Odds and ends

Here are some short posts for today:

1.   When I complain about how tight money in the euro zone is causing a depression, some conservatives respond that the real problem is the dysfunctional, statist economic policies in the Mediterranean countries. But now we see that even thrifty, “hard-working” countries such as The Netherlands are suffering from the decline in eurozone nominal GDP.

That option should terrify both the Liberals and Labour. After over a year of recession and austerity, polls show confidence in Mr Rutte’s government at a miserable 12%. On the right, small-business owners feel betrayed by a Liberal-led cabinet that has raised value-added tax and imposed a surtax on high incomes. On the left, union members are abandoning a Labour Party that has accepted lay-offs and pay freezes in the public sector.

The big winners of a tough year have been the parties that have consistently opposed austerity, above all the PVV. As the recession drags on, Mr Wilders, a master of political rhetoric, has capitalised on the crisis and austerity fatigue by savaging the EU, which demanded the extra €6 billion effort. Opinion polls now show the PVV getting over 20% of the vote.

The Dutch are a famously thrifty people and their government has been among Europe’s strongest advocates of austerity. But two years of cuts and recession have made a dent in these Calvinist attitudes: fully 80% of the public now thinks austerity is doing more harm than good.

A few weeks back I pointed out that a reasonably good center-right government in Sweden was likely to be undone by its own tight money policies. Now we see an anti-immigrant, pro-big government, populist, right-wing party in the Netherlands gaining ground as a result of the policies of the European Central Bank.

2.  Here’s Casey Mulligan:

To appreciate the added burden that the two redistribution waves put on the labor market, look at what people keep, on average, when they decide to retain or accept a job, or to take on a longer work schedule. Before the recession, a decision to work would benefit public treasuries by an amount equal to 40% of the compensation from the job. The worker and his family got the other 60%.

In the years 2015 and beyond, full-time workers with median incomes will keep only half of the compensation created by their decisions, with the other half going to the government in the form of additional taxes and savings on subsidy payments. By keeping 50% rather than 60%, workers will find that the reward for holding a job will have fallen a damaging 17%.

Advocates of redistribution try to perpetuate the income-maximization fallacy that business continues as usual as long as tax rates are less than 100%, because receiving even 1% of your compensation is supposedly better than getting no compensation at all. But even if full confiscation were the only way that taxes would depress the labor market, recall that the nearby chart is just an average: The average rate rising to 50% and above involves millions of people with rates far higher.

America absolutely must have taxes and safety-net programs, even though they reduce the reward for working. But advocates for the recent program expansions have failed to acknowledge that redistribution necessarily increases marginal tax rates and contracts the labor market.

Don’t be surprised if the second redistribution wave coincides with a recessionary double-dip.

I will be surprised if there is a double dip recession in the US. But here’s what I do believe:

a. That part of the drop in labor force participation that is not due to demographics is due to bad supply-side policies.

b. The 7.3% unemployment rate reflects a lack of aggregate demand, i.e. insufficient nominal GDP.

Call me a “supply and demand-sider.”

3.  If the Communist Party of China could vote in US elections, they’d vote Libertarian:

An editorial on the state-run Xinhua news service, considered a channel for Beijing’s official views, said: “The United States, the world’s sole superpower, has engaged in irresponsible spending for years.”

4.  Despite the government shutdown, weekly unemployment claims came out today. The four-week average fell to 304,200. The ratio of the four-week average of new claims to the US population (in thousands) fell to 0.96. The only lower figure in the past 40 years was during April 2000, when NASDAQ peaked at 5000 and the ratio fell to 0.955.

There is always talk about the “new normal.” The Great Stagnation. Low interest rates.  The tendency of Americans to move less often than they used to. Young people don’t drive as much. Now you can add a new, new normal; people don’t get laid off as often. (Or perhaps they get laid off but don’t qualify as often for unemployment.)

