Bloomberg’s editors miss the point
Another article on the eurozone crisis that misses the elephant in the room:
The same goes for the weakest euro-area economies, except that in their case more government spending would have depended on the willingness of the EU to provide it. Therein lies the first clear lesson of the limping EU recovery: EU institutions should be reformed to provide at least the possibility of fiscal stimulus if it’s deemed necessary. The lack of nationally differentiated monetary policies within the euro area only underscores this need, because fiscal policy is all there is.
Yes there are no nationally differentiated monetary policies in the eurozone, but that misses the more important point that the deep eurozone recession, and especially the double dip, was caused by tight money at the ECB. The US has done just as much austerity as the eurozone; it is monetary policy that explains why eurozone unemployment went from being equal to US unemployment in 2010, to nearly 5% higher.
I can’t understand why so many people in the media miss such a blindingly obvious point. But they do. Even Paul Krugman understands that fiscal policy is only needed when at the zero bound, and the eurozone has not been at the zero bound for 98% of the past 5 years.
The position held by Keynesians . . . is that fiscal stimulus is necessary only under certain special conditions. Namely, when you’re up against the zero lower bound
Tags:
5. December 2013 at 18:51
“Yes there are no nationally differentiated monetary policies in the eurozone, but that misses the more important point that the deep eurozone recession, and especially the double dip, was caused by tight money at the ECB.”
Why did the ECB find itself in a position of having to increase its inflation in order to reverse the consequence of longer money holding times (i.e. falling spending)?
In other words, given the fact that the ECB was not destroying Euros from people’s bank accounts, why did so many people all of a sudden decide to hold onto Euros for longer, and thus reduce their spending, such that Sumner is claiming the ECB engaged in “too tight” monetary policy?
This question has never been answered by Sumner. And for good reason. For he would have to consider the possibility that the reason people held onto money for longer was because of past looseness of the ECB that distorted the economy that eventually brought about a sudden drop in investment spending, and thus aggregate spending.
5. December 2013 at 18:53
“The US has done just as much austerity as the eurozone; it is monetary policy that explains why eurozone unemployment went from being equal to US unemployment in 2010, to nearly 5% higher.”
If a central bank can print $100 quadrillion dollars directly to the currently unemployed to perform janitor services at the Fed, thus “eliminating unemployment”, why should we ipso facto consider this to be “the” proof that inflation works?
Are we here on this Earth to simply work for work’s sake? Or are we here to work for the sovereign consumer? If the sovereign consumer wants to change their spending, such that previously employed people have to find new work, why do we need a mommy and daddy government to stop this?
The socialist liberals on this blog…geez.
5. December 2013 at 19:17
ssumner,
Not sure if we took Krugman’s statement the same way – “only needed” was a little unclear to me.
He is saying: 1)If not at the ZLB, fiscal or monetary is an option, 2) If at the ZLB, fiscal is the only option (assuming monetary policy is immasculated at the ZLB, as some folks maintain). So the EU, at or above the ZLB, would benefit from fiscal policy. It seems this is a standard expression of macro in some circles (not here!) so I’d be surprised if I read it differently than you did.
To your point, though, yes of course monetary policy is almost dutifully ignored. Unfortunately.
5. December 2013 at 19:22
Oh my! I’ve just seen in your previous entry:
“PS. Off topic, does anyone know how to find a quote of Krugman saying fiscal policy is not appropriate when not at the zero bound? He said this in 2009, how do I find?”
In this case I refer again to my previous post. He is stating that at the ZLB, fiscal is necessary because monetary is useless. This is not to state the fiscal is not appropriate at other times, it is simply not necessary at other times becauase at other times there are other options (ie, monetary policy options).
5. December 2013 at 19:30
Scratch all of the above. Found that in the previous post as left by igoru.
http://krugman.blogs.nytimes.com/2009/09/28/crowding-in/
Apologies to have had this conversation with myself by the assistance of your blog…
5. December 2013 at 20:26
What central bankers are thinking I cannot fathom…is squeezing inflation down to zero from 2 percent or 3 percent worth a perma-recession?
