Does monetary policy explain the British jobs recovery?

There’s been a lot of discussion of the disconnect between British output (which has done poorly over the past 6 years), and total employment, which is reaching new records, and is even at near record levels as a percentage of the population.  After discussing the strong UK jobs growth, Matt Yglesias presents data on the weak RGDP performance, and then comments:

This is a very long time for GDP to recover to its pre-crisis point, and GDP per person is at an almost shockingly low level. This is far worse than the US has done.

There are some different possible interpretations of this. North Sea fossil fuel production is down. Banking has taken a hit everywhere, and it’s a huge share of the British economy. Or perhaps the Keynesian story is right — Cameron and Nick Clegg have kept government spending lower and taxes higher than they should have been, depressing output.

What’s most interesting, however, is not the dispute but two things that look indisputable. One is that something (or perhaps several things) have gone badly wrong for the British economy. The other is that the Bank of England has managed to get the country to weather that bad stuff without endless mass unemployment. Monetary policy doesn’t solve all problems. But the very fact that the UK economy has so many problems, underscores the reality that monetary policy is extremely potent in fighting the particular scourge of unemployment. Here in the USA, productivity and total output have gone much better, but monetary policy has been less aggressive and joblessness is a bigger problem despite a better overall economy.

There are some concepts lurking in the background here, such as nominal GDP and sticky nominal wages.  Yglesias sometimes presents quasi-MM arguments, but couched in more theoretically neutral language.  In any case, I like the way he described the importance of monetary policy in the final paragraph.  I like it a lot. Good monetary policy will keep the labor market in equilibrium, even if RGDP is being battered by real problems.

But no matter how much I like his conclusions, I must in good conscience point out that he’s slightly oversold his case here.  I had exactly the same view until I looked at the data.  I’m going to argue that he’s right, but for the UK/eurozone comparison, not the UK/US comparison.  Here are NGDP growth rates (total) between 2008:1 and 2014:1:

Eurozone  +4.68%

France   +6.62%

Britain  +12.43%

USA    +15.97%

I separated out France, as it’s the European economy most similar to Britain.  They have almost identical populations, GDPs and GDPs per capita.  I think the more expansionary monetary policy does explain why Britain has done better than France and the eurozone, or at least it’s part of the story.  But I see no evidence that UK monetary policy has been any more stimulative than in the US, at least in the sense that would be of importance to market monetarists—NGDP growth.  So why has Britain done better on the jobs front?  Very simple, their wage growth has been significantly more restrained.  Why?  I have no idea.  But in an accounting sense, that’s the explanation.  It might be viewed as a bit of an embarrassment to MMs, as we don’t have an explanation.  But the Keynesians don’t either, and even worse, the left wing of Keynesianism says wage restraint is contractionary.  At least we say it’s expansionary.

Britain a weird country with one really, really positive supply side fundamental–flexible labor markets.  And one really, really negative supply-side fundamental–horrible worker productivity. And it nets out to pretty decent job creation and poor output growth.

If you use the MM model to compare countries, you sort of implicitly assume similar labor markets. Then the country with the faster NGDP growth will have more job creation.  But of course labor markets are not all equal, and some of the inter-country differences in employment will be due to wages, and only a portion will be due to NGDP growth differentials.  Interestingly, none of labor mystery is explained by productivity.  But when you turn to real GDP, then you look at productivity and employment.

Britmouse has a related post:

There is an interesting asymmetry in how people read the macro data.

For a given increase in aggregate nominal spending (income) I think it would be generally agreed that “what we want to see” is a higher volume of output and not much inflation.  Does anybody disagree? Anybody out there who would prefer the trade-off shifts towards higher inflation and lower output growth?  No?

OK.  For a given increase in aggregate nominal income (spending) we can consider the same trade-off between employment and wages.  I had taken it as given that we had a depressed labour market and so “what we want to see” is that increases in aggregate income will translate primarily into higher employment.

Then he presents data on flat hourly wages and discusses how virtually all of the nominal income growth is feeding into jobs, jobs, jobs.  But the reaction from the left puzzles him:

Yet this is seen somehow as a bad thing, see, for example the Guardian here, which puzzles me.  Do you have a sticky wage model of the labour market, in which AD shocks can raise/lower employment, or not?   Is higher employment in 2014 a good thing, or not?   These questions have simple answers for this simpleton blogger.

I can never figure liberals out.  They say unemployment is far worse than inflation. It destroys a man’s spirit.  It’s just plain psychologically devastating in all sorts of ways, even with unemployment compensation programs. Then I suggest replacing the minimum wage and welfare with jobs for everyone and big hourly wage subsidies, and liberals respond; “But isn’t it punitive to make people work?  If the workers aren’t very productive, why not just left them enjoy leisure time with a guaranteed annual income?”

So like Britmouse I’m confused; is unemployment horrible, or isn’t it?

PS.  If someone told you about that 6 year eurozone NGDP growth total of 4.68% back in early 2008, they either would have thought you were crazy, or that the eurozone was about to go into a depression. But the eurozone VSPs insist that monetary policy has nothing to do with the actual depression that did occur. I’m speechless.

PPS.  And now Lars Christensen is telling us that the ECB wants employers to raise wages. Yeah, that’ll create lots of jobs in a eurozone that has seen 4.68% NGDP growth in 6 years.  In honor of Lars’ newest post, I’m going to invoke Godwin’s law: even the Nazis had a better monetary policy.


Tags:

 
 
 

76 Responses to “Does monetary policy explain the British jobs recovery?”

  1. Gravatar of Frances Coppola Frances Coppola
    28. July 2014 at 18:27

    This is a pretty awful piece by Yglesias.

    The low gdp/capita is due to the fact that the UK’s working population has risen considerably over the last few years. And this also explains falling wages. With a flexible labour market, if your participation rate rises AND you have net immigration, your wages are likely to fall. In-work benefits encourage wages to fall, as do sanctions on the unemployed, workfare programs, and benefit reforms designed to increase the participation rate. The UK has all of these. It’s hardly surprising therefore that real wages have been falling for six years. Indeed NOMINAL wages actually fell in 2011 (that little gem is from the IFS, who were rather surprised by their own findings). So much for “sticky wages”.

    Low wages and low productivity are related, of course. And both are connected with what Yglesias doesn’t mention – the UK’s very low business investment. This suggests that what is going on in the UK is substitution of low-wage employment for capital investment. It’s kept people employed during what has for the UK been a very severe and prolonged downturn, no doubt because of the terrible damage inflicted on its financial sector in the crisis (worse than anywhere else except Iceland and Ireland).