5.  Marcus Nunes shows that the RBA has once again kept Australia out of recession, despite the global commodity slump:

According to the WSJ: “Proactive Central Bank is Behind Australia´s Rebound”:

Australia’s economy is showing signs of a tentative recovery — and the country’s central bank deserves much of the credit.

A year ago, Australian newspaper headlines were full of recession warnings as iron ore prices fell sharply and the mining industry convulsed. The economy grew 2.6% on-year in the second quarter, down from growth rates as high as 4% early last year. Economists predict respectable but not spectacular growth next year.

Now, several recent indicators are spurring hope that the slowdown is ending.

Australia is one of the very few countries that didn´t tank with the onset of the “Great Recession”. In fact Australia´s last recession was in 1991!

The RBA has certainly done a better job than most central banks, particularly by not letting nominal spending tank like it did in the US, UK, Japan and the Eurozone. Australia was not explicitly targeting NGDP but it would have performed even better if it was.

Recall that people excused Australia’s success in 2008 by pointing to exports of iron, despite the fact that Australia ran a huge CA deficit.  That excuse no longer holds.

Oh, and when is that Australian housing bubble going to pop?  And how about the British, Canadian and New Zealand bubbles?  You can be sure that if prices decline in 2045, those claiming bubble in 2005 will say they were right all along.

6. Some have argued that QE is contractionary because it reduces the amount of “safe assets.”  David Beckworth has a new post that uses a VAR model to show that QE is indeed expansionary.  As you may know I don’t have a lot of confidence in VAR studies, however the markets seem to agree with David and that’s good enough for me.

PS.  I am blocked from Free Exchange, despite the fact that I pay for a paper subscription to The Economist. Does anyone else have that problem?


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30 Responses to “Odds and ends”

  1. Gravatar of dbeach dbeach
    3. October 2013 at 11:33

    Yikes, that story about the Netherlands is scary. I’ve long thought that the tight-money policies of the ECB would lead to a dangerous rise in the power of populist xenophobic parties, but I had assumed that would mostly happen in southern Europe, as for example Golden Dawn in Greece. Seeing it in the rich countries as well is troubling.

  2. Gravatar of Jaap de Vries Jaap de Vries
    3. October 2013 at 11:38

    Actually I have asked the PM Rutte whether a monetary offset would be useful with all the budget cuts coming up (February this year). He responded something along the lines like: inflation is like weed, once it starts growing it gets out of control.

    He is a historian so it did not surprise me. He has the 80′s in mind probably.

    It made me sad, because the liberals will get smacked in coming municipal and european elections. On top of this, this gives strength to the publics illusion that spending cuts (or raised taxes, people never know the difference) kill the economy.

  3. Gravatar of Vivian Darkbloomt Vivian Darkbloomt
    3. October 2013 at 11:49

    “inflation is like weed”.

    There is a famous “coffeeshop” in Amsterdam called the “Tweede Kamer” (play on Second Chamber, as in Parliament). Maybe that’s where Rutte got the idea in the 80″s. In a somewhat altered state, I could see that this analogy might make sense.

  4. Gravatar of Alan Alan
    3. October 2013 at 12:18

    When you say you’re blocked from Free Exchange, do you mean you’re prompted for a log-in, or you can’t even access it after logging in?

    My guess is you need to use the print subscription to set up an online account. I was surprised that they’ve started putting up paywalls around the blogs.

  5. Gravatar of MFFA MFFA
    3. October 2013 at 12:33

    Prof Sumner,

    In the case of countries like the Netherlands, would you then advocate for the government to do more fiscal stimulus, since the ECB is letting AD be too low? I’m unsure as to how much the ECB can offset AD in one particular country and thus make the multiplier 0 in that country.

    I’m also puzzled as to why the Netherlands seem to be doing so bad, when neighbor Belgium is doing ok-ish (by European standards). Belgium has tended to have more inflation than its neighbors, which might be the proof that the ECB can’t totally offset what each individual country does on the fiscal side.

