  Of course this theory doesn’t explain why some regions are doing better than others, but that’s true of almost any adverse demand shock.  There will be regional differences based on different industry mixes, public debt burdens, etc.

Now look at hypothesis A.  How do we account for the sharp fall in NGDP?  Recall that people like Evans and Carney are increasingly likely to see stable NGDP growth as evidence of sound monetary policy.  Are we to believe that items listed in hypothesis A just happened to coincide with the biggest NGDP crash since the Great Depression? Obviously not.  Even the proponents of hypothesis A would see a link, but presumably with causation running from A to B.  OK, but then what if the ECB had not let NGDP growth crash, what then?  If you actually believe that tight money did not cause the crisis, you’d be forced to argue that the crisis would have happened anyway, even with sound monetary policy.  That would be absurd, as it would amount to claiming that an 19% crash in NGDP growth over 5 years would not slow RGDP growth, because the “real problem” was the items in hypothesis A.  A medical analogy would be that shooting a flu patient in the heart with a 45 would not worsen their condition, as their real problem was having the flu.

Now some will argue that the ECB cannot do more, as they have an inflation mandate.  Maybe so, but let’s look at the increase in the GDP deflator over the past 9 quarters:

1.58%, 0.96%, 0.82%, 0.44%, 0.50%, 0.87%, 1.16%, 1.07%, 1.31%.

What don’t you see?  Unlike the US and Britain, I don’t see any GDP deflator rates above 2%.  Yes, the CPI has been above 2% at times, but which variable matters more for economic stability, the price of stuff Europeans consume, like Saudi oil, or the price of stuff European companies produce?  In fact, inflation is probably even lower than the numbers I just quoted, as I am pretty sure they include the recent increases in indirect taxes, which is part of the fiscal austerity.  Tight fiscal policy triggers tight monetary policy–what a wonderful system!

Even if the eurozone was still operating as a fixed exchange rate system, as in the 1980s and 1990s, this data would represent a catastrophic policy failure.  But now that they have a single currency, it’s even worse.  Now individual countries are not able to fix their competitiveness problems with devaluation.  This makes it especially important to get monetary policy right–to provide the optimal amount of AD for the overall eurozone region–not the healthiest member of the group.  How far are they from the optimum?  Angela Merkel is now suggesting that even Germany needs fiscal stimulus.  Given that the entire edifice is teetering on the edge of disaster, don’t you think the European elite would go out of their way to do whatever it could?  Look at those GDP deflator numbers again.  The ECB seems willing to cross all sorts of previous lines in the sand, with radical policies such as buying sovereign debt and bailing out banks, but isn’t willing to produce enough AD to get GDP inflation up to say 1.9%, or 1.8%, 0r 1.7%, or even 1.6%, even in a single quarter.  Are they masochists, or do they not have a clue as to what’s actually going on?

Ultimately the eurozone crisis is a massive failure of imagination among the Very Serious People than run Europe.  We have a huge demand shock creating a depression with year after year of high (and still rising) unemployment, just as all the textbooks say it should.  You have a severe NGDP growth plunge producing a debt crisis, just as the textbooks say it should.  We have low interest rates being a very poor indicator of the stance of monetary policy, just as the textbooks say it is.  And even with this massive demand shock occurring right in front of their eyes, they can’t see it.  All they can see are the symptoms, and they assume those symptoms are the causes.

We spend years trying to teach our students to get beyond the superficial “common sense” explanations of macro events, to look deeper into the root causes.  And yet when our best and brightest are faced with the defining challenge of our era, they react like a bunch of ignorant freshman students, unable to see beyond the news headlines.

PS.  Marcus Nunes has a post showing the scale of the disaster.


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47 Responses to “The Eurozone NGDP Catastrophe”

  1. Gravatar of tom s. tom s.
    17. December 2012 at 07:03

    ” Our GDP is up 9.59% from 2008:2 to 2012:3.” Shouldn’t you clarify that’s NGDP?

