Moving the goalposts, the sideline markers, and switching balls
I was wondering how Paul Krugman would react to the embarrassing divergence between the economic performance of the US and eurozone, give that America’s been doing more fiscal austerity in recent years, but it’s the eurozone that had the double-dip recession. Here it is:
Anyway, here’s the picture:
The US did substantial stimulus in 2009-10 (although not, I’d argue, nearly as much as these numbers suggest), but then began withdrawing it rapidly despite still being in a liquidity trap. At this point fiscal policy is only modestly more expansionary than it was before the crisis, which is a big policy mistake.
But Europe is far worse. It, too, is in a liquidity trap, with the extra problems of severe adjustment needed in the periphery, made worse by a weak economy and excessively low inflation. Yet aggregate fiscal policy is clearly tighter than it was before the crisis.
And that, ladies and gentlemen, is why European had a double-dip recession, still has incredibly high unemployment, and is in general in such a mess.
Where to start? In the very first sentence he wants to have it both ways. He’s been arguing that fiscal policy in America is tight, and now he presents a graph that shows it loose, and that he admits is misleading. Why would that be? Because this graph seems to explain why we’ve done better than Europe.
Then he says that Europe’s in a liquidity trap. That’s true, but it’s only been true for 24 hours. The previous five years rates were always above zero, and the ECB was often raising them, as when they raised rates twice in 2011 and drove the eurozone into a double-dip recession.
But by far the most misleading part of the post is the final sentence. For years Keynesians have been telling us that the LEVEL of the deficit doesn’t matter, it’s the change from the previous period that matters. Remember all those Keynesians insisting that UK fiscal policy was tight when only Greece and Egypt had bigger budget deficits? All because it was slightly less insanely loose than under the disastrous Brown government?
Now look at the change in the structural budget deficit in Krugman’s graph. What do you see? You see that fiscal policy in 2008-09 was way more expansionary in the US than Europe. Unfortunately for Keynesians, the initial slump in the US and eurozone were fairly similar despite the much larger US stimulus. Then in the past three years the US deficit has actually been shrinking slightly faster than in Europe. And yet it’s the eurozone that has had the double-dip recession, not the US. The eurozone unemployment rate has soared to 12.2% while ours fell to 7.3%. (The two rates were identical about 3 years ago.)
This is another epic failure of the Keynesian model. Another failed “experiment.”
PS. There’s one big difference between US and eurozone economic policy since 2010—monetary policy
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8. November 2013 at 08:16
Scott:
“Then he says that Europe’s in a liquidity trap. That’s true, but it’s only been true for 24 hours. The previous five years rates were always above zero”
ECB deposit rate is zero since July 2012 – since then the ECB is not paying interest on reserves, unlike the Fed.
Draghi yesterday said it is possible to cut rates even more: “We haven’t reached the lower bound. As I said, we have a whole range of instruments that we can still activate before reaching the lower bounds. I mentioned some of them before but, in principle, we could even cut the interest rate, the MRO rate, further. So, we are not there yet.”
8. November 2013 at 08:27
[…] Spoiler: It’s the Fed. […]
8. November 2013 at 10:12
Ugh, Warren Buffett, like Alan Greenspan, doesn’t understand monetary policy.
Buffett thinks Hank Paulson is a hero, for god’s sake!
http://www.gurufocus.com/news/234307/warren-buffett-interviews-henry-paulson-on-the-collapse-of-the-global-financial-system
8. November 2013 at 10:14
Vaidas, Yes, even as I wrote that I knew I’d oversimplified–but I wanted to drive home the point that:
1. Yes, rates are near zero.
2. But they were cut only yesterday.
3. They’ve been higher for the past 5 years, and sometimes rising.
Sometimes nuance can be a distraction that doesn’t add much and confuses the reader. So I cut him some slack and gave him the assumption that the ECB is currently at zero. But as you point out even that is debatable.
8. November 2013 at 11:42
Didn’t the unemployment rate fortuitously improve near an election? The labor force participation rate is still dire and apparently still seeking new lows.
8. November 2013 at 14:17
Krugman’s graph comes from the October 2013 IMF World Economic Outlook (WEO):
http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weorept.aspx?sy=2010&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=GGSB_NPGDP&grp=0&a=&pr.x=61&pr.y=9
http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weorept.aspx?sy=2010&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=163&s=GGSB_NPGDP&grp=1&a=1&pr.x=50&pr.y=7
Note that the US’ general government structural deficit is projected to decrease by 4.1% of potential GDP from 2010 to 2013. In contrast the Euro Area’s general government structural deficit is projected to decrease by 3.2% of potential GDP from 2010 to 2013.
So conventional estimates of fiscal stimulus indicate US fiscal policy has been nearly 30% more contractionary than the Euro Area fiscal policy from 2010 to 2013.
8. November 2013 at 14:32
“The eurozone unemployment rate has soared to 12.2% while ours fell to 7.3%. (The two rates were identical about 3 years ago.)”
The two rates were both exactly equal to 10.0% in October 2009:
http://research.stlouisfed.org/fred2/graph/?graph_id=144993&category_id=0
8. November 2013 at 19:24
“Buffett thinks Hank Paulson is a hero”
Hanky-Panky Paulson is arguably the biggest financial criminal of the entire financial crisis.
Think of all he did:
* get a special exemption from cap gains on his Goldman shares when he went to treasury
* selectivley disclosed plans to wind to Fannie and Freddie to his Wall St buddies over a month before the public announcement
* banned short selling in Sept 2008 in order to create a temporary short squeeze in financial stocks, thereby wiping out arbitrage funds but allowing big players an exit strategy.
* heavily involved in the AIG bailout, which was designed to ensure that Goldman Sachs received payment on its CDS positions.
8. November 2013 at 19:32
Looks to me like the deficit got better because the ARRA was self-financing. /sarc
8. November 2013 at 20:49
“The previous five years rates were always above zero, and the ECB was often raising them, as when they raised rates twice in 2011 and drove the eurozone into a double-dip recession.”
Never reason from an interest rate change.
9. November 2013 at 08:11
Mark, Thanks for the data. I’ve been citing 12.2% unemployment, they must have several measures as your graph shows 12.0%.
9. November 2013 at 10:17
“I’ve been citing 12.2% unemployment, they must have several measures as your graph shows 12.0%.”
The measure in my graph will probably show 12.2% when FRED gets around to entering the data. It was 12.0% in August which is the most recent month in that graph.
17. February 2017 at 09:11
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