  6. Gravatar of Shaun Shaun
    3. October 2013 at 12:42

    I nromally don’t comment here, but this was just absolutely genius and comedic gold:

    Recall that people excused Australia’s success in 2008 by pointing to exports of iron, despite the fact that Australia ran a huge CA deficit. That excuse no longer holds.

    “Oh, and when is that Australian housing bubble going to pop? And how about the British, Canadian and New Zealand bubbles? You can be sure that if prices decline in 2045, those claiming bubble in 2005 will say they were right all along.”

    I laughed pretty loud in my office.

  7. Gravatar of AlanInAZ AlanInAZ
    3. October 2013 at 13:41

    “The president’s health-insurance plan forces those who hire, work and produce to pay full price for health care, while creating generous discounts for practically everyone else.”

    Casey Mulligan began his piece with the above statement that is wrong and incendiary. The health care exclusion is the federal government’s largest tax break. Most employees are getting very subsidized insurance and don’t know it, but Mulligan should know this.

  8. Gravatar of Gordon Gordon
    3. October 2013 at 15:07

    “Call me a “supply and demand-sider.” This description of yourself reminds me of the talk you gave to Oxford about the Great Depression. If I remember correctly Lars Christensen provided a link on his blog to the recording on Vimeo. I’ve always thought that a link to the talk would fit in nicely to your “Quick intro to my views” section. The Vimeo url is http://vimeo.com/11700175 if you’re interested in doing that.

  9. Gravatar of ssumner ssumner
    3. October 2013 at 15:43

    Jaap, I’m told that’s the attitude throughout the eurozone. If it weren’t they wouldn’t be committing mass suicide.

    Alan, I was told you only get 6 articles a month. Even a password didn’t seem to help.

    MFFA, Yes, I’d advocate a cut in the employer portion of the payroll tax.

    Thanks Shaun

    Alan, Good point.

    Gordon. Done.

  10. Gravatar of John Papola John Papola
    3. October 2013 at 17:59

    “Some have argued that QE is contractionary because it reduces the amount of “safe assets.””

    Wait… what? What’s a safer financial asset than cash? If the Fed were buying lots of gold, I could see that being a reduction of safe assets, perhaps. But who says this? I don’t get it.

  11. Gravatar of ChargerCarl ChargerCarl
    3. October 2013 at 18:15

    If I were President I’d act just like Steinbrenner and just buy out all the Australian central bankers to come work for the FED.

    And Svensson

  12. Gravatar of Ricardo Ricardo
    3. October 2013 at 18:24

    @John Papola:
    - Re: On QE reducing safe assets and being contractionary. Some of that is related to this: http://www.voxeu.org/article/other-deleveraging-what-economists-need-know-about-modern-money-creation-process

    Other relevant stuff for John Papola:
    - Anti Say’s Law ideas may be resurgent, re new book: “Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy”

    - Finally, I’d like to say I greatly enjoyed the “Keynes vs. Hayek” videos. Terrific work!

  13. Gravatar of Geoff Geoff
    3. October 2013 at 18:32

    As expected, there is no analysis or consideration of why “aggregate demand” should not rise at rate X. No, it is not a correct answer to say “the ECB let it rise at only X%” or “the ECB failed to make it rise by at least Y%.”

    When someone dies of cancer, we don’t attribute the cause to the doctor failing to give medicine. We attribute the cause to a genetic anomaly, that is, the biology of the individual.

    A valid answer for why “aggregate demand” is growing at X% instead of Y% has to consist of positive reasons and positive forces, not absenses of a “fix”.

    The reason why Sumner does not address the actual cause for why individuals should slow down their spending, and thus why “aggregate demand” should change, is because it will compel him to address micro-foundations, specifically relative prices, relative investment allocations, all of which he doesn’t understand, and hence dismisses it as unimportant, or lacking in explanatory power.

  14. Gravatar of Peter N Peter N
    3. October 2013 at 18:39

    Calling something a bubble is a diagnosis. If you believe in the EMH, then you wouldn’t expect that such a diagnosis was an investment opportunity. It is not a requirement of any other common economic diagnosis that it provide such an opportunity.