    Scott, I agree that monetary policy has been enormously helpful in the UK. If we had been in the Euro, with the ECB’s ridiculously tight monetary policy and no ability to offset local shocks, we would be in a similar mess to Ireland. That we are not is indeed in large part due to the Bank of England’s support: more recently, tax cuts for middle-income earners, government support for the housing market and inflows of foreign capital have also provided stimulus. I think that’s where our current growth comes from.

    So the question now is how we persuade businesses to increase capital investment. If they don’t, then poor productivity & low wages could become entrenched, which doesn’t bode well for future growth. It seems the combination of supportive monetary policy with a flexible labour market and in-work benefits has helped the UK to weather the storm but isn’t helping it to rebuild.

  2. Gravatar of Frances Coppola Frances Coppola
    28. July 2014 at 18:39

    Is there a more incompetent central bank than the ECB?

  3. Gravatar of ssumner ssumner
    28. July 2014 at 18:41

    Frances, Flexible labor markets might explain the low productivity, but certainly not the low total GDP growth, which is what Yglesias focuses on. More people working should mean more total GDP. But GDP is flat since 2008.

    Speaking of “building” it’s very hard to build things in the UK where people want to live, due to tight zoning. That reduces living standards in a densely populated country that is attracting lots of immigrants.

    BTW, a fall in the nominal aggregate wage rate might be consistent with sticky wages on a given job, as lots of low skilled part time jobs were being added, changing the job mix (composition bias.)

  4. Gravatar of Philippe Philippe
    28. July 2014 at 20:13

    Scott,

    My impression is that the UK is attracting a lot of immigration from Europe. Both highly-skilled and low-skilled. The UK is the only place for a lot of people, it seems. This means an influx of investment and consumer spending. The Eurozone is a disaster in a lot of places. Many wealthy French people are also moving to London, possibly for tax reasons as well as work opportunities.

    The Bank of England monetary policy seems to be one of the few in Europe which is not crazy. The UK has its own currency, and as such, reasonable interest rates.

    London real estate is still an amazing investment, because there is a very limited supply, London is a great city, the UK legal/political system, etc etc. A lot of the growth seems to be based on that (in London at least).

  5. Gravatar of Ralph Musgrave Ralph Musgrave
    28. July 2014 at 20:21

    Scott is right to poke fun at liberals and lefties who complain about unemployment one minute, and then continue complaining as soon as anyone thinks up some sort of subsidised employment for the unemployed. Scott says he can’t “figure out” these people. I can: they’re just after something to complain about!

    As regards their complaints about it being wrong to “make people work”, they don’t seem to have worked out that if one person is allowed to live a life of leisure on benefits, then someone else is being “made to work” and pay taxes to support the person who enjoys the leisure.

  6. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 20:23

    “Good monetary policy will keep the labor market in equilibrium, even if RGDP is being battered by real problems.”

    Good monetary policy batters the real economy. Socialist money does not and cannot facilitate real growth. It is why market forces keep reasserting themselves and manifesting in recessions.

    Monetarists who believe the government and not the market ought to determine money amd spending will always perceive the destructive after-effects of “good” monetary policy as sudden failures of maintaining “good” monetary policy, and/or “bad” fiscal policies. The notion that “good” monetary policy be implicated as a cause, is villified.

    The same socialist mentality pervaded in the former Soviet Union. Even those who didn’t truly believe in socialism, found themselves defending their own motivated and prompted socialist “plans” out of apathetic “second best” rationalizations. Well, the thinking went, if the government is going to decide resource allocation in food and clothing and housing, then it may as well follow MY plan as “the” optimal one. And don’t you dare criticize the root of socialism, because I am staking my intellectual investment on socialism as such continuing to exist.

    On a related note, where in MM is there any discussion of distinguishing between sustainable versus unsustainable “recoveries”? Healthy versus unhealthy “employment” growth? Production and “output” based on direction versus misdirection?

    I think it is woefully inadequate if it expects me to purposefully ignore the realities within these concepts. I cannot reasonably treat all equal increases in RGDP equally, all equal increases in employment equally, and all equal NGDP increases equally. Let the market sort it out? What market?!?!? You can’t expect a free market to sort things out when we can’t even practise a free market with a socialist monetary system running amok. Money is a tool of enonomic calculation. It isn’t blood where certain aggregate flows are healthy whereas other flows are not healthy. It isn’t manna or food the quantity exchanged of which supports growth. What supports growth is market based decisions based on market spending, price, and interest rates. The more free market the price system, the more powerful money becomes to enable growth, NGDP be damned.

    Have MMs forgotten what a free market actually is? Did they ever know?

  7. Gravatar of Philippe Philippe
    28. July 2014 at 20:47

    “Let the market sort it out? What market?”

    You are part of ‘the market’. Make your consumption and investment decisions as you please.

    “Money is a tool of enonomic calculation.”

    It’s easier to make individual economic calculations if you know in which direction the nominal GDP is heading.

  8. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 22:36

    Philippe:

    “You are part of ‘the market’. Make your consumption and investment decisions as you please.”

    What you call a “market” is not in fact a market. It is a narrow band of possible choices constrained by threats of, and actual uses of, initiations of force.

    If I did consume and invest the way I pleased, and the thugs in government found out about it, I would be kidnapped and then thrown into a cage — not because these types of decisions are themselves violent, but because they “break the government’s laws”.

    I cannot use the money I please for example. I must pay taxes in dollars no matter what I earned. That is a violent prevention of me using my property as what pleases me.

    I also cannot invest in the production of soft drugs the way that pleases me without threats of a SWAT team throwing flash grenades into baby cribs.

    I cannot invest in the production of life saving medicine in a way that pleases me, because I would have to get the government’s permission which will be denied if they don’t want me competing with their big pharma friends. Or what you call a “social welfare maximizing license and/or permit.”

    I cannot even consume raw milk as it pleases me without being threatened with kidnapping and a cage.

    Consume and invest as I please? Oh ya, and I bet you believe a political prisoner can go wherever he pleases, just as long as where he wants to go, is where his captors permit him to go without putting a cap in his ass.

    Philippe, you’re living in a dreamworld fantasyland. You know the old tired talking point about “sheep, wake up?”. You’re making it very difficult for me to refrain from throwing that on the table.

  9. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 22:43

    Philippe:

    “It’s easier to make individual economic calculations if you know in which direction the nominal GDP is heading.”

    It is even easier to know which direction market driven money supply, spending and prices are heading, because you take out the whims of politicians and ivory tower never worked in the business world academics arbitrarily determining new rules for money printing.

