Germans now favor a dual mandate for the eurozone; inflation and growth

Back in 2011, rising oil prices (and higher VATs) briefly pushed inflation above the ECB’s near 2% target.  Some pundits suggested it was unwise to tighten, because unemployment was so high, and the price increases were transitory, but the German’s insisted that the ECB must focus like a laser on inflation, and ignore all other factors.  So the ECB tightened repeatedly in 2011, driving the eurozone into a catastrophic double dip recession (depression?)

And now we face the opposite situation.  Eurozone inflation is down to 0.3%, and plunging oil prices seem likely to send it even lower.  So once again the Germans are suggesting that the central bank focus like a laser on . . . both inflation and growth:

German council member Jens Weidmann signaled how oil is now a focal point in the quantitative-easing debate when he said last week that the drop in energy costs is like a mini stimulus package, suggesting no need for the ECB to expand its current measures. The opposing view, previously argued by Draghi and ECB Chief Economist Peter Praet, is that temporary price shocks can deliver lasting harm to an economy as feeble as the euro area’s.

Seriously, it doesn’t matter what the data show, the Germans will always find a reason to favor ever tighter money, ever more deflationary policies.  Even if their own preferred policy (inflation targeting) calls for easier money.

PS.  Over at Econlog I have a related post on the IMF’s shameful record.

HT:  Michael Darda

Update:  For fans of Monty Python, Peter Tasker’s updating of the “What Have the Romans Ever Done for Us?” skit to Abenomics is wonderful.  I won’t quote the whole thing, but the punch line is:

Cleese – Alright, alright. Apart from full employment, higher asset prices, lower interest rates, record-high profit margins, better corporate governance, a tourism boom, more working women, exports and capex, what has Abenomics ever given us?

Twelfth voice – Nominal GDP growth?

Cleese – Growth! Oh, SHUT UP!

HT:  Nicolas Goetzmann

Update#2:  Lars Christensen has an excellent post on the fallacy of pointing to low eurozone bond yields as evidence that monetary stimulus is not needed.


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61 Responses to “Germans now favor a dual mandate for the eurozone; inflation and growth”

  1. Gravatar of benjamin cole benjamin cole
    1. December 2014 at 06:56

    One of the excellent commentators pointed out that Germans in fact tolerated higher rates of inflation in the 1960’s through the 1980s. In Germany, as in the United States, the recent peevish fixation, obsession, even monomania with inflation is of relatively recent origin.

    I would like to see a timeline or history of this new rigid focus of the economics profession and central bankers.

  2. Gravatar of Steven Kopits Steven Kopits
    1. December 2014 at 07:33

    Are we mixing real and monetary effects here?

    Lower oil prices are not a monetary phenomenon. They are a real one (oil really is cheaper in real terms). Ditto for VAT. That is not a monetary effect. It’s a real effect, even if it shows up in prices. To argue that lower oil prices are bad for the economy is just patently absurd if you’re a net oil importer.

    Moreover, the ECB has been easing interest rates more than the Fed since January 2012. In response, perhaps you’re going argue something about NGDP, can’t reason from prices changes, etc. Fine, but then put up the damned graph. Show the policy points with an arrow or two.

    http://www.prienga.com/blog/2014/10/17/did-the-ecb-tank-the-euro-zone

    Personally, I agree that the Eurozone could do with easier monetary policy (in part to offset Russia-related effects). But the problems of France and Italy and Greece and Hungary have diddly to do with monetary policy and everything to do with the need for structural reforms. Easing monetary policy just takes the pressure off for structural reforms.

    Be a real market monetarist, and argue for a Fiscal Accountability Act (FAA). That’s the most important policy innovation. If you want GDP growth in Italy or France, Step No. 3 is an FAA. And Step No. 3 is the one that’s missing just now.

    http://www.prienga.com/blog/2014/11/20/shell-and-exxons-most-important-rd-initiative

  3. Gravatar of TravisV TravisV
    1. December 2014 at 08:02

    Prof. Sumner,

    You disagree with Peter Tasker that Abenomics has reduced interest rates, correct?