  2. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    17. December 2012 at 07:28

    “I never seem to be able to find NGDP numbers for the eurozone”

    The first goal of market monetarism wrt the EU should be to make those numbers more accessible.

    Every month, the Portuguese statistics office sends out a press release with an RGDP estimate. They caution that while it is easy to measure NGDP in real-time, the real/inflation split is harder and so the estimate is likely to be changed. But they don’t actually tell you what the NGDP was!

    So, they measured this important number with good accuracy (NGDP), add a very noisy estimate (inflation) and only report the result, but not NGPD.

  3. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    17. December 2012 at 07:30

    “I am pretty sure they include the recent increases in indirect taxes”

    Yes, this is true. Also, they exclude housing (because there was no European wide agreement on how to include it).

  4. Gravatar of The painful knowledge of monetary history « The Market Monetarist The painful knowledge of monetary history « The Market Monetarist
    17. December 2012 at 07:53

    [...] Update: Scott Sumner also picks up on the European tragedy. [...]

  5. Gravatar of Lars Christensen Lars Christensen
    17. December 2012 at 07:56

    Scott, the European situation is truly tragic. Since the ECB’s insane rate hikes in 2011 European unemployment has probably risen by 3-4 million people. Talk about the social cost of failed monetary policy.

  6. Gravatar of J.V. Dubois J.V. Dubois
    17. December 2012 at 07:57

    Yes, this is an important stuff and it has to be said. We are witnessing a massive, massive failure of VSPs with history-shaping consequences for hundreds of millions of people. I honestly do not understand what is really going on. Could this all really be happening?

    PS: Thanks for this blog. When I read this piece of news http://finance.yahoo.com/news/economic-slowdown-throughout-euro-zone-114353720.html – I had an urge to destroy something. Knowing that there are other people out there not completely insane is reassuring in a way.

  7. Gravatar of Becky Hargrove Becky Hargrove
    17. December 2012 at 08:04

    Lars,
    Join me in thanking Scott’s student, Garrett MacDonald for digging up that information, as I had no idea the Eurozone NGDP was actually that bad since 2008. Garrett did us all a good service.

  8. Gravatar of Lars Christensen Lars Christensen
    17. December 2012 at 08:07

    Becky,

    Well I am unfortunately painfully aware of the European NGDP data. The striking thing is how NGDP growth started to diverge dramatically between the US and the euro zone after the ECB decided to hike interest rates twice. It is horrific.

  9. Gravatar of Ritwik Ritwik
    17. December 2012 at 08:08

    Scott

    “Tight fiscal policy triggers tight monetary policy–what a wonderful system!”

    Which is why I believe that if monetary policy tries to stabilize NGDP, it should stabilize NGDP at factor cost, not market prices.

    An indirect tax hike has, ceteris paribus, the most likely result of increasing NGDP at market prices and depressing NGDP at factor cost. Monetary policy that tries to offset the AD effect of the hike should focus on the latter, not the former. Would you agree?

  10. Gravatar of ssumner ssumner
    17. December 2012 at 08:14

    Tom, Thanks, I fixed it.

    Luis, Britain does the same with NGDP, releasing it later. That makes no sense. And the house price crash gets completely ignored—inflation targeting is crazy for all sorts of reasons, but mismeasurement is a good place to start.

    Lars and JV, Yes, the ECB is creating an artificial demand-side depression, a smaller repeat of the 1930s, and the profession doesn’t even see what’s happening. Just as in the 1930s they blame the symptoms of the demand collapse for actually causing the demand collapse.

    Becky, I agree.

  11. Gravatar of ssumner ssumner
    17. December 2012 at 08:16

    Ritwik, Yes, and they also might want to consider targeting per capita NGDP. Population growth is a relatively easy variable to adjust for.

  12. Gravatar of Steve Steve
    17. December 2012 at 08:33

    Marcus did a post on this last week. The BundesECB is doing a very good job at targeting 2% NGDP in Germany.

    http://thefaintofheart.wordpress.com/2012/12/11/what%c2%b4s-really-bleeding-europe/

  13. Gravatar of Bill Woolsey Bill Woolsey
    17. December 2012 at 08:59

    I think key goal of central banks is to avoid increases in short term interest rates. They maximize this subject to the constraint that inflation and unemployment don’t increase too much. The reason for the constraint is voters. The CPI inflation is relevant because that is what impacts voters.