Central bankers say “yes”—especially if they have a “single mandate” to beat inflation….
Are the lessons of Japan completely lost on central bankers?
Have the Fed and other central bankers adopted intellectual insularity and hubris as their new norms?
Should central bank staffs be paid in relation to have much real growth they obtain while holding inflation under 3 percent?
5. December 2013 at 20:28
“the sovereign consumer”
I guess you see yourself as occupying that position.
Your entire ideology seems to be about eliminating national sovereignty and replacing it with the ‘sovereignty’ of people like yourself, who crave the power to ‘deny’ basic resources to ‘inferior’ people on a whim.
5. December 2013 at 20:41
Philippe:
“I guess you see yourself as occupying that position.”
Of course you would guess that. When your mindset is one of centralized control, you tend to infer that in the statements of others.
I see myself, and you, and every other individual, as “occupying” that position. I see every individual being free to make their own choices, even if those choices contain abstentions from trading with others.
“Your entire ideology seems to be about eliminating national sovereignty and replacing it with the ‘sovereignty’ of people like yourself, who crave the power to ‘deny’ basic resources to ‘inferior’ people on a whim.”
Yes, I am proud of wanting myself, and everyone else, to be able to control their own earnings according to their own benefit, even if that includes “denying”, “withholding”, “excluding”, and “hoarding” their own earnings such that others who demand it, cannot use guns to take what they want.
Your entire ideology seems to be about eliminating individual sovereignty and replacing it with a ‘sovereignty’ of some people like yourself, who crave the power to ‘impose’ coercion and violence on ‘inferior’ people on a whim.
We disagree yes. But the way I manifest my disagreement with you is secession from dealing with you. The way you manifest your disagreement with me is imperialism and forcing me at gunpoint to give you what you want, and if you are too scared to do it personally, then you call upon your friends who wear government badges.
Damn me for wanting more peaceful coexistence, huh?
5. December 2013 at 21:02
“your mindset is one of centralized control.”
No, that’s not my mindset. Though I think its good to have systems which protect people from extremely nasty personalities like yourself.
“I see every individual being free to make their own choices”
What you actually crave is the power to subject others to your whim without the busybody state getting in the way.
5. December 2013 at 21:35
Scott, I do agree that ECB monetary policy is too tight. ECB is failing to meet its mandate. It has allowed M3 growth to fall for the whole of this year and has only now responded to inflation seriously under target by a paltry cut in the refi rate, which at the moment is not the most important rate. It is discussing negative deposit rates, and maybe some more liquidity (another LTRO or similar). But its hands are seriously tied. There are vast political obstacles to looser monetary policy, particularly of the unconventional kind. The Eurozone’s record suggests that if things became desperate enough, the ECB would find a way through the political minefield that was just wide enough to avoid catastrophe, but no more.
I would like to make a point about the nature of the Eurozone, though, Scott. It is anything but a homogenous area, and there are absolutely huge divergences in implied interest rates. The ECB is constantly under pressure from certain core countries to raise rates because of local inflationary pressures, especially in housing markets, at the same time as certain periphery countries are suffering the effects of interest rates that are far too high. Greece, for example, needs a deeply negative interest rate. It isn’t going to get it. And we also have the credit bifurcation problem, which means that nominal interest rates for businesses in periphery countries are far higher than those for businesses in core countries. Since banks are the principal source of business finance in Europe, I don’t think the ECB will be able to control this without a lot of progress being made on banking union, including some sort of shared responsibility for bank support. The fragmented and balkanised nature of the European banking system at the moment makes monetary policy transmission immensely difficult.