  4. Gravatar of ssumner ssumner
    1. December 2014 at 08:14

    Steven, You said;

    “Lower oil prices are not a monetary phenomenon. They are a real one (oil really is cheaper in real terms). Ditto for VAT. That is not a monetary effect. It’s a real effect, even if it shows up in prices. To argue that lower oil prices are bad for the economy is just patently absurd if you’re a net oil importer.”

    Exactly my point.

    Regarding your search for “concrete steps,” didn’t the ECB do much less QE than the Fed?

    And Europe has many problems, not just one “real problem.”

    Travis, I’m not sure why interest rates have fallen–it’s a global phenomenon. Lower real interest rates.

  5. Gravatar of Major.Freedom Major.Freedom
    1. December 2014 at 08:36

    Cleese – Alright, alright. Apart from higher asset prices, lower interest rates, record-high profit margins, what has Abenomics ever given us?

    Not full employment, not better corporate governance, not a tourism boom, not more exports, and not more capex (in real terms).

  6. Gravatar of Adam Platt Adam Platt
    1. December 2014 at 08:48

    This is unbelievable. I don’t see how this European crisis ends. Euro zone Nominal GDP is probably about 20% off its pre-2008 trajectory at this point while Greece is nearly 50% off. And after all of that Germany is concerned about having to reach a 2% inflation target?! I haven’t been to Europe in many years, but I just can’t understand how Nominal GDP hasn’t become the focus of the conversation when 20%+ unemployment in Spain and Greece is such an utterly predictable replay of the Great Depression.

  7. Gravatar of Major.Freedom Major.Freedom
    1. December 2014 at 08:54

    It wasn’t the “tight” money that caused the recession in Germany, it was the prior inflation that distorted the capital structure which subsequent tightening only revealed sooner rather than later when the correction would have been even more painful.

    It is not true that division of labor economies can finally and permanently adapt to the distortionary havoc that socialist money causes. Investors can never know how to fix the errors because the only way for them to know is by observing and being subject to free market prices, profits and losses. These are the only information and forces that can enable investors to allocate scarce means and labor to “when” consumers are willing to consume the outputs. Sure, inflation that increases investment beyond the rate of voluntary savings can enable consumers to buy and consume more than what their voluntary savings are physically making possible. But this is a short term phenomenon only. At some point, the real capital requirements will be learned as insufficient, and that is why we have credit crunches, deflation and recessions. It is not because the central bank refused to accelerate inflation and prolong the correction until the currency collapses. Central bankers desire control. This is why we see an almost perfect correlation between central banks abstaining from accelerating inflation, I.e. “tightening”, and recessions. It is not because of tight money that we see recessions. Tight money just makes us see them sooner rather than later.

    Market monetarists are almost entirely ignorant of the extremely important concept of economic calculation. There is little to no understanding of the transition mechanism of inflation, nor of the price system, nor of market processes. This ignorance is attempted to be covered up with EMH mantras, and platitudes of markets know best, but I know better. I know because there is zero consideration given to the costs of “optimal rule” inflation. There are only considerations given to the costs of deflation.

  8. Gravatar of Adam Platt Adam Platt
    1. December 2014 at 09:07

    MajorFreedom,

    I suppose that a Gold Standard, which would have dictated utterly massive deflation from 2008-2011, would have been a good idea in your opinion? Your use of the term “socialist money” (funny, my money hasn’t expressed any radical political opinions lately) shows that you’re thinking in purely ideological terms rather than looking at facts and data. But I think that anybody that reads your ramblings already understands that.

  9. Gravatar of David Pinto David Pinto
    1. December 2014 at 11:23

    My favorite bit of Monty Python economics is from the Dennis Moore sketch.

    Male Peasant What you got for us today then.
    Moore Well I’ve managed to find you four very nice silver spoons Mr Jenkins.
    Male Peasant (snatching them rudely) Who do you think you are giving us poor this rubbish?
    Female Peasant Bloody silver. Won’t have it in the house. (throws it away) And those candlesticks you got us last week were only sixteen carat.
    Male Peasant Yes, why don’t you go out and steal something nice like some Venetian silver.
    Female Peasant Or a Velasquez for the outside loo.
    Moore Oh all right. (turns purposefully)
    Usual montage of Dennis Moore riding plus song.
    Song Dennis Moore, Dennis Moore
    Riding through the land
    Dennis Moore, Dennis Moore
    Without a merry band
    He steals from the poor and gives to the rich
    Stupid bitch.
    Dennis Moore reins to sudden halt and looks over to camera.
    Moore What did you sing?
    Singers (speaking) We sang… he steals from the poor and gives to the rich.
    Moore Wait a tic … blimey, this redistribution of wealth is trickier than I thought.