    It is far easier for investors to make accurate predictions of future oil production and consumption, and gold production and production, then to guess what a monopoly central bank will do. Permanent NGDPLT? Not as good as market driven money, because market driven money allows for people to get out of any money that they think is sub-optimal. With NGDPLT, they’re trapped in a police state monopoly.

  10. Gravatar of Britmouse Britmouse
    28. July 2014 at 23:35

    Frances, I remember seeing the headlines but can’t find a paper expanding on that. The most reliable data for UK nominal wages is the ASHE and that says (in aggregate) nominal hourly wage growth has been slow but positive.

    Scott, nice post (of course!) I was also looking at the France/UK comparison recently. Eurostat data:

    French hourly wage growth was 3.2% 1992-2008, then 2.4% 2009-2014.
    UK hourly wage growth was 4.3% 1992-2008, then 1.6% 2009-2014.

    But the French unemployment rate was the same in early 2011 as it was in 2006 (9.1%). Whereas the UK was 3% higher. If you have a high estimate of the natural rate of unemployment in France (say 9%) and a low one for the UK (say 5%), then France has done much better judged in terms of unemployment too.

  11. Gravatar of Frances Coppola Frances Coppola
    29. July 2014 at 01:25

    Britmouse, I was at the presentation when the IFS unveiled their figures – which is why I remember their surprise. I’ll try to find the relevant paper.

    Scott, Yglesias looked at both GDP and GDP/capita:

    “This is a very long time for GDP to recover to its pre-crisis point, and GDP per person is at an almost shockingly low level. This is far worse than the US has done.”

    RGDP has not been “flat” since 2008. It has actually been rising since 2008, though slowly. But it had an awfully long way to go. The UK’s 2008-9 recession was far deeper than the US’s, as the chart in this link shows:

    http://3.bp.blogspot.com/-559n2AljOTs/U9JicfaaDzI/AAAAAAAAAtg/LNCHQDYkL5g/s1600/G7+GDP.png

    It was then derailed again in 2010/11 due to a combination of factors including the Coalition government’s front-loaded austerity measures, tight monetary policy (Special Liquidity Scheme ended in 2010 with no offset – see Simon Nixon on this), oil price shocks and above all the Eurozone crisis.

    I think you are right that the correct comparison should be with the large Eurozone countries rather than the US. But France did not experience anything like as deep a recession as the UK. The country that did was Germany. The question is, why did Germany rebound so much faster than the UK? It certainly wasn’t because of helpful monetary policy from the ECB…I would say it is at least partly because it hasn’t fixed its banks. It still has a lot of pain to come.

    BTW, I did not mean “rebuild” in the sense of construction. I was referring to gross capital formation.

    Re sticky wages – yes, composition is undoubtedly a factor, but it’s not the whole story. The IFS reported that wages fell even when people remained in the same job. I will try to find the relevant paper.

  12. Gravatar of James in London James in London
    29. July 2014 at 02:08

    Wages are rising at 2% peer annum in the UK and rising: at the level of wage deals. See the Thomson Reuters IDS database. Mix effect appears to be keeping aggregate wage growth flat.

    “Productivity” is more difficult to measure than inflation, ie really, really difficult. See this NBER paper for a quaint comparison of service sector producitivity levels at one data point across four countries from way back in ancient history before the TMT revolution of 2000.
    http://www.nber.org/chapters/c10131.pdf

    Who needs more capital investment in telecoms when you can chat all day on Skype for free. Who needs shopping centres either with Amazon offering to work for you at a loss? Or bank branches and cheques?

  13. Gravatar of TravisV TravisV
    29. July 2014 at 04:12

    Re the minimum wage, I am shocked, shocked that Obama’s Department of Labor put out such an unreliable study……

    http://www.usnews.com/opinion/economic-intelligence/2014/07/28/obamas-minimum-wage-data-leads-to-a-misleading-conclusion

    “if we shorten this time span by just one month — looking now at January 2014 to June 2014 — we get a very different picture.

    In June, the number of jobs in the 13 minimum-wage states was, on average, only 0.59 percent higher than it was in January, while, for the same time period, the number of jobs for the 37 states that did not raise their minimum wages was higher, on average, by 0.69 percent. Job growth since January (the month that these 13 states actually hiked their minimum wages) was slower in states that raised the minimum wage than in states that did not.”

  14. Gravatar of ssumner ssumner
    29. July 2014 at 04:44

    Philippe, You said;

    “London real estate is still an amazing investment, because there is a very limited supply, London is a great city, the UK legal/political system, etc etc. A lot of the growth seems to be based on that (in London at least).”

    I tend to agree, but that makes the mystery even deeper—there has been almost no growth in Britain in 6 years.

    Britmouse, I don’t quite follow that comparison. Why are you giving wage growth up to 2014 but unemployment in 2011? Wouldn’t the current unemployment rates be more informative? UK unemployment has been falling fast, which French unemployment rose after 2011.

    But I do agree that the change in unemployment doesn’t closely match wages—I’d guess Britain looks better than France if you compare changes in total employment. Do you have data on that.

    Frances, Given that both total and per capita GDP did horribly, I wouldn’t criticize Yglesias for not focusing on explanations that apply only to per capita and not total.

    When I said total GDP was flat I just meant that current GDP was about the same as early 2008. I realize there was a deep fall and bounce back. But that’s still a horrible growth record.

    The view that “austerity” slowed British growth has been pretty convincing refuted by recent events. I’ve done lots of posts on that. Due to monetary offset, “austerity” has almost no impact on GDP growth. I use scare quotes for two reasons. First, the UK had some of the world’s largest budget deficits during the austerity. And it’s hard to measure cyclically adjusted deficits. And second, because some of the most famous Keynesians changed their story on austerity as soon as growth picked up. They started frantically re-writing history, claiming policy wasn’t austere in 2012-13, whereas at the time (when growth seemed slow) they were claiming it was.

    Germany has stronger supply side fundamentals than Britain, although they have started moving in the other direction.

    At least we agree on the ECB!

    James, Good points.

  15. Gravatar of Britmouse Britmouse
    29. July 2014 at 05:25

    I was rushed earlier, sorry. My second point was that prior to 2011, the French labour market does not look bad relative to the labour market before 2007 in terms of unemployment; whereas the UK looks much worse comparing the same periods. This is complicated by the collapse in French unemployment 2007-8, the only point below 8% in the three decades of data Eurostat have.

    And the other point was slower NGDP growth should be OK if trend wage growth was slower, which is also true for the comparison in France’s favour.