I also think that the lack of any form of pooled debt instrument in the Eurozone (apart from ESM/EFSF bonds, which are far too limited in quantity) makes unconventional policy such as QE very difficult. I suppose it would be possible for the ECB to purchase a weighted basket of EU government bonds, but it’s still going to get accusations of breaching the Lisbon treaty on monetary financing of government. And there is already a shortage of Bund liquidity – do we really want to make it worse?
5. December 2013 at 22:13
“Greece, for example, needs a deeply negative interest rate”
What about the Greek pensioners?
5. December 2013 at 23:37
“…But its hands are seriously tied. There are vast political obstacles to looser monetary policy, particularly of the unconventional kind. … ”
The reason for the “vast political obstacles” is that the majority of the Europeans identify inflation as one of the two biggest problems facing Europe right now. Democracy works so we get as a result this suicidal policy.
If Europe’s population was not so economically illiterate there will be zero political obstacles to the ECB doing the right thing. Media and “experts” play a big role in shaping the opinions of the population but ultimately it is up to every person to evaluate what is presented to them and make up their mind.
In Europe the vast majority of people are happy to conclude that our problems are mostly caused by other nationalities’ flawed traits instead of due to inadequate monetary policy.
6. December 2013 at 00:32
Philippe,
Greek pensioners’ much bigger problem is six years of deep recession, probably a seventh in 2014, severe cuts to public spending including pension entitlements and a PSI that lopped 75% NPV off their funds.
But monetary policy should not be determined by the needs of a particular group, anyway. It is the Greek ECONOMY that needs a deeply negative interest rate.
6. December 2013 at 00:57
Krugman, in the link given by Scott, did not say “fiscal policy is only needed when at the zero bound..” He made the daft statement that “when you’re up against the zero lower bound, and conventional monetary policy is useless, fiscal stimulus may be your best option.”
That statement is daft because given that there are only two basic ways of imparting stimulus, fiscal and monetary, it’s pretty blindingly obvious that when monetary policy is “useless” there’s only one alternative.
The more interesting question is: when both fiscal and monetary policies are effective (i.e. when we’re above the zero bound) which of the two is better? Now I wish someone from the monetarist camp would tell me why imparting stimulus just via borrowing and investment (which is what monetary stimulus involves) is better than imparting stimulus via a much broader range of types of spending (which is what fiscal stimulus involves). In particular, will someone explain why, in a recession, there is any reason to think it’s exclusively investment spending that is sub-optimum rather than other types of spending?
6. December 2013 at 05:15
Frances, Good question, I should probably do a whole post in reply, but here are a few comments:
1. For the purpose of this blog I don’t think it makes much sense to differentiate between the ECB failure to hit its inflation target and the ECB having the wrong target. Unless I am mistaken the ECB has some power to change its mandate. I believe it switched from “Inflation to below 2%” to “inflation below but close to 2%.” I’d like to see it change to “inflation using the GDP deflator below but close to 2%, level targeting” That would give it huge scope for stimulus today, as the GDP deflator (the most comprehensive measure) has run far below 2% in recent years. In any case both issues are “policy decisions” made by the European elite. That’s who I am addressing.
2. Even with the current target, policy is too tight. The fact that housing prices are rising in some markets has no bearing on monetary policy, under any reasonable mandate. House prices rise because low long term real rates are the new normal. Using the actual inflation target, money is too tight even in Germany. If that seems, “wrong” for Germany, its because inflation is the wrong target. But that’s exactly my point! !
3. There are huge divergences in the eurozone, but those divergences are more closely related to the NGDP crash than most Europeans believe. They are missing the big picture, that much of the financial crisis (not all) was produced by the ultra low NGDP growth.
4. The purpose of pundits like me is to tell the European policymakers what needs to be done. It’s up to them to make it politically realistic. For years commenters lectured me that I did not understand Japan, that a higher inflation target was politically impossible due to the power of the old folks in Japan. They were wrong, so I’d prefer to focus on what needs to be done. If things in Europe get bad enough, change will come.