    A bubble’s popping point depends not just on objective valuation, but also expectations and government actions. This make timing unpredictable. Certainly it makes shorting extremely risky (it’s always harder to go short).

    What it is is as diagnosis of malinvestment based on historical norms (not prices) and demonstrably unreasonable implied ROI. For instance one sign of a housing bubble is the ratio of cost to rent to cost to buy.

    “Oh, and when is that Australian housing bubble going to pop? And how about the British, Canadian and New Zealand bubbles?”

    There is no British housing bubble. There is a London area housing bubble. It will pop when the government believes the political effects of it continuing are worse then those of popping it. Meanwhile, expect new subsidies.

    I don’t think there is a Canadian bubble, either, but is there a Vancouver bubble? Probably.

    Australian housing has become overpriced in the major cities, but given the government’s commitment to supporting prices, I wouldn’t bet on them coming down anytime soon unless the government miscalculates by doing something like removing the negative gearing deduction.

    Finally, a bubble may not mean that prices aren’t reasonable by some valuations. Houses have become larger, so prices per sq. ft. can be more reasonable, but if rents and median income don’t support higher prices, this doesn’t matter all that much. ROI dominates hedonics.

  15. Gravatar of Tom Tom
    3. October 2013 at 22:00

    Scott, when you say thrifty I assume you mean the Dutch state? Remember Dutch households are not so thrifty. They have a debt to income ratio of 250%, second only to Denmark in Europe mainly due to housing expenditure (mortgages). Consumption in the Netherlands has been falling for the last 3 years as house prices have tumbled. Highly leveraged consumers with massive exposure to (volatile) housing markets is unlikely to generate sustainable nominal GDP growth – unless the Ponzi scheme can go on forever. Although I agree tight money is an issue, how much of a reversal looser money might have is debatable given consumers’ propensity to deleverage now they have realised they cant pay back their debts.

  16. Gravatar of Vivian Darkbloomt Vivian Darkbloomt
    4. October 2013 at 00:03

    “They have a debt to income ratio of 250%, second only to Denmark in Europe mainly due to housing expenditure (mortgages).”

    This is misleading. Popular in the Netherlands housing market is a type of mortgage called the “spaarhypothek” (savings mortgage). Alongside the mortgage, one holds a blocked savings account on which income accumulates tax free. The savings account accumulates to pay off the mortgage and the mortgage is not paid off until the end of the mortgage term (typically long-term).

    Statistics show the full mortgage debt, but don’t count the blocked savings (or the income on it). While the Dutch likely do expend quite a bit on housing (it is the most densely populated country which makes housing relatively expensive regardless of savings habits), the availability of the spaarhypothek (among “standard” choices) tends to overstate the amount of housing debt. Query: Does population density also explain Denmark’s “lack of thriftyness”? It ranks high in European population density.

    Finally, despite land scarcity, both the Netherlands and Denmark rank relatively high in the percentage of home ownership (about 55 percent of each). There are a few European countries with higher percentages; however, their rates are above average, I think. The percentage of home ownership has a significant effect on the ratio particularly combined with population density. This statistic does not discount to the present future required rental costs. If these factors were taken into account, I wonder what the debt-to-income ratio would be of someone in, say, New York or San Francisco?

  17. Gravatar of ssumner ssumner
    4. October 2013 at 03:37

    John, Check out the link to David Beckworth.

    Tom, You said;

    “Highly leveraged consumers with massive exposure to (volatile) housing markets is unlikely to generate sustainable nominal GDP growth – unless the Ponzi scheme can go on forever. Although I agree tight money is an issue, how much of a reversal looser money might have is debatable given consumers’ propensity to deleverage now they have realised they cant pay back their debts.”

    This makes no sense to me, Housing markets never deliver sustainable NGDP growth, that’s the job of central banks. So I don’t see your point.