    The Eurostat data on total employment says that UK employment is up 2% 2008-2014 whereas French employment is down slightly; most of the difference is in 2011 onwards where the UK soared and France went sideways.

    http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=lfsi_emp_q&lang=en

  16. Gravatar of Nick Nick
    29. July 2014 at 05:52

    I know I’m poking the bear here bringing this up when you just posted about IT, but wouldn’t *most* people agree that money has been looser in the UK than the US, and point to the UKs higher inflation rate? Or, at least most of those who believe inflation is a reflection of monetary policy? Is it all the VAT?

  17. Gravatar of ssumner ssumner
    29. July 2014 at 06:17

    Thanks Britmouse. Of course total employment is the theoretically appropriate measure in the simple NGDP/sticky wage framework. That’s not a huge difference, but then the NGDP growth difference between France and the UK is fairly modest, especially (as you note) when you account for the different trend lines.

    I think the reason for the current dissatisfaction in France isn’t the 6 year discrepancy, but the fact that recently Britain’s done significantly better, and that’s expected to persist for at least another year.

    Nick, I suppose some would point to inflation, but I think it’s a waste of time even discussing inflation. Never reason from a price level change.

  18. Gravatar of James in London James in London
    29. July 2014 at 06:18

    Nick. It’s also administered prices, that use formulas like RPI+2% and such like for utility bills etc. Also rents use public housing disproportionately; when private sector rents are flat public housing rises relentlessly at the RPI rate of several months’ earlier. And then there is VAT too, as you say. Market-based inflation is lower.

    And then the UK makes hardly any hedonic adjustments. Even though the UK makes more than any other European country, most of whom make none, it is a lot less than the US. The US is the clear market leader in hedonic adjustments and, not coincidentally I reckon, the leader in GDP growth.

  19. Gravatar of Philo Philo
    29. July 2014 at 06:46

    “Lars Christensen is telling us that the ECB wants employers to raise wages” *in Germany* (not in the PIIGS).

  20. Gravatar of Benny Lava Benny Lava
    29. July 2014 at 06:55

    Anyone know offhand if there is a disparity between France and Britain in terms of part time vs full time job growth? It was implied at one point that Germany’s job growth came in no small part through part time job growth.

  21. Gravatar of Britmouse Britmouse
    29. July 2014 at 07:08

    Benny, the Eurostat series I linked above has a breakdown of “Part time workers as % of total employment”. Change from 2008Q1 to 2014Q1:

    France: 17.4% to 19.2%
    UK: 25.4% to 26.8%

    The data are erratic but if anything France has started heading up over the last year, but the UK has started heading down.

  22. Gravatar of Steven Kopits Steven Kopits
    29. July 2014 at 07:09

    Could you comment on the rationale for choosing Q1 2008 as the base?

    The Fed Chairman did not declare a recession until Dec. 2008, for example.

  23. Gravatar of Steven Kopits Steven Kopits
    29. July 2014 at 07:11

    Also, a more conceptual question:

    I tend to think of monetary policy as the oil to the real economy’s engine. That is, good monetary policy can lubricate the system and insure optimal operation for a given state of the real economy, but it is not the real economy itself.

    Is that the way you see it?

  24. Gravatar of Steven Kopits Steven Kopits
    29. July 2014 at 07:31

    Are we back to oil?

    Since 2005, the UK has reduced oil consumption by 19%, second only to the PIIGS, which typically saw reductions from 26-32%.

    What has changed in Britain is that it has gone from being a net oil exporter to a major oil and gas importer.

    How does it pay for these growing and costly imports? Well, it has two options:

    1. It can import less, which it has done. To offset a loss of imports it must increase the productivity of energy usage. If it cannot do so easily, it will have to reduce economic activity or resort to capital account measures (borrow more).

    2. Nevertheless, the UK has to pay for such oil imports as it consumes. It can do so with exports, which can arise from migrating to higher value goods, or lower wages, which allow it to be competing on costs.

    The discipline, it seems to me, is likely to come through the current account.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. July 2014 at 07:57

    Scott,
    Off Topic.

    Just to let you know, I found time after a massive extreme bounds analysis marathon (for my dissertation) to run the nowcast for 2014Q2 GDP. The BEA preliminary estimate will of course be released tomorrow morning.

    I project 3.8% NGDP, 1.6% RGDP and 2.1% GDP implicit price deflator inflation in 2014Q2 (the apparent discrepancy is due to rounding).

    This is more pessimistic than the consensus projections. The only thing that really stands out to me is a huge increase in public construction which I use to project government gross investment.

    There was a big increase in PCE in March following the winter vortex, but it completely fizzled out in April and May. Thus I’m just as puzzled by the failure of GDP to “bounce back” as everyone else.

  26. Gravatar of ssumner ssumner
    29. July 2014 at 08:15

    James, Yes, I’ve wondered about the hedonic adjustments. But that doesn’t explain everything, as France is also falling further behind the US in PPP GDP/person.

    Philo, Yes, but Germany is in the eurozone, so higher German wages mean higher eurozone wages. And that means lower eurozone output, assuming wages rise for the “wrong” reason. In fact, I doubt ECB pressure will have any impact on German wages.

    Steven, 2008:1 is widely used in Europe, it’s the point at which GDP started falling. In the US GDP was flat in the first half.

    Oil is a decent analogy, although even oil is “real” in the respect of facilitating transactions. But in the long run changes in M are purely nominal events.

    Another way it’s a good analogy is that when people talk about “not using monetary policy” it’s like not using oil–not really an option. Also, once you have the right amount of oil, adding more doesn’t help. But removing oil can hurt a lot.

    Mark, Very interesting–of course we might have to wait a few months, the last initial estimate was revised 300 basis points!

  27. Gravatar of benjamin cole benjamin cole
    29. July 2014 at 08:25

    Great blogging. Ms. Coppola: Until very recently the Bank of Japan was even more incompetent than the ECB. There are some FOMC board members who are menaces to American prosperity, such as Richard Fisher.

  28. Gravatar of TravisV TravisV
    29. July 2014 at 09:08

    WELCOME BACK MARK SADOWSKI!!!!!!!

  29. Gravatar of TallDave TallDave
    29. July 2014 at 11:40

    Good post.

    Eurozone: worst monetary policy, no sources of growth.

    United States: middling monetary policy, fracking.

    UK: better monetary policy, no source of growth.

    Japan: improving monetary policy, tentacles.