    Why the interest rate goal? I think it is the special interest of the banking industry.

    What about unemployment? This is less of a problem because it mostly effects the unemployed. (If it was really high, like over 50%, then it would be weighted more than inflation.)

    Also, increasing unemployment is serious problem because of the fear factor. If it stabilizes, even if it is at a high level, it isn’t that much of a problem.

    Real GDP, output gaps, the GDP deflator, nominal GDP are not important to central banks.

    There is no special interest group worried about them, and only to the degree they are related to the things voters care about — CPI inflation and unemployment–do they have instrumental value.

  14. Gravatar of StatsGuy StatsGuy
    17. December 2012 at 09:26

    Scott, I still say the ECB is responding to this and other commodities:

    http://www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=120&currency=eur

    The US, UK, Aus, etc. have had more flexibility due to greater natural resource endowments. Japan feels similarly constrained.

    Strong currencies tend to have a consumption mentality in them, strangely enough – “strong” currency policies are designed to preserve relative wealth (intention does not equal success). We need to thank the markets for balancing this by rewarding policies that enhance productive capacity.

    So many conservatives cast the CBs as interventionist and anti-market due to QE. Quite the contrary, QE is PRO market. Lack of QE is interventionist, by preserving a monopolistic disequillibrium in money markets.

  15. Gravatar of Mike Sax Mike Sax
    17. December 2012 at 09:36

    Yes the U.S. is in much better shape than the EU-as the NGDP numbers indicate-also than Britain.

    This is what I was saying during the election. However sluggish the US recovery is at least it’s a recovery. We never did a double dip like Britain and the EU

  16. Gravatar of Saturos Saturos
    17. December 2012 at 09:37

    Scott and Ritwik, don’t tax hikes work just like supply shocks? Shouldn’t NGDP be immune to these problems?

  17. Gravatar of Saturos Saturos
    17. December 2012 at 09:52

    Daniel Drezner hates “bubbles” too: http://drezner.foreignpolicy.com/posts/2012/12/17/the_worst_word_of_2012

  18. Gravatar of Major_Freedom Major_Freedom
    17. December 2012 at 09:57

    Now let’s compare the two hypotheses. Suppose tight money was the cause, hypothesis B. What does economic theory suggest would happen if a central bank ran a tight money policy that reduced NGDP growth 19% below trend? The answer is simple; high unemployment, lack of competitiveness, banking distress and debt problems. Of course this theory doesn’t explain why some regions are doing better than others, but that’s true of almost any adverse demand shock.

    You mean if you start with the a priori theory that inexplicable “demand shocks” are the cause for recessions, that because all demand shocks contain regional differences in performance, it means falling NGDP is no worse a theory than all other “demand shock” theories, so it is the best theory out of all possible theories?

    What about the qualitative theories that explain the demand shocks themselves? Sumner offers this to rebut such challenges:

    Even the proponents of hypothesis A would see a link, but presumably with causation running from A to B. OK, but then what if the ECB had not let NGDP growth crash, what then? If you actually believe that tight money did not cause the crisis, you’d be forced to argue that the crisis would have happened anyway, even with sound monetary policy. That would be absurd, as it would amount to claiming that an 19% crash in NGDP growth over 5 years would not slow RGDP growth, because the “real problem” was the items in hypothesis A. A medical analogy would be that shooting a flu patient in the heart with a 45 would not worsen their condition, as their real problem was having the flu.

    This is a caricature of those who argue the causation runs from A to B. Yes, of course, it would indeed be absurd to argue that without further inflation from central banks, the correction would have been steeper, unemployment would have been higher, output would have been lower, and the “crisis” would have been even “worse”. Even the Austrians agree on this restricted point.