5. The technical issues are a sideshow. With a proper target (level targeting) the ECB would not have to do any more QE.
So good questions, but I have a somewhat different perspective.
Ralph, You said;
“Krugman, in the link given by Scott, did not say “fiscal policy is only needed when at the zero bound..”
You seem to have some problems with reading comprehension, he most certainly did say fiscal policy is only needed at the zero bound. Read it again.
6. December 2013 at 06:51
Euro 17 Countries (Million Euro from Eurostat http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-EK-13-001/EN/KS-EK-13-001-EN.PDF)
2009 4,571,555
2012 4,738,235
a 3.64% increase
U.S. (From FRED)
2009 3,480
2012 3,772
an 8% increase
6. December 2013 at 07:02
But don’t we have something of a conflict of interest? Does Germany really need higher inflation? Wouldn’t that devalue the loans Germany has made to Greece? And isn’t low German and Austrian unemployment not at least partly a result of the Euro over-valuing (and pricing out of the market) southern tier labor?
Without a fiscal union, isn’t the problem that current inflation and interest rates are, for all that, acceptable to Germany?
6. December 2013 at 07:24
Frances Coppola
“It has allowed M3 growth to fall for the whole of this year and has only now responded to inflation seriously under target by a paltry cut in the refi rate, which at the moment is not the most important rate.”
True, many Euro Area banks are getting unsecured overnight funds at the EONIA rate, but banks on the periphery, which is about a third of the Euro Area by NGDP, are partially or totally cut out of the unsecured interbank market and can only finance themselves through the ECB’s operations at the MRO rate. Thus the MRO may not the most important rate in Germany or France, but it almost certainly is the most important rate in Italy and Spain.
“The ECB is constantly under pressure from certain core countries to raise rates because of local inflationary pressures, especially in housing markets, at the same time as certain periphery countries are suffering the effects of interest rates that are far too high.”
True, according to the European Commission’s house price index, house prices are rising in Belgium, Germany, Estonia, Luxembourg, Malta, Slovakia and Finland. But in the Euro Area as a whole house prices are down by 2.2% year on year. House prices are falling in France and are in an accelerating free fall in the Netherlands which has the potential to create further problems. Of course the question remains, what does monetary policy have to do with any of this and the answer, quite frankly, is not much:
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-304230_QID_-7FDE7821_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;TYPPURCH,L,Z,0;INFOTYPE,L,Z,1;INDICATORS,C,Z,2;&zSelection=DS-304230INDICATORS,OBS_FLAG;DS-304230INFOTYPE,INDEX_Q;DS-304230TYPPURCH,TOTAL;&rankName1=INFOTYPE_1_2_-1_2&rankName2=TYPPURCH_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=TIME_1_0_0_0&rankName5=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23
“I suppose it would be possible for the ECB to purchase a weighted basket of EU government bonds, but it’s still going to get accusations of breaching the Lisbon treaty on monetary financing of government.”
By some standards the ECB is already in breach of the Treaties of the European Union. Article 127(1) of the Treaty on the Functioning of the EU is very explicit that provided price stability is assured the central bank is obliged to contribute to the general economic policies of the European Union in order to serve the general objectives of the EU as set out in Article 3 of the Treaty on European Union. These include “balanced economic growth”, “full employment” and “economic, social and territorial cohesion, and solidarity among Member States”.
Does anyone seriously believe that the ECB is doing enough to serve these objectives, and thus not already in breach of the Treaties of the European Union?