  30. Gravatar of Britmouse Britmouse
    29. July 2014 at 11:41

    Steven Kopits, where do you get your oil data? Productivity in the UK energy supply sector has fallen by 45% since 2004 (a fairly linear collapse), which may play a part in this too.

  31. Gravatar of Frances Coppola Frances Coppola
    29. July 2014 at 11:47

    Scott,

    There was no monetary offset in the early stages of UK austerity. The Bank of England actually tightened policy in the fall of 2010, as Simon Nixon explains here: http://blogs.wsj.com/simonnixon/2013/05/24/how-mervyn-king-lost-the-battle-of-britains-banks/

    Ending the Special Liquidity Scheme a year early without any other measures to offset the effects of tax increases and oil price rises at that time is tight monetary policy by any standards. The Bank of England did not embark on its second round of QE until October 2011, more than a year after the SLS was ended and Coalition austerity began.

    The path of RGDP suggests that the UK economy experienced negative shocks several times from 2010 to 2013 that were not entirely offset by monetary policy, and that is the reason for the poor growth. Other Eurozone countries – even Germany – show a similar pattern, so I would guess that the Eurozone crisis was a considerable part of it. But not all by any means. The inflation that Nick mentions is not irrelevant: underlying it were double-digit percentage rises in energy prices for households and businesses, made worse by the Coalition’s imposition of “green levies” on energy bills to subsidize renewables. That’s a substantial supply-side shock which started in the fall of 2010 and continued for the whole of 2011.

    I’d guess that undervaluing of the Euro relative to fundamentals in Germany has something to do with its fast recovery. I’m amazed that you think a country whose business investment is even weaker than the UK’s has better supply-side fundamentals.

  32. Gravatar of Frances Coppola Frances Coppola
    29. July 2014 at 11:48

    Steven,

    GDP revisions indicate that the US entered recession in January 2008.

  33. Gravatar of Major.Freedom Major.Freedom
    29. July 2014 at 12:04

    Frances:

    “Ending the Special Liquidity Scheme a year early without any other measures to offset the effects of tax increases and oil price rises at that time is tight monetary policy by any standards.

    You can’t say that if the standard is a free market in money production.

  34. Gravatar of Frances Coppola Frances Coppola
    29. July 2014 at 13:58

    Major Freedom,

    As you well know, the standard on this blogsite is anything but a free market in money production.

  35. Gravatar of Major.Freedom Major.Freedom
    29. July 2014 at 14:34

    Unfortunately I do.

    Just thought I’d give my two cents by saying that inflation is low in the UK only by some particular standards.

  36. Gravatar of Daniel Daniel
    29. July 2014 at 14:45

    Frances – why are you engaging the moron ? Don’t you know you should never feed the trolls ?

    Also, you’re free to set up your own private currency, as long as you don’t call it “dollar”.

  37. Gravatar of Major.Freedom Major.Freedom
    29. July 2014 at 16:02

    Daniel:

    You sound so insecure and afraid that you feel compelled to get others to agree with you in order for you to find meaning for your ideas. Sad.

    No, we’re not free to set up our own currencies, because we’ll be taxed in dollars thus coercing us back into the dollar hegemony.

  38. Gravatar of Major.Freedom Major.Freedom
    29. July 2014 at 16:19

    Daniel:

    You tell others not to engage with me, and yet you habitually engage with me. It is almost as if…as if you want to be the only one who engages with me. Do you hate me because you like me? Is this how love was shown in your household growing up? Bickering and calling each other names?

  39. Gravatar of A A
    29. July 2014 at 18:07

    Frances Coppola, “free market in money production” in the modern world only makes sense as a semantic term. If a government has the knowledge and capacity to produce fiat money, then “free market” simply refers to a set of policy choices. If an adult watches two five year olds engage in an MMA bout, then you could say that he/she is taking a hands off approach. Or you could say that the adult took the appropriate steps to induce a baby MMA outcome.

  40. Gravatar of ChrisA ChrisA
    29. July 2014 at 20:34

    When I look at the GDP graphs since 2008, it seems we are actually looking at smallish differences between UK and Germany/France growth since 1998, basically all within 3% of each other, which must be close to measurement error. I wonder how the forthcoming GDP revisions will affect the UK story? It would only take a mild downwards revision to the peak and slight upwards revision to the post 2008 story to bring the UK 2014 GDP up to Germany and past France (even without revisions could be there by end 2014). If so then there is a very similar real growth story for the major European countries (not surprising since they are all major trading partners with each other) with the US and Canada as outliers. Likely the under-performance of the major European economies is all ECB related – even the core economies can’t just shrug off imploding PIIGS. The specific UK story, compared with Germany/France is not absolute growth but much better employment in the UK due to better monetary policy and more flexible labor, so same pie but shared more widely than in France/Germany. US and Canada grow more because, as pointed out by Scott, they have a more expansionary monetary policy basically driven by the Fed, same as Australia. If you look at it this way (and the GDP revisions fall out like I suggest), it is all text book, no real mystery.

  41. Gravatar of James in London James in London
    29. July 2014 at 23:31

    ChrisA. Very good points re: measurement error. I studied Economics, my son studies Physics. He continually ribs me about the apallingly cavalier way economists treat error bars – mostly by not having them or ignoring them. While producitivity is fairly easy to work with on a micro level, if often a very sensitive issuue (that’s why we have management consultants), it is phenomenally difficult at a macro level.

    Few economists, desperate for data, ever think seriously about just how much countries are just randomly collected groups of people, not naturally or easily amenable to scientific study. Most of the comments we read about US vs Canada vs France vs UK vs Japan etc read more like the average discussion about sports teams between sports fans. Fun, for sure, but not very objective.

    The only really common thing about these individual economies is their monetary system – which makes monetary economics so important.

  42. Gravatar of James in London James in London
    30. July 2014 at 00:17

    Scott: I would like to see a comparative study of the impact of cumulative hedonic adjustments to GDP deflators across different countries. With suitable error bars, of course.

    That said, the striking thing about the US versus other countries is how same’y the country is versus similar sized geographical population agglomerations. Think US (320m) vs the EZ population agglomeration (330m), or Vietnam/Thailand/Burma/Malaysia/Cambodia/Singapore/Laos(250m),or North Africa (200m). That, to me, dull uniformity is what makes for superb economies of scale and greater productivity; it is also what provides a spur for the big idea of European Union; and what makes the prospect of China overtaking the US so inevitable, and India following behind.