    As far as debt, I don’t know what that has to do with thriftiness. Debt and saving are essentially unrelated concepts. Debt is a zero sum concept, saving is a positive sum concept.

    Peter, I strongly disagree. If bubbles don’t imply investment opportunities, then the term is essentially meaningless.

  18. Gravatar of sdfc sdfc
    4. October 2013 at 04:45

    The RBA kept rates too low for too long during an income boom and encouraged households to take on a bucket load of debt.

    House prices aren’t the major problem, it’s the rise in debt that has driven prices where they are that is the problem.

    Debt is not a zero sum game because it is what backs the money supply.

  19. Gravatar of Tom Tom
    4. October 2013 at 11:12

    Thanks Vivian. I was aware of the Spaarhypotek product but I didn’t know that the debt was only marked down once the complete mortgage was paid off. I assume this must be the same in Denmark as if you compare the levels from this table they both stand out from the rest:

    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00104

    Your point on land scarcity is important although the land premium in the UK is actually higher than Netherlands and Denmark. If the UK had spaarhypotek, the level would most likely be approaching 300%.

    Scott, I am not sure I understand your point. If consumers borrow money to consume – which generally accelerates when house prices are rising – they are spending money which they don’t have (otherwise why pay interest costs). Hence the data generally shows that as debt to income ratios rise, savings rates tend to fall.

    My point on NGDP growth was only that large swings in house prices would make the job of a central bank trying to maintain stable NGDP more difficult. Central banks traditionally haven’t displayed much interest in trying to dampen volatile housing markets. Maybe that was your point? If so, it’s not clear how NGDP targeting might manage this given the tendency of credit markets to jump to default. NGDP futures market would definitely help, but house prices are notoriously unpredictable and volatile.

  20. Gravatar of ssumner ssumner
    5. October 2013 at 04:21

    sdfc, You said;

    “Debt is not a zero sum game because it is what backs the money supply.”

    I have no idea what this statement even means.

    Tom, You said;

    “If consumers borrow money to consume – which generally accelerates when house prices are rising – they are spending money which they don’t have (otherwise why pay interest costs). Hence the data generally shows that as debt to income ratios rise, savings rates tend to fall.”

    The act of borrowing money has no impact on saving rates. The borrower saves X less, and the lender saves X more. It’s a wash.

    House prices are volatile, but have little impact on NGDP. The growth in NGDP was fairly normal during our huge housing “bubble.”

  21. Gravatar of Vivian Darkbloomt Vivian Darkbloomt
    5. October 2013 at 04:46

    “The act of borrowing money has no impact on saving rates. The borrower saves X less, and the lender saves X more. It’s a wash.”

    If the issue is, as here, debt-to-income *per country*, would that not depend on who (domestic or foreign resident) that lender is? Why should we assume that the ultimate net lenders are residents of the same country as the (net) borrowers?

  22. Gravatar of Tom Tom
    5. October 2013 at 06:28

    Scott, a lot of studies by the BIS and IMF have highlighted the indirect relationship between excessive household debts and falling savings rates. Consumption driven by rising consumer debt is unsustainable. The US/UK data leading up to the crisis showed that when consumers accessed cheap credit their propensity to save fell. Ie they could continue their level of consumption by taking on more debt and saving less. Moreover, as debt servicing increases this has an impact on savings too as shown by the below study from BIS.

    Eg http://www.bis.org/publ/bppdf/bispap46.pdf

    “Korea experienced a rapid increase of household debt in the early 2000s. The heavy burden of debt repayment in the household sector has made the Korean economy less stable.
    Specifically, the surge of household debt has caused the household savings rate to fall and thereby heightened the volatility of private consumption.”

    The data and their analysis seems pretty compelling to me.

    Re: nominal GDP, you are right that it was stable during the run up to 2008, but that’s because most of housing investment goes into existing assets which doesn’t impact NGDP. The problem starts when house prices fall leading to lower consumption which does affect NGDP. If the prior level of consumption had been sustainable then this wouldn’t have mattered. My view is that the “boom years’” rate of consumption was not sustainable as it was fuelled by a boom in personal credit.