6. December 2013 at 07:47
Matt McOsker,
The following is the percent change in the real general government consumption expenditure between 2009Q4 and 2013Q3 (except as noted):
1.Malta 13.6 2013Q2
2.Luxembourg 10.0 2013Q2
3.France 4.5
4.Estonia 4.2 2013Q2
5.Germany 3.3
6.Belgium 2.9 2013Q2
7.Austria 0.5
Euro Area (-0.5)
8.Finland (-0.3)
9.Netherlands (-2.4)
10.Slovakia (-4.5)
11.Italy (-4.6) 2013Q2
12.Slovenia (-5.1)
United States (-5.3)
13.Spain (-5.4)
14.Ireland (-10.6) 2013Q2
15.Portugal (-11.2) 2013Q2
16.Cyprus (-17.0) 2013Q2
17.Greece (-20.0) 2011Q1
http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055780_QID_-3AE25C01_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;S_ADJ,L,Z,0;UNIT,L,Z,1;INDIC_NA,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055780S_ADJ,SWDA;DS-055780INDIC_NA,P3_S13;DS-055780INDICATORS,OBS_FLAG;DS-055780UNIT,MIO_NAC_CLV2005;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23
6. December 2013 at 08:31
Mark why look at real versus nominal especially when looking at targeting NGDP? Why not look at total expenditures? What number is being plugged into the GDP formula?
6. December 2013 at 08:41
Mark I should have expanded the last part… Total government expenditures would show up in the GDP formula in C as well as G. So why exclude what shows up in C?
6. December 2013 at 08:46
Steven You said;
“But don’t we have something of a conflict of interest? Does Germany really need higher inflation?”
I strongly disagree. Let’s assume that Germany does not need higher inflation because they have such low unemployment. That proves my point that inflation is a bad target, and they should target NGDP, or some other dual mandate. In which case ECB policy is far too tight.
Now lets assume the single mandate inflation target is correct. German inflation (which is below 2% btw), does not matter, what matters is eurozone inflation, which is below 1% and falling. So if the Germans are right that the ECB should focus on inflation then money is still way too tight, and monetary stimulus is needed.
Bottom line is that ECB policy is far to tight according to any criterion, even the preferred criterion of the Germans. The Germans are wrong under any conceivable view of the ECB mandate.
6. December 2013 at 10:22
Matt McOsker,
I wanted to show you another perspective. In my opinion neither my version or your version really captures fiscal policy stance accurately. There is a better way.
But before I discuss that way, I need to point out that you are comparing apples to oranges. The Euro Area government expenditures you posted are for the “general government.” Thus they include *all levels* of government. The US figures you posted are for the *federal government only*. FRED shows nominal US total government expenditures rose from $5,564.2 billion in calendar year 2009 to $5,788.0 billion in 2012, an increase of 4.02%:
http://research.stlouisfed.org/fred2/series/W068RC1A027NBEA
6. December 2013 at 11:02
Matt McOsker,
In my opinion the most objective way of measuring fiscal policy stance is the *change in the general government cyclically adjusted balance*, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy (tax changes as well as spending changes), and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature.
The following are the changes in CAPB over the between the calendar year 2010 and 2013 as a percent of potential GDP. All data comes from the Excel File of the October 2013 IMF Fiscal Monitor:
1.Finland 0.87
2.Belgium 1.31
3.Austria 1.58
4.France 2.90
5.Germany 3.29
6.Italy 3.48
Euro Area 3.62
7.Netherlands 4.30
United States 4.40
8.Ireland 4.80
9.Spain 5.20
10.Slovenia 5.23
11.Slovak Republic 5.70
12.Portugal 7.59
13.Greece 10.41
Note that estimates of the CAPB are not available for Cyprus, Estonia Luxembourg and Malta.
http://www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm
6. December 2013 at 11:27
Thanks Mark. Yes I was wondering about local expenditures in Europe. I know you talked about CAPB before – and I need to sit down and look at it more carefully. In the end I guess my point was that there has overall not been massive austerity in the overall Eurozone 17 countries nor the U.S. On the other hand there has not been massive fiscal stimulus either. In the US it seems there was enough to take the edge off.
6. December 2013 at 17:14
Mark Sadowski,
I agree with you, actually. I’m merely pointing out the political pressures on the ECB. It is not nearly as “independent” as it should be.