  43. Gravatar of Steven Kopits Steven Kopits
    30. July 2014 at 03:00

    Britmouse -

    Oil data comes from the following sources:

    EIA: Monthly and annual data, all energy types:
    http://www.eia.gov/forecasts/steo/

    BP: Annual energy data, all types:
    http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html

    Economic data, from the IMF:
    http://www.imf.org/external/pubs/ft/weo/2014/01/weodata/weoselgr.aspx

    Upstream Spend (capex) Data: Barclays semi-annual E&P surveys (semi-public information)

    Oil project economics: Goldman Sachs’ Top 400 Report. (Non-public, acquirable with contacts.)

    Historical macro data, Penn World Tables:
    http://www.rug.nl/research/ggdc/data/penn-world-table

    This latter is a truly remarkable resource. As a guy who spends a lot of time with spreadsheets trying to get numbers right, I can only imagine the heroic effort invested over decades to make the PWT meaningful and reasonably accurate. It would be well worth a blog post (not on Scott’s site, which is mostly monetary) in its own right.

  44. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. July 2014 at 03:03

    The question is, why did Germany rebound so much faster than the UK? It certainly wasn’t because of helpful monetary policy from the ECB…I would say it is at least partly because it hasn’t fixed its banks. It still has a lot of pain to come. The second part may well be true, but I would point out the ECB has been running the ideal monetary policy — for Germany. Hence the Eurozone operating principle: the more your economy is like/in sync with Germany, the better you do; the less, the worse.

  45. Gravatar of Michael Byrnes Michael Byrnes
    30. July 2014 at 03:40

    Scott wrote:

    “Britain a weird country with one really, really positive supply side fundamental–flexible labor markets. And one really, really negative supply-side fundamental–horrible worker productivity. And it nets out to pretty decent job creation and poor output growth.”

    Do you think these two fundamentals are distinct or related?

  46. Gravatar of TravisV TravisV
    30. July 2014 at 04:37

    Real GDP grew 4.0% last quarter!!

    http://www.businessinsider.com/q2-gdp-report-july-30-2014-7

  47. Gravatar of Brian Donohue Brian Donohue
    30. July 2014 at 04:42

    Mark,

    If I’m reading it right, looks like you undershot. 4.0% RGDP?

    http://www.bea.gov/newsreleases/national/gdp/2014/gdp2q14_adv.htm

  48. Gravatar of TravisV TravisV
    30. July 2014 at 04:48

    Prof. Sumner,

    With today’s news, do you still believe this forecast of yours?

    http://www.themoneyillusion.com/?p=27034

    “The Fed has a big NGDP problem. It’s becoming increasingly clear that when the labor market recovers, RGDP growth will be very slow, maybe 1.2%. Add in about 1.8% on the GDP deflator, and 3% NGDP growth looks like the new normal, assuming the Fed intends to stick with 2% PCE inflation targeting. Bill Woolsey wins!!”

  49. Gravatar of Brian Donohue Brian Donohue
    30. July 2014 at 04:51

    TravisV,

    JINX!

  50. Gravatar of Nick Nick
    30. July 2014 at 05:14

    GDP! GDP! GDP!
    But seriously folks, don’t get *too* excited about the advance estimate. Incidentally, If I read the annual revision right, the 2013 MM ‘experiment’ with offset at ZLB looks even better than ever. If I read it right…

  51. Gravatar of Steven Kopits Steven Kopits
    30. July 2014 at 05:46

    Re: Q2 GDP.

    Given the massive revisions the BEA routinely makes, I put very little faith in the 4% GDP number. I’d prefer Mark’s number, until we see revised GDP for the quarter.

  52. Gravatar of ssumner ssumner
    30. July 2014 at 07:49

    Frances, I’d be very interested in knowing how you determined there was no monetary offset of fiscal austerity. I recall the BOE being concerned about inflation during that period. Is that wrong?

    Regarding the Germans, I was referring to labor market reforms, which have sharply boosted employment. I’d add that Germany has a good industry mix for the China boom, they produce a lot of the capital goods and luxury cars that China covets. I view that as a “supply-side” factor but others might view it differently (especially Keynesians.)

    ChrisA, I agree that the trend rate in these countries has been similar in recent years.

    James, Agree on error terms. I’m confused by your agglomeration argument–can you restate?

    Michael, Partly related but not completely. Places like Italy are poor in both dimensions, so one doesn’t imply the other.

  53. Gravatar of ssumner ssumner
    30. July 2014 at 07:51

    Frances, BTW, I enjoyed your interesting talk on future trends in London during June (with Ryan and Izabella). Unfortunately I had to rush to a different event, and couldn’t meet you at the social event afterwards.

  54. Gravatar of Major_Freedom Major_Freedom
    30. July 2014 at 08:01

    A:

    It is interesting that the first thing that comes to your mind when thinking about laissez-faire, about free markets, is an adult figure watching little children fight each other. We’re all socialist children now.

    A free market in money production is not merely a semantic term. It refers to a very specific property right expression. Whether this is infringed upon by violent thugs, is secondary.

    Governmental fiat money is certainly not a “modern” invention. To juxtapose a free market in money on the one hand, and “modern” money on the other, gives the false impression that fiat money is modern whereas free market money is ancient.

    Ever read Marco Polo’s journals? Fascinating stuff actually. Here is one nugget he wrote about Kublai Khans’ paper money monopoly in China:

    “Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both…All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves…The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.”

    Fiat money is not “modern”. If we take the strict definition of fiat money, meaning money literally “by decree”, then government inflation of currency goes back to at least the Roman Empire. The Denarious underwent devaluation from almost pure silver, to just 0.02% silver at the collapse of the empire around 400-500AD where they could not be imposed as a monopoly any longer. Some historians link the collapse of the currency as playing a pivotal role in the decline of the empire.

  55. Gravatar of TallDave TallDave
    30. July 2014 at 08:08

    Frances: The question is, why did Germany rebound so much faster than the UK?

    But isn’t that a bit like comparing Texas to Japan? Like Texas, Germany probably benefits from being less dysfunctional than other areas it shares a currency union with — that is, ECB policy right now is much more appropriate to Germany than to Spain or Greece.

  56. Gravatar of TallDave TallDave
    30. July 2014 at 08:10

    Given the massive revisions the BEA routinely makes, I put very little faith in the 4% GDP number. I’d prefer Mark’s number, until we see revised GDP for the quarter.

    I second the motion.