  10. Gravatar of Dawson Dawson
    1. December 2014 at 12:22

    is it important for the US Federales to keep the price of credit low as can b while oil prices r low, so that marginal producers (shale, Nigeria, Venezuela, probly more) can turn over debt and sell at a nominal price that’s a bit highr?

    is oil just like any commodity where gov interference in price discovery may b inappropriate?

  11. Gravatar of Steven Kopits Steven Kopits
    1. December 2014 at 13:56

    Scott –

    “Regarding your search for “concrete steps,” didn’t the ECB do much less QE than the Fed?”

    Yes, but the Fed itself estimates the impact from QE2, Twist and QE3, including signaling, to be minimal.

    There is a major difference between the US and Europe. The US was increasing oil production dramatically after mid-year 2011, right in the jaws of an oil shock.

    As we know, oil consumption correlates with oil production most of the time. Oil producers get to consume more oil. And US oil consumption growth (or reduced decline, as the case may be) was more favorable than that of either Europe or Japan.

    The correlation (R2) between GDP growth and oil consumption
    from 2005 to 2013 is 0.95. By way of comparison, for deficit growth and GDP it’s only 0.11 (and carrying the wrong sign) from 2007, the start of the recession, through 2013.

    http://www.prienga.com/blog/2014/11/28/deficit-spending-and-gdp-growth

    If my model is right, the US should have a very strong 2015, with Europe recovering unexpectedly, and the PIGS having a remarkably good year, at least in terms of GDP growth. So let’s see how it plays out.

  12. Gravatar of Steven Kopits Steven Kopits
    1. December 2014 at 13:57

    Here’s a more pertinent question: Where’s Sadowski? I haven’t seen sign of him in months.

  13. Gravatar of Steven Kopits Steven Kopits
    1. December 2014 at 14:00

    As for Europe: I agree, they have more than one real problem.

    That’s why we need an FAA. Let’s get the incentives aligned. That’s the very first step towards solving problems.

  14. Gravatar of TravisV TravisV
    1. December 2014 at 14:52

    Great stuff from Prof. Sumner:

    Reason Magazine: Whatever Happened to Inflation?

    http://reason.com/archives/2014/11/30/whatever-happened-to-inflation/3

  15. Gravatar of Major.Freedom Major.Freedom
    1. December 2014 at 15:28

    Adam Platt:

    “I suppose that a Gold Standard, which would have dictated utterly massive deflation from 2008-2011, would have been a good idea in your opinion?”

    A 100% reserve gold standard up to 2008 would have prevented the undue monetary expansion that caused the massive deflationary credit crunch 2008-2011.

    If you want to compare two monetary orders, you don’t first assume a fiat inflationary order for years on end and then demand a gold standard to clean up the mess and complain that the medicine tastes really bad. You have to also ask if a gold standard would have allowed for the unsustainable boom beforehand as well.

    But since we have lived through a fiat money standard, then we would of course be compelled to shift money from paper to gold. That means we have to be extremely careful and come up with as seamless a transition as possible. To that end, gold bugs have a plan, and it would be based on gradualism.

    I myself do not advocate for a government imposed gold standard. I advocate for competing currencies in the market. My idea is for transitioning to a free market in money. Remove the direct and indirect restrictions against competition. Allow individuals to opt out, and for those who like toilet paper, allow them to continue to use that.

    Governments forcing an immediate gold standard on a population that has for generations lived and died in an inflationary world, where old habits of thought are extremely challenging to change, and where the great bulk of the real economy is intertemporally dependent on inflation, not in the sense of aggregate demand but in the sense of the transition mechanism of inflation, would lead to a much needed correction for sure, but it would be highly costly on those whose jobs and investments are highly dependent on inflation. In order for most people to be intellectually and emotionally equipped for this, we would need to first overhaul the entire economics establishment.