  23. Gravatar of Geoff Geoff
    5. October 2013 at 15:56

    Not all suffering is a bad, must be avoided using coercion and violence kind of suffering.

    Is the foundation of NGDPLT really nothing but a myopic, frankly childish, view of economic hardship?

  24. Gravatar of sdfc sdfc
    6. October 2013 at 03:04

    Scott

    “Debt is not a zero sum game because it is what backs the money supply.”

    I have no idea what this statement even means.

    It simply means that deposits are created by bank lending. When I borrow from a bank it doesn’t lend me someone else’s deposit but creates a new deposit. The new deposit is the banking sector’s liability while my debt is the banking sector’s asset.

  25. Gravatar of W. Peden W. Peden
    6. October 2013 at 03:20

    sdfc,

    So what backs a quarter or a $5 note?

  26. Gravatar of sdfc sdfc
    6. October 2013 at 03:55

    If I want to hold currency rather than a deposit then the bank would draw down vault cash or exchange reserves for currency with the central bank. Of course most money is held as deposits rather than currency.

  27. Gravatar of W. Peden W. Peden
    6. October 2013 at 04:11

    sdfc,

    Granted, but that still leaves my question unanswered. You said that debt backs the money supply and I’m asking you what it is that backs a quarter or a $5 note.

  28. Gravatar of ssumner ssumner
    6. October 2013 at 05:42

    Vivian, Yes, but then we should be talking about CA balances, not debt. You could say that about anything that might have an indirect effect on savings, under certain circumstances.

    Tom, You said;

    “Consumption driven by rising consumer debt is unsustainable.”

    That’s false. What may be unsustainable is huge CA deficits, but as Australia has shown that’s not even necessarily true. Consumption driven by domestic debt is 100% sustainable.

    You said;

    “The problem starts when house prices fall leading to lower consumption which does affect NGDP.”

    No, consumption does not drive NGDP, monetary policy does.

    You said;

    “My view is that the “boom years’” rate of consumption was not sustainable as it was fuelled by a boom in personal credit.”

    Most people claim just the opposite, that there was too much investment, especially in home building.

    sdfc, That’s not the standard use of the term “backed”. I thought you meant “redeemable into.” In any case, by your definition bank deposits can also be backed by bank reserves.

  29. Gravatar of Tom Tom
    6. October 2013 at 06:19

    Scott,

    You said: “consumption driven by domestic debt is 100% sustainable” It’s interesting that this was also Keynes’ view in the General Theory but it’s not how credit practitioners see it. When the riskiness of borrowers not being able to pay back their loans increases then credit begins to dry up. The main issue is the feedback effects between asset prices and debt lead to the inherent instability of credit. A good recent paper on this is from Goodhart & Hofman (2008) ‘House Prices, Money, Credit and the Macroeconomy’ http://www.ecb.int

    I agree that if credit were stable then monetary policy drives NGDP, but if it’s unstable then credit will impact the behaviour of economic agents which in turn will impact NGDP. I dont expect you to agree with me on this but this is why I would argue that the NGDP target needs to take account of credit stability.

    The argument that it was overinvestment that drove house prices is debatable. The ratio of new stock to existing stock did increase from 1.3% to 1.8%, (historical average of 1.6 million starts up to 2.2 million on an existing stock of 125 million), but without the existing housing stock rising due to increasing demand fueled by rising consumer debt, it is hard to see how the prices of new stock would drive the whole market. The UK has been through a housing boom and bust a number of times since 1945 which provides a useful benchmark.

  30. Gravatar of Steve Steve
    7. October 2013 at 09:51

    Scott,

    Re: Free Exchange. Having a print sub to The Economist does not give you access to all of the online/electronic version stuff. You have to get a “Print + Electronic” sub to bypass all the access restrictions.

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