  57. Gravatar of James in London James in London
    31. July 2014 at 06:01

    My point on agglomerations is that if you think of the US as a company then there will be economies of scale in having 300m employees over one having 10m – other things being equal. The same’ness of different parts of US is always the think I notice when travelling there, vs italy against netherlands, thailand against vietnam, egypt vs algeria. Think of a cake-making company that has a market of 300m vs 10m, or an entertainment studio, or a mobile phone company, or a bank. All can spread their fixed costs over greater numbers of customers. Other things being equal, prices for similar goods, but especially (less tradeable) services, will thus be lower in the US than elsewhere.

    The “single market” of the US – one currency, one law, one language, one polity, one tax system(all more or less) – will enable you to have larger organisations serving that market that then can gain economies of scale. In smaller countries, you will get smaller organisations serving that market gaining smaller economies of scale.

    You can see it in action when interstate commerce laws were gradually repealed. Replicating the US in pursuit of these economic efficiencies is one of the drivers of European Union, alongside “peace in our time”, the ability to be a superpower, “bigger jobs for the boys” etc.

    If you think of the huge barriers to trade in similar-sized population agglomerations to the US, it seems obvious to me why the US has a higher PPP GDP per capita than most other countries. Over time the “single market” inside China or India should overtake the US – other things being equal. Of course, they are not equal, but a massive driver of US wealth is merely US population size.

    This size benefit could well be much more important than scratching around for cultural or supply-side differences versus various European countries or other “Western” countries like Australia or Canada. Those latter two both “should” really be wealthier per capita than the US.

    Globalisation helps spread benefits of economies of scale, but nothing like the ones enjoyed inside countries themselves.

    The hedonic adjustments is also something worth looking at, of course, but fiendishly difficult.

  58. Gravatar of ssumner ssumner
    31. July 2014 at 06:43

    James, That’s obviously possible, but I view diseconomies of scale as being more plausible. Big governments are inefficient. Small developed countries are often richer than big developed countries, AFAIK

    Use IMF figures. The top 14 richest countries has one bigger than 40 million (the US)

    The next 14 have 5 countries bigger than 40 million (German, Britain, France, Japan, Korea.)

  59. Gravatar of Jim Glass Jim Glass
    31. July 2014 at 07:42

    My point on agglomerations is that if you think of the US as a company then there will be economies of scale in having 300m employees over one having 10m – other things being equal.

    Well, as “companies” go there is a market side and a management side.

    There’s a huge advantage to having a *market* of 300 million people versus 10 million.

    But on the management side, there’s sure no advantage to having one elected representative per 700,000 compared to per 23,000 — nor to having a bureaucracy 30x bigger and thicker than another, and that far more removed from the people, to run the same program. The ‘economies of scale’ to bureaucracies are strongly inverse.

    Politicians distant from voters and massive bureaucracies far removed from average people are much less responsive to them, far more open to capture by interest groups, and far more able to look out for themselves first, at the citizenry’s cost.

    Compare the USA to the Scandinavian countries.

    The USA has the size of the market, which is great for the business sector which provides all the extraordinary material goods and services we all enjoy, and thus great for us the people through all that enjoyment — plus 98+% Congressional re-election rate and impermeable, often ‘legally corrupt’ (when not outright corrupt) bureaucracies. See: VA hospitals, legendarily massive Medicaid fraud, inner city school systems of horror, etc.

    The Scandinavians have to make do with a much smaller market, but have politicians and administrators who are far closer to the average people (many are average people) and who thus as providers of govt services are far more nimble and responsive to local needs — with a far better reputation for honesty.

  60. Gravatar of James in London James in London
    31. July 2014 at 09:00

    Scott. Qatar, Luxemburg, Singapore, Brunei, HK, San Marino aren’t countries, they are cities. Canada and Australia are proper countries as are the Nordics. Canada and Australia have at least as good government as the US, but are $10k behind on PPP GDP per capita. It doesn’t make sense.

    Of the bottom ten countries by PPP GDP per capita, half are less than 10m people and only one is above 21m people. Small is pretty meaningless. We do really need to compare like with like population agglomerations, hence US vs EZ. I only brought up ASEAN or North Africa to illustrate the truly massive differences between countries to show the general idea and benefits derived by the homogeneity (no offence) of the US.

    Jim. Much more than half the Eurozone (mostly the southern bit) has worse politics and regulation than the terrible stuff you list for the US, and a bit less than half is probably better. On average, it’s hard to say. But the EZ is still miles away from being the integrated single market like the US. Hence, the PPP GDP per capital gap to the US.

  61. Gravatar of Jim Glass Jim Glass
    31. July 2014 at 15:22

    Jim. Much more than half the Eurozone (mostly the southern bit) has worse politics and regulation than the terrible stuff you list for the US

    There are many, many factors that go into that, out of history, culture and contingency.

    To stay on point, the issue was “economies of scale” coming out of the size of the market versus the size of the government, political/bureaucratic administration, with your analogy of companies to governments.

    In my decades in the business world, *all* the businesses I’ve known have said “big market good! bigger better!!” … but I have never, ever heard even one business claim having a bigger thicker management than its competitors as an *advantage* — well, not since IBM did in its last glory days of the 1980s (alas, I’m that old), immediately before it set the all-time world record for corporate losses. And even IBM didn’t say that the benefit of the immense bureaucracy it bragged about (“more analysts than any other provider to help your business make the best decision”) was due to any economies of scale.

    Since the IBM implosion of back then the universal effective management creed has been: ever smaller management team, flatter organization, closer to the customer. That’s companies.

    As to governments I gave the US-Scandinavian comparison as an example of similar polities — they are compared endlessly! — that exactly illustrate the differences discussed, one with a huge market and politicians far away from the people plus thick bureaucracies for 300 million, the other with smaller markets and politicians and bureaucrats much closer to the people. (Trying to skip this comparison to look at eastern/southern Europe instead seems only to obfuscate things.)

    If you think governmental “economies of scale” come from having one representative per 700,000 voters instead of one per 25,000, and from having bureaucracies for a nation of 300 million like the VA hospital and Medicaid systems, as apposed to bureaucracies on the scale of the Finnish, Swedish, Danish health systems, well, that’s an opinion.

    My opinion is that if “economies of scale” really resulted from larger size of government, we’d all be speaking Soviet today.

  62. Gravatar of Jim Glass Jim Glass
    31. July 2014 at 16:03

    “This is a pretty awful piece by Yglesias.”

    I’ve given my opinion of Yglesias before, but perhaps I was wrong.

    Is it possible he’s doing parody?

    https://twitter.com/mattyglesias/statuses/404454885359636481

  63. Gravatar of Major.Freedom Major.Freedom
    31. July 2014 at 16:23

    Pretty awful piece by this person Yglesias appears to be a reduncancy.