    I am primarily a person of ideas, more so than laws. I am pro free market, but this does not mean that I think any population would instantly be able to handle a sudden transition to a free market. Philosophy is the most important. It is with philosophical enlightenment that social and legal affairs are able to best be handled. There are a lot of stupid dimwits out there, thanks in large part to the government taking significant control over “educating” the masses. And the central banks have taken significant control over economic science, which means there are thousands of idiot economists who are paid to not learn how socialist money is an economy killer, which of course leads to idiot graduates who then teach journalists, politicians, and future students.

    Ideas are what have to be improved first. Then when the transition is made, people will more fully understand why old job opportunities disappeared and why new ones arose. They would know it isn’t because of arbitrary greedy businessmen or terr’rsts taken our jerbs. It is because they have lived in a society warped by socialist violence, in all of its forms, direct and indirect.

    You don’t see me with a militia group outside the Fed demanding they close their doors, because that would be like sending the sheep to the next wolf who exploits based on philosophical ignorance.

    “Your use of the term “socialist money” (funny, my money hasn’t expressed any radical political opinions lately) shows that you’re thinking in purely ideological terms rather than looking at facts and data. But I think that anybody that reads your ramblings already understands that.”

    That we have socialist money IS a fact. It IS “data”.

    Everyone thinks in terms of ideology. An ideology is just a set of ideas. Everyone has “a” set of ideas, hence everyone thinks in accordance with “an” ideology.

    You are thinking from an ideology. Your ideology is that I ought to regard as sacred and holy the technocratic social engineering by men I have never met, sitting in ivory towers guarded by its own army, and I am to revere it as a force for social good, of social progress. You monetary socialist ideologues try to evade coming face to face with your ideology by adopting a form of apathetic fatalism in your discourse with your intellectual opponents. It turns into “Well, you may not like the central bank, but for now it’s here and we have to deal with it”. Any radical communist or fascist can promote their ideology that way, and trick many people into believing they’re really just trying to make the best of a bad situation.

    I know better. You are a radical, extreme ideologue. You just don’t want to, or you are unable to understand how to, admit it. Every anti-gold standard advocate is an ideologue. Every promoter of “better socialist rules” is an ideologue. Every believer of “some government intervention is needed/beneficial” is an ideologue.

    Please don’t lie and tell me that there is some sort of definition of ideologue that includes free market advocates, but for some reason excludes government intervention advocates. Don’t piss on me and tell me it’s raining.

  16. Gravatar of ssumner ssumner
    1. December 2014 at 17:45

    Steven, You said:

    “Yes, but the Fed itself estimates the impact from QE2, Twist and QE3, including signaling, to be minimal.”

    Isn’t the Fed the same institution that denies it implemented a tight money policy in 2008? If so, why should we take anything they say seriously? Money was tight in 2008 by almost any conceivable measure. I’ve never seen an argument that money was easy in 2008 that could even pass the laugh test. And yet that’s what the Fed seems to believe.

    Again, it’s a mistake to think in terms of concrete steps, you need to consider the monetary regime, the overall strategy. What is their target path for inflation, NGDP, etc, and what will they do if they miss? These are the important questions. But you asked for concrete steps, and I gave them to you. Then after asking for concrete steps, and after I provided them, you told me they don’t matter very much. That’s what I’ve been saying for years.

    Fracking is far too small to affect the US GDP to any significant extent. Certainly it can’t explain why unemployment rose in Europe while it fell in the US.

  17. Gravatar of Ray Lopez Ray Lopez
    1. December 2014 at 21:55

    Off topic, but I see that’s allowed (viz, Major Freedom), the blogsphere is in an uproar because Brad DeLong has adopted Scott’s targeting NGDP with his magic wand! Pixie dust and magic wand, an unbeatable combination! See more here: http://delong.typepad.com/sdj/2014/11/2014-12-04-waving-a-magic-wand.html#comment-6a00e551f08003883401b8d09e67a3970c

  18. Gravatar of Ray Lopez Ray Lopez
    1. December 2014 at 22:06

    @Major Freedom – if you read this, check out the Kindle book “War and Gold” by goldbug, Oxford scholar and UK parliamentarian Kwasi Kwarteng, it’s quite good.