    But what Sumner is not mentioning is that the proponents who argue the causation is A to B are also arguing that the cause of current A is prior stimuli to avoid prior A’s, which is the very “solution” proposed by MMs to avoid B.

    In other words, MMs perceive problem B, and advocate for a solution that Austrians argue is the very cause for A that made MMs perceive B to be a “this will make things even worse” problem in the first place.

    The analogy to explain what MMs are saying would be this: Shooting a flu patient with more flu viruses would not worsen their condition, as their real problem was having the flu. Or, drinking even more can stop the problems of hangovers. Or, throwing more gasoline on fires can solve the problems of fires. Or, you get the picture.

    Yes, massive deflation can “make the economy worse” in the short run, but that is not sufficient for advocating for more inflation in the short run, for the inflation itself causes the very same problems that lead to forces building up that are associated with sudden deflation later on.

    The only way to know the proper money production is by the free market. If there is a crushing deflation, without the Fed burning money, then you have to ask why individuals in the market would reduce their spending. You can’t argue it’s because the Fed didn’t print enough, because that would be arguing in circles. The question MMs have to address is why, absent accelerated Fed inflation, would spending suddenly collapse? Why did the Fed find itself in a position of having to accelerate its inflation in order to stave off a collapsing NGDP? Why would accelerating money printing be perceived as needed, and why was the prior money supply growth insufficient?

    There is no objective law of markets that says spending shall increase by 5% per year. In a free, healthy market, spending fluctuates, because the subjective values of money vis a vis goods fluctuates. Just like in the 1920s when most economists conflated the stable prices with a stable market, so too are MMs conflating stable NGDP with a stable market.

    Stable NGDP growth can be associated with gradual errors building up due to the way money is produced, where it enters the market, who receives it, and what they do with it. Stable NGDP targeting schemes contain distortions to relative prices and spending no less than price targeting schemes. NGDP targeting does not raise all spending and prices equally, and because of that, gradual NGDP growth can be associated with gradual problems building up that cannot be solved by continuously accelerating money inflation (for obvious reasons).

    It is not an exaggeration to say that the Fed is an attacker of free market stability by its very existence, let alone how much it does or does not inflate.

    Money production can only be supportive of the division of labor if it is itself integrated into the division of labor. Money is a commodity. If the state monopolized the production of food, or housing, or clothing, or medicine, then their actions would be an attack on free market stability as well. The same is true for the most valuable commodity used as a medium of exchange.

    This passage:

    Ultimately the eurozone crisis is a massive failure of imagination among the Very Serious People than run Europe. We have a huge demand shock creating a depression with year after year of high (and still rising) unemployment, just as all the textbooks say it should. You have a severe NGDP growth plunge producing a debt crisis, just as the textbooks say it should. We have low interest rates being a very poor indicator of the stance of monetary policy, just as the textbooks say it is. And even with this massive demand shock occurring right in front of their eyes, they can’t see it. All they can see are the symptoms, and they assume those symptoms are the causes.

    Is a perfect example of the pot calling the kettle black. For all Sumner can see are the symptoms of falling expenditures from one moment in time to the next, and he assumes those symptoms are the causes.

    He doesn’t understand the CAUSES of demand shocks, because he doesn’t understand the effects of non-market money production on economic calculation, on relative pricing and spending, and how that ties in with real resource allocations in the division of labor.

  19. Gravatar of Doug M Doug M
    17. December 2012 at 10:14

    Eurostat publishes that data here:

    http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

  20. Gravatar of Anonymous Anonymous
    17. December 2012 at 10:18

    [...] [...]

  21. Gravatar of jsalvatier jsalvatier
    17. December 2012 at 11:11

    Graphs, graphs, graphs!

  22. Gravatar of marcus nunes marcus nunes
    17. December 2012 at 11:30

    This post contrasts Germany and the rest (NGDPwise):
    http://thefaintofheart.wordpress.com/2012/12/11/what%C2%B4s-really-bleeding-europe/

  23. Gravatar of marcus nunes marcus nunes
    17. December 2012 at 11:38

    Sorry for doubling-up. Just saw Steve had linked to it.