  64. Gravatar of Major.Freedom Major.Freedom
    31. July 2014 at 16:24

    Haha ipad makes me look foolish.

    Wait for it…

  65. Gravatar of Ben J Ben J
    31. July 2014 at 23:03

    Jim Glass,

    You can be certain that tweet is a joke. Yglesias and Dave Weigel, his former coworker who writes politics for Slate, are always trying to out-sarcastically-earnest-tweet each other.

  66. Gravatar of James in London James in London
    1. August 2014 at 01:27

    Jim. Nordic countries should have higher PPP GDP per capita than the US, Canada and Australia too. None do. All, apart from Norway, are 25% behind. And Norway, with it’s immense oil wealth per capita, is only level with the US. The numbers don’t make sense, unless you opt for some overwhelming compensating advantage for the US. And that’s size.

    Another aspect of economies of scale is the law of comparative advantage. I am always impressed in the US by how even the least educationally qualified find roles, and fulfil them well. Iron rules of customer engagement and work schedules laid down by large firms that have honed the roles to their most easily understood parts.

    This law of comparative advantage works best the bigger the number of people in the market. It also allows greater specialisation, on the other hand. The smaller the market the less specialisation that can take place. I am always amazed by the range and size of specialist trade associations or professional groups that hold conferences at the US hotels that I stay at. It is a wonderful example of the benefits of market size, specialisation and the economies of scale.

  67. Gravatar of Frances Coppola Frances Coppola
    1. August 2014 at 05:44

    Goodness, Scott, I had no idea you were there! It was a fun event. Sorry to have missed you! Did you get a copy of the book?

    On lack of monetary offset in 2010-11: yes, the BoE was concerned about inflation at that time, and understandably so since inflation was well above target. We know now that this was due to commodity price shocks, consumption tax rises feeding through into CPI and above-inflation rises in administered prices. But at the time it would have limited the MPC’s willingness to provide further monetary easing. So I think monetary policy was actually too tight in 2010-11 and contributed to the tailing-off of the UK recovery at that time. The Eurozone crisis kicked in later and was offset by a second round of QE, though it now appears not completely.

    It’s very easy to be wise after the event, but we should remember that economic forecasting is an inexact science, and MPC members (and FOMC members) are making their best judgment at the time with incomplete and inadequate information. For example, the ONS later revised UK GDP figures downwards quite substantially – had the original figures been more accurate, the MPC might have eased more aggressively.

  68. Gravatar of ssumner ssumner
    1. August 2014 at 06:04

    James, You may be right, but I wouldn’t put too much weight on the US. Germany is surrounded by lots of much smaller and richer countries (Austria, Switzerland, Netherlands, etc.) Belgium is richer than France. Taiwan richer than China. Czech Republic and Slovakia richer than Poland. Slovenia is richest of the former Yugoslavia republics, and one of the smallest. Uruguay richer than Brazil, Chile richer than Argentina. The counterexamples are endless.

    I do think your economies of scale argument is correct, but there can also be diseconomies in governance.

    Frances, My point about the BoE was not to criticize their policy, but rather to point out that it implies that more fiscal stimulus would not have helped in 2010-11. If it boosted AD higher, the BOE would have offset it with tighter money, to prevent inflation from rising even further. Whenever a central bank targets inflation the fiscal multiplier is presumed to be roughly zero.

  69. Gravatar of Frances Coppola Frances Coppola
    1. August 2014 at 09:59

    Scott, sure, more fiscal stimulus would not have worked while the BoE was tightening policy. But that’s not what I’m saying. In 2010-11 there was actually fiscal contraction, in the form of consumption tax rises and – later – benefits reforms, coupled with tighter monetary policy. Hence the OVERALL stance was contractionary. There was no monetary offset of the tighter fiscal stance.

  70. Gravatar of daserra daserra
    1. August 2014 at 14:41

    Surely the US’s status as the only global military superpower, controller of the worlds main reserve currency and master of espionage and coercion give it a massive advantage over mere “serf” nations.

  71. Gravatar of Jim Glass Jim Glass
    1. August 2014 at 15:26

    Jim … Another aspect of economies of scale is the law of comparative advantage. I am always impressed in the US by how even the least educationally qualified find roles, and fulfil them well. Iron rules of customer engagement and work schedules laid down by large firms that have honed the roles to their most easily understood parts.

    This law of comparative advantage works best the bigger the number of people in the market. It also allows greater specialisation, on the other hand. The smaller the market the less specialisation that can take place. I am always amazed by the range and size of specialist trade associations or professional groups that hold conferences at the US hotels that I stay at. It is a wonderful example of the benefits of market size, specialisation and the economies of scale.

    All of which is entirely true as to how economies of scale grow with the size of the market.

    None of which relates to any economies of scale of government which grow as the size of government grows relative to the size of the market. Again, even the Soviets don’t speak Soviet any more.

  72. Gravatar of TallDave TallDave
    1. August 2014 at 17:36

    it seems obvious to me why the US has a higher PPP GDP per capita than most other countries.

    Apparently we mostly just work more. The productivity per capita isn’t that different, but the hours worked are, which is probably a function of the far greater labor mobility in the United States, along with greater freedom to contract for long hours.

  73. Gravatar of James in London James in London
    1. August 2014 at 22:33

    Jim: insofar as the legal system or the road system or weight & measures is government, big is good. That’s all I meant. Big state industries, in health, education or unemployment insurance are horrible. Agreed.

    Tall Dave: Interesting, but 20% more hours per year than the rest of the developed world?

    .

  74. Gravatar of James in London James in London
    1. August 2014 at 22:42

    daserra: even in your fantasy world the economic cost of being the “only global military world superpower” is a huge drag on the economy given the waste of having 3.8% of GDP spent directly on defence. 50% more than the world average. Plus the 1% spent by the Veterans Administration on pensions, disability and healthcare.

  75. Gravatar of ssumner ssumner
    2. August 2014 at 15:43

    Frances, The monetary offset theory is symmetrical, it works both ways.

  76. Gravatar of James in London James in London
    4. August 2014 at 07:40

    Tall Dave:
    http://stats.oecd.org/Index.aspx?DataSetCode=ANHRS
    This data series shows US working 5-7% more hours than Australia, Canada adn the US, though 20% more than France! However, the OECD specifically warns against making intra-coutnry comparisons and only use it for trends. Skimming some countries shows that adjustments for vacations is very variable, for instance.
    Good article here shows how tricky the comps are:
    http://www.bls.gov/opub/mlr/2009/05/art1full.pdf [written by a US stato]

Leave a Reply