  19. Gravatar of J.V. Dubois J.V. Dubois
    2. December 2014 at 01:38

    Ray: That was a very good catch and reason for mad props to DeLong. First it was Kocherlakota turning his view 180 degrees [maybe] after serious and well thought bashing on his advisors by Nick Rowe and now this. There may yet yet be a hope for this world [to have a real discussion where good arguments prevail].

  20. Gravatar of Philippe Philippe
    2. December 2014 at 03:59

    Adam,

    don’t expect reasonable or logical responses from ‘major freedom’. Possibly one of the most deluded and irrational individuals I have encountered on economics blogs.

  21. Gravatar of Steven Kopits Steven Kopits
    2. December 2014 at 05:43

    Scott –

    I’m not sure what you’re saying. I thought you were arguing that the Fed’s comparatively loose policy explains the difference between Europe and the US after mid-2011. But now you’re arguing that it wasn’t loose? Or that is was loose but the Fed doesn’t understand that?

    In any event, you seem to be arguing that the Fed blew their analysis of the efficacy of QE2+. OK. Let’s here the critique in its specifics. Here’s the Fed’s analysis:
    http://www.frbsf.org/economic-research/publications/economic-letter/2013/august/large-scale-asset-purchase-stimulus-interest-rate/

  22. Gravatar of Steven Kopits Steven Kopits
    2. December 2014 at 06:01

    As for the role of oil.

    In any ecology, we would expect the population and activity to expand until a binding constraint is reached. It could be food, land, water, or, in the case of deer, the population of automobiles.

    I think we would expect such constraints to also apply to human populations and economic activity. It will grow until a binding constraint is encountered. It could be land, labor, capital, human ingenuity–or it could be energy. It will not always be the same constraint. Id’ not that we’re just applying the lessons of the very first lecture of macro: The premise of economics is that resources are scarce and human desires unlimited. You with me so far?

    Now, how would we identify a binding constraint? What characteristics would it have? How would the economy as a whole appear if it had encountered a binding constraint like energy? What would you expect to see, for example, in terms

    – price
    – price acceleration
    – investment
    – levels of activity
    – employment
    – wages
    – supply response to investment, and for

    Performance of the sectors other than the binding constraint, in terms of
    – Unemployment
    – Wages
    – Investment

    How would terms of trade look between producers and consumers of the constrained commodity? Who would have better GDP growth? Deficits? Would we expect to see the volume of the constrained commodity consumed to fall? What kind of correlation would we expect between a constrained commodity and GDP growth? At the constrained point, what would we expect the price growth of the commodity to be?

    I can think of six or seven features I’d expect to see. But I’ll leave the topic for mulling for now.

  23. Gravatar of Adam Platt Adam Platt
    2. December 2014 at 06:06

    Thanks Philippe,

    I thought I was just dealing with typical Austrian misunderstandings of what currency is, but it appears his issues go far deeper. More than I can address on an economics blog, haha.

  24. Gravatar of Kenneth Duda Kenneth Duda
    2. December 2014 at 07:39

    Scott, off topic, have you noticed Brad Delong’s questions to you?

    http://equitablegrowth.org/2014/12/01/cato-institutes-brink-lindsey-running-economic-growth-conference-wekeend-honest-broker-week-november-28-2014/

    > Why has nominal GDP targeting not already swept the
    > economics community? It really ought to have.

    How’s this for an answer: “because you and other prominent economists aren’t pushing it hard enough.”

    Brad’s second question is a weird version of the efficient market hypothesis, that if there were a better monetary policy, someone else would have already picked it up off the sidewalk:

    > leads immediately to the conclusion that anybody who claims to have
    > uncovered the Philosopher’s Stone here is a madman. How can you reassure
    > me that I (and you) are not mad?

    The answer is (1) there is no competitive market for monetary policies, which slows progress, and (2) even where there is a highly competitive market, there are many many improvements over time; do you have any idea how many different techniques have been used over the last 40 years to print transistors on silicon?, and (3) no one is claiming sorcerer’s stone status for NGDPLT, only that it would be a dramatic improvement over today’s ZLB-impaired muddle.