  24. Gravatar of marcus nunes marcus nunes
    17. December 2012 at 11:42

    But here´s a new one commenting on Jeffrey Frankel´s once again pushing for NGDPLT:
    http://thefaintofheart.wordpress.com/2012/12/17/jeffrey-frankel-does-it-again/

  25. Gravatar of J J
    17. December 2012 at 11:47

    @Scott
    Angela Merkel isn´t saying that Germany needs fiscal stimulus. In Germany, there is currently no debate about fiscal policy and the coalition in Berlin is aiming at closing the defict in 2013. When it comes to european fiscal policy, most politicans are concernd that the defict reduction in Greece, Spain et al. isn´t working fast enough. Also, if you google “angela merkel konjunkturprogramm” (= angela merkel fiscal stimulus) you only find news from 2008/2009 advocating it or news from 2012, where Angela Merkel advocates fiscal tightening.
    Apart from this, I agree completly with your article.
    Sorry for any typos, im from Germany ;)

  26. Gravatar of Major_Freedom Major_Freedom
    17. December 2012 at 11:52

    marcus nunes:

    Constant growth rate of NGDP implies an exponentially increasing trend (in Germany) on a linear Y graph, not a straight line as you have now.

    Something like this:

    http://i.imgur.com/wGjJ9.png

  27. Gravatar of Major_Freedom Major_Freedom
    17. December 2012 at 12:04

    marcus nunes:

    That post on Jeffrey Frankel is flawed.

    He writes:

    “The bold sentence above indicates that he forgot, temporarily, that it´s supposed to be a LEVEL target, not a GROWTH target (although if you are on target the growth rate of NGDP should be ‘constant’). Saying that monetary policy was excessively easy in 2004-06, because NGDP growth exceeded 6%, is a mistake even some bona fide market monetarists entertain. And the bad part about it is that it gives credence to those like John Taylor, among others, who point to the “easy” monetary policy over that period (“rates too low for too long”) as an important cause of the housing bubble and bust and the ensuing “Great Recession”.”

    It is one thing to say that NGDPLT calls for temporarily “excessive” NGDP growth only after a temporary period of “inexcessive” NGDP growth. He is right to say that Frankel’s claim that MM would have avoided the 2004-2006 “excessive” NGDP growth of 6% is not correct if NGDPLT was started after the temporary “inexcessive” NGDP growth prior, because to make up for prior inexcessive growth, current excessive growth is called for.

    But it is quite another thing to suggest that the easy money 2004-2006 wasn’t an important cause of the housing bubble. Bubbles aren’t backward looking. Even if the Fed is engaging in “excessive” NGDP growth as a “make-up”, that “excessive” inflation will have the same type of booming effect (not necessarily the same quantity) whether there was prior “inexcessive” NGDP growth or not.

    It doesn’t matter that the author of the article believes 5% NGDPLT growth is all well and good and cannot possibly generate any bubbles. It doesn’t matter if he thinks it is justified to engage in +1000% NGDP growth after a period of -500% NGDP growth, that +1000% NGDP growth, if it brought about by inflation, will have the same type of booming effect on the real economy regardless.

  28. Gravatar of ssumner ssumner
    17. December 2012 at 12:15

    J, You said;

    “Angela Merkel isn´t saying that Germany needs fiscal stimulus. In Germany, there is currently no debate about fiscal policy and the coalition in Berlin is aiming at closing the defict in 2013.”

    Reuters just reported the following a few weeks ago:

    “Chancellor Angela Merkel said on Tuesday Germany needs to stimulate domestic economic demand and urged opposition parties to stop blocking proposed tax cuts in the upper house of Parliament.”

    Are they lying?

  29. Gravatar of ssumner ssumner
    17. December 2012 at 12:24

    Doug, That data is only since 2009, where do I get the earlier data?

  30. Gravatar of ssumner ssumner
    17. December 2012 at 12:31

    Marcus, Yes, those graphs make the picture very clear, I’ll add a link.

    Saturos, This is one of those cases where NGDP is not optimal. Nominal national income, which excludes indirect business taxes, would be better.

