I’ve argued that one should “never reason from a quantity change.” A fall in RGDP could be due to supply-side factors or demand-side factors. That’s also true of the unemployment rate, but as a practical matter the unemployment rate is usually preferable to RGDP as an indicator of demand shortfalls. If NGDP keeps growing at a steady rate, then wages should also grow at a relatively steady rate. In that case an adverse supply shock might be expected to reduce output but not employment. Workers would earn about the same nominal wage, but a lower real wage (or more precisely a lower W/NGDP.) That’s my “musical chairs” model.
I recently argued that the Keynesians are probably wrong about Britain, on the basis that the employment data is more reliable than real GDP data. Today I’ll argue the Keynesians are probably right about Iceland on the basis that the unemployment rate is more reliable than the real GDP data (as a indicator of demand shortfalls.)
Ramesh Ponnuru sent me the following from Benn Steil and Dinah Walker:
Here it is, folks: Iceland, whose currency lost half its value against the euro in 2008, vs. Estonia, Latvia, and Ireland, all of which were euroized or pegged to the euro over the entire period . . .
So Iceland is doing no better than Ireland, contrary to the claims of Paul Krugman. If Krugman has used my preferred indicator, however, he would see that Iceland has done far better on the unemployment front:
And now Ireland:
Even accounting for Iceland’s lower natural rate of unemployment, it looks like they’ve done better.
Now a few caveats:
1. The smaller the country the more subject to real shocks, and thus the harder to disentangle demand shocks. Look at the wild quarterly swings in Icelandic RGDP. Even Ireland, with only 4.5 million people, is 20 times larger than Iceland! Real shocks to Iceland’s major industries (fish, aluminum) could explain their erratic RGDP.
2. Smaller countries are also subject to employment swings via immigration and emigration, to a greater extent than large countries. So unemployment numbers are also flawed.
Nonetheless, I expect certain Republican-hating bloggers who thought my British post was garbage to proclaim this post a masterpiece, definitive proof that Krugman is right about Iceland.
PS. For those who don’t know, Iceland devalued and kept their NGDP rising, while Ireland, which was on the euro, saw its NGDP fall.