In America, it feels good to start banging your head against the wall

Here’s Paul Krugman discussing Britain:

couple of weeks ago I tried to get at what’s wrong with the latest tactic of the austerians in terms of a classic Three Stooges scene. Curly is seen banging his head against the wall; when Moe asks why, he replies, “Because it feels so good when I stop.”

And here’s a typical news story describing an American economy that is growing faster in 2013 than 2012:

Friday’s report of third-quarter GDP was the latest positive piece of economic news. Growth was revised up to 4.1 percent, the first above 4 percent and best-performing quarter since fourth- quarter 2011.

“There’s such good news on the economy, and I’m really encouraged about the 2014 outlook,” said Knapp, who now expects companies to show better revenue growth than they’ve been reporting in recent periods.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said the third-quarter number could mean that fourth-quarter growth will be even better than the 3 percent he expects-a forecast that’s already more bullish than average.

“The numbers are looking really good,” he said. “On the GDP, the upward revision was all in demand.”

.  .  .

The third-quarter growth forecast was for it to remain at 3.6 percent, but gains in consumer and business spending pushed it up.There had been a lot of skepticism about the third quarter, as it was inflated by a big inventory number, and the concern was that there would be a giveback for that in the fourth quarter.

“Now that you have better sales, it makes the inventory numbers look even better because producers are building the inventories in anticipation,” LaVorgna said.

Thanks to Ben Bernanke for proving the cushion for America’s head.  Of course Ben is much too modest to take credit, and indeed late last year denied the Fed could provide an adequate cushion.

But he did.  :)



11 Responses to “In America, it feels good to start banging your head against the wall”

  1. Gravatar of Geoff Geoff
    22. December 2013 at 09:51

    “Thanks to Ben Bernanke for proving the cushion for America’s head.”

    I’m glad these types of comments are being put on record.

    In the future, when the economy goes into yet another round of painful corrections that were caused by Bernanke’s “cushion” (just like the 2007-2009 correction was caused by Greenspan’s “cushion”), it will be clear once again that the monetary socialists were wrong, and were again responsible for the needless suffering of millions of people across the country (and world).

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. December 2013 at 10:37

    Here’s the 2013 policy counterfactual year in review by currency area. I’ve excluded all currencies that are pegged to larger currency areas such as Denmark and Hong Kong, and of course the individual members of the Euro Area.

    The change in Cyclically Adjusted Primary Balance (CAPB) as a percent of potential GDP comes from the IMF Fiscal Monitor (October 2013). The change in NGDP growth rate (in percent) comes from the IMF World Economic Outlook (October 2013).

    Currency Area-CAPB—NGDP
    2.Czech Rep.—2.1—-1.8
    3.Euro Area—-1.1—-0.2
    6.New Zealand–0.4—-4.2
    10.Japan —–(-0.2)—0.5
    14.Korea —–(-0.8)—1.5

    Notice the correlation? Good, because there isn’t one.

    The R-squared value is 0.0029 meaning only 0.29% of the change in NGDP growth is explained by the change in CAPB.

    In fact only five currency areas out of 15 even have the sign combination (e.g. more positive NGDP growth with more negative CAPB) predicted by the monetary policy doesn’t do anything crowd.

    Notice also that in addition to the UK there are six other currency areas where NGDP growth increased despite contractionary fiscal policy.

    Now, it’s true that only the Czech Republic, Japan, Switzerland, the UK and the US are at the zero lower bound (Draghi says “zero” means zero), and so only these currency areas may be in Krugman’s mythical “liquidity trap”, but if you run a regression on that obviously too small sample the R-squared value is still only 0.0854.

    Note also that the forecasted change in NGDP growth rate for US is too large in magnitude. By my estimates it looks like US NGDP will increase by 3.4% in 2013 meaning the change in NGDP growth rate will be (-1.2%). If that’s the case the R-squared of the currency areas in ZIRP drops to 0.0565.

    P.S. The only nations that increased their CAPB this year by more than the US are Denmark (2.6%) and the Netherlands (2.4%), and the Netherlands’ NGDP growth rate actually increased this year (I guess they can thank Draghi and the ECB Governing Council for finally bringing the MRO rate near to zero).

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. December 2013 at 12:04

    I’ve been looking at the same numbers for the Euro Area, and quite frankly, they’re weird.

    Currency Area-CAPB—NGDP
    4.Slovak Rep.-1.1–(-1.8)

    Note that CAPB is not available for four Euro Area members. Recall also that the weighted averaged for the Euro Area change in CAPB is 1.1% of potential GDP, and that the increase in the NGDP growth rate for the Euro Area as a whole is 0.2 points.

    The R-squared value is 0.1461, which is not statistically significant when we might expect it to be, since they are all part of the same currency area. More importantly, the slope of the regression line is very noticeable positive, implying contractionary fiscal policy is expansionary. In particular note the performance of Portugal, Slovenia, Greece, Ireland and Spain on the one hand, and Germany on the other.

    Now, obviously I don’t think that’s true. What I think is that the positive relationship is spurious, and is driven by the fact that peripheral countries are doing more fiscal austerity than the core Euro Area countries (the Netherlands is practically a honorary member of the periphery at this point), but at the same time the ECB’s more expansionary policy stance since 2011 is affecting the Euro Area asymmetrically. That is, the countries most helped by the ECB’s more expansionary policy stance are precisely the peripheral countries, which just happen to be doing more fiscal austerity.

    This is a different take on Krugman’s cessation of the banging of the head analogy. Draghi is copying Bernanke by offering a pillow, and this has benefited the Euro Area asymmetrically.

  4. Gravatar of benjamin cole benjamin cole
    22. December 2013 at 12:24

    I think a meaningful way to look at the USA economy is how it has performed since QE3—that is, open-ended QE that targets growth (through the unemployment proxy) and inflation.

    This observation may be the point MMers should make…

  5. Gravatar of Z Z
    22. December 2013 at 12:35

    Hi Scott,

    How do you reconcile the stronger growth/lower unemployment in 2013, with the drop off in NGDP growth? That implies that MP has tightened, but that job growth has continued unabated? Or has the fiscal cliff somehow affected NGDP but not growth?

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. December 2013 at 13:07

    I notice an error on the Euro Area statistics.

    “4.Slovak Rep.-1.1–(-1.8)”

    should read

    “4.Slovak Rep.-1.8–(-1.1)”

  7. Gravatar of ssumner ssumner
    22. December 2013 at 14:18

    Thanks Mark, Interesting info.

    Z, NGDP growth in 2013 is running at roughly the same level as 2012. RGDP growth is higher because wages and prices gradually adjust to the lower track of NGDP, shifting the SRAS curve to the right.

  8. Gravatar of Saturos Saturos
    22. December 2013 at 21:20

    What was their concern for the inventory share of GDP in Q3, that it represented unsellable inventory or that it was borrowing a higher GDP figure from a future quarter where its sale would be subtracted from GDP as disinvestment?

  9. Gravatar of ssumner ssumner
    23. December 2013 at 06:27

    Saturos, I think the latter.

  10. Gravatar of Barry “The Economy” Soetoro Barry "The Economy" Soetoro
    23. December 2013 at 11:55

    We were told the sequester would destroy America. Now you’re telling me growth is up?

  11. Gravatar of ssumner ssumner
    24. December 2013 at 10:54

    Barry, I feel sorry for people who don’t follow MM blogs. :)

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