  31. Gravatar of Rien Huizer Rien Huizer
    17. December 2012 at 12:36

    Scott,

    Do you really think policymakers in the EUR zone are not aware of this? These results are very much similar to the German results during the nineties. Europe is supply side export oriented. Consumption takes a back seat and the number of jobs (even with declining pay) is more important than popular affluence.

    But there is no shortage of academics capable of understanding what you write about, it just does not motivate politicians, for the time being.

    The politicians catering to the seriously unhappy ones (like in Spain, Greece etc) seem to be doing not as well as one would expect from the situation and notions of rationality. So, I guess, complaining about Europe is unproductive. The bureaucrats are in charge and they like what they see, as long as it pushes the integration agenda forward.

  32. Gravatar of ssumner ssumner
    17. December 2012 at 12:37

    Statsguy, That may be a factor, but (as you imply) perhaps not a good reason.

  33. Gravatar of Major_Freedom Major_Freedom
    17. December 2012 at 12:39

    Germany is Japan!

  34. Gravatar of ssumner ssumner
    17. December 2012 at 12:44

    Rien, You said;

    “Do you really think policymakers in the EUR zone are not aware of this?”

    I am quite sure that they are completely unaware of this. When I talk to people out in the “real world” I find most people are completely incredulous when I explain how tight money caused a needless “great recession”. I have to carefully explain the idea, as they’ve never heard this theory before. And I’m including my fellow economists. And I’m including my fellow economists from elite institutions. It boggles the mind to think that Eurocrats understand this. They don’t. Why do you think Merkel is calling for fiscal stimulus in Germany?

  35. Gravatar of James in london James in london
    17. December 2012 at 12:52

    Regional variations within a monetary union are very common, even in a country as relatively small as the UK (vs the US or the EZ).
    http://www.moneyobserver.com/news/12-12-11/uk-gdp-be-tale-many-cities-2013

    The EuroZone is partly just having to get used to the new world their citizens all voted for. They’ve made their bed and they have to lie in it. The near-universal elite consensus in favour of a single currency inside those countries is a true puzzle when the economic consequences are so appalling.

  36. Gravatar of Tom Tom
    17. December 2012 at 16:47

    While I think you’re very right to want more monetary stimulus now; and very right that most Europeans don’t understand it, you’re still wrong about the start of the crisis, and it will always hurt your argument.

    If you actually believe that tight money did not cause the crisis, you’d be forced to argue that the crisis would have happened anyway, even with sound monetary policy.

    Mal-investment, on a massive scale, caused the crisis. Even with “sound money”, the crisis of banks giving loans to millions of people who are speculating that house prices will always go up, and thus are making bubble investments, that crisis is not solved by “sound money”, or good NGDP trend adjustments.

    But the cause was in the 2006-2008 time frame (peak house price, collapse of Lehman Bros). Already 4, soon 5 years ago. We needed looser monetary policy.
    BUT the Dems (and in Europe the Social Dems) wanted fiscal policy higher spending and higher taxes; while the Reps (and in Europe the Conservatives, and often the Christian Dems), wanted reduced taxes and eventually smaller gov’t.

    Neither US nor European politics has produced a clear mandate for either the lower taxes less gov’t spend, nor higher taxes more gov’t spend fiscal policies. Regardless of this gridlock, the CBs should be monetizing the debts more, now, while rates are low.

  37. Gravatar of Ben J Ben J
    17. December 2012 at 17:40

    Tom you should read Scott’s National Review article, it explains his views in more detail.

    It’s interesting that you point out the 2006-2008 timeframe, when housing prices and construction employment were falling, but there was no significant increase in the general unemployment level (I believe a couple of points).

    Only when NGDP started falling rapidly in late 2008 did the unemployment rate increase dramatically.

    So your story would need to include an explanation for why the adjustment process in housing that had already been occurring for years with minimal increase in the general unemployment level suddenly caused an enormous increase in unemployment, a financial crisis, and a collapse in output in late 2008.

    What else happened in late 2008 again?

  38. Gravatar of jknarr jknarr
    17. December 2012 at 19:29

    I’m not certain why we should treat the ECB’s policy as mistaken. Ought not we assume that they know what they are doing? The ECB is a supranational institution acting in the EU – not national government – interests. Their challenge is to fiscally unite the EU – a political agenda. Austerity is the hammer, debt is the anvil toward a federalized Europe. It’s really no mystery. Can’t unite Europe without destroying countries first.

  39. Gravatar of chris mahoney chris mahoney
    17. December 2012 at 21:41

    Where did your student find NGDP for the eurozone?

  40. Gravatar of JB JB
    18. December 2012 at 01:12

    “PS. Marcus Nunes has a post showing the scale of the disaster.”

    Well, Germany = 1/17 * log(660/475) = 1.9% annual NGDP growth
    rest of Eurozone = 1/17 * log(1700/900) = 3.74% annual NGDP growth

    So from the perspective of “targeting 4-5% annual NGDP growth”, I see a disaster in Germany, and an almost (on average) correct policy in the rest of the Eurozone.

  41. Gravatar of Rien Huizer Rien Huizer
    18. December 2012 at 03:18

    Scott,

    “It boggles the mind to think that Eurocrats understand this. They don’t. Why do you think Merkel is calling for fiscal stimulus in Germany?”

    “Eurocrats” have economists working for them! But generally, they tend to toe the political line of the dominant countries. Understanding the MM argument theoretically is not that difficult. But practice is a different matter. There is also no infrastructure (data, models, guidelines etc) to implement a policy based on NGDPLT targeting. I think that scaling up RGDP to NDGP is maybe trickier in the Ezone than in a nation state like the US.

    Why do I think Merkel is calling for fiscal stimulus in Germany?
    1. Merkel (Frau Sauer to be more precise) will do whatever polling and instinct will tell her to do. At least that is the assessment of the specialist journos in Germany. And it appears the German public is aware of “inflationary” tendencies (house prices rising very fast in most metro areas) which is an old scare topic there.

    2. Despite a balanced budget provision in the constitution, there is more fiscal space in Germany than in most other EUR zone countries (despite unfunded pension liabilities not being properly accounted for). This space might be used to do targeted vote buying, dressed up as stimulus. Getting “stimulus” into
    fashionable territory is imo mainly a preparatory step towards vote buying/pork

    3. Adopting policies that would alleviate the problems in the periphery is extremely unpopular, which is exploited by traditionalists in the Bundesbank by having highly public maverick positions that undermine ECB credibility

    4. German policymakers are very familiar with the situation in Japan where weak domestic demand contributes to a buoyant JPY. A stand alone Germany would probably have the same problems. EUR uncertainty ensures that the EUR remains weak, resulting in the same trade and employment effects as Sweden engineered in 2008/9. Given the rather peculiar (apparent) German voter preferences the sacrifices this policy-by-omission requires go unnoticed.

    As an economic history expert on the 1930s you must be familiar with the economic policy and -theory repertoire existing in Germany in the interwar years the electoral fate of politicians who tried responsible policy and of those who did otherwise.

  42. Gravatar of ssumner ssumner
    18. December 2012 at 06:28

    jknarr, You said;

    “Ought not we assume that they know what they are doing?”

    Given that economists outside the ECB don’t know what’s going on, why assume that those inside do? Are they special?

    Chris, Eurostat.

    JB, People have drowned in lakes that on average are only 2 feet deep.

    Rien, You said:

    ““Eurocrats” have economists working for them!”

    I’d say that not one economist in 100 understands that tight money caused the Great Recession.

    In the 1930s voters punished the politicians that drove Germany into a Depression, as they should in a democracy. Unfortunately those more enlightened on monetary policy had deficiencies in other areas, to put it mildly.

  43. Gravatar of J J
    18. December 2012 at 08:39

    @ssumner
    Ah, okay. I checked it and reuters is of course not lying, but to say angela merkel is running for fiscal stimulus and that there is a debate over lacking aggrgate demand is a least an exaggeration and not the intention of the tax reliefs. It is more of an concession to the FDP, which is struggling to make it into the Bundestag in the elections next year and has the label of “tax-reduction-party”.. I think Merkel said it just to have an additional argument in a speech and not to introduce a new policy. At least in the german media and politics it was regarded as such. Btw, when a german politican talks about “Binnennachfrage” (=”domestic demand”, which is what she said originally), they are usually miles away from the concept of aggregate demand or output gap economists have in mind. A german politican means “this policy rises the wages of a broad fraction of the people and because of this, they consume more which in turn leads to higher growth”. But again, that was not her main pint and yes, german politicans mostly live in the economic dark ages.

  44. Gravatar of jknarr jknarr
    18. December 2012 at 10:02

    Scott —
    “Given that economists outside the ECB don’t know what’s going on, why assume that those inside do? Are they special?”

    Well, on one hand, economists might know something. On the other hand, they may know nothing. ;)

    But, thankfully, I was not speaking about economists, but rather policymakers! Who likely know what they are doing in their actively crushing AD, and have their reasons. Our model is improperly specified. Central bank economists do what they are told.

  45. Gravatar of Rien Huizer Rien Huizer
    18. December 2012 at 14:24

    Scott,

    Just finished reading one of Goetz Aly’s densely written works and maybe it cast a spell. I was focussing on the political price of sound, long term policy (of course without NGDPLT enlightenment). Probably the success of Nazi populism (cum economic engineering) is one of those things that makes one wonder about voter rationality (yes I read (even bought) the book about the myth of the irrational voter). My only point in discussions such as these is that I am looking for practical, politically feasible solutions that provide better outcomes than proven German monetarism. I am not an advocate of it, but it seems to be associated with international competitiveness (but so does Socialkism with Chinese characters of course). Only, it has, in most societies a political price because it does not cure business cycle problems.

  46. Gravatar of ssumner ssumner
    19. December 2012 at 06:16

    J, You said;

    “A german politican means “this policy rises the wages of a broad fraction of the people and because of this, they consume more which in turn leads to higher growth”.”

    Unfortunately that’s also what most western economists mean.

    Rien, Does the record of non-elected governments throughout history make you wonder about the rationality of not relying on the electorate?

    German monetarism throughout post WWII history was clearly one of the best monetary policies of all time. Pity the ECB has abandoned the stable NGDP growth that drove German success for so many years.

    I’m not sure if you were joking about China, which is one of the poorest countries in East Asia–by far. To regard China as a “success” is absurd. Their per capita exports are absolutely tiny.

  47. Gravatar of Rien Huizer Rien Huizer
    19. December 2012 at 07:25

    Scott,

    Does the record of non-elected governments throughout history make you wonder about the rationality of not relying on the electorate?

    Not quite sure what you mean: Both the Weimar gvts and Hitler’s were elected (although Hitler closed the door behind him). Hitler and the communists together had 65% of the under-35 vote in the final Weimar election, both with highly interventionist and anti-democratic programs and anti-market programs. German policy past the great inflation was in essence a prototype of the post WWII policies (under very different constraints of course) but voters did not reward virtue and opted for something completely unfeasible and ultimately suicidal. One would expect citizens of an Arrow-Debreu world to reward the democratic gvts and deselect the authoritarians. Anyway that may have been an aberration. I concede that voter irrationality is rarer than most people expect.

    The joke about China is simply that certain Chinese policies post Deng XP (and not to forget Zhu RZ) made China an extraordinarily attractive (export) manufacturing location, using a variety of “market” policy instruments, whilst retaining a large core of state owned activities that may well be subsidising export oriented ones in the “private” sector but hardly in a centrally orchestrated fashion.Nevertheless, also hardly unfettered laissez faire and probably unthinkable in a democratic market economy.. I am very curious what the next chapter will bring. Concede tiny % of China’s overall economy devoted to foreign trade but that does not make that policy less successful (as a supply side oriented person I measure success by market share and technological progress, of course). I did not say China as a whole is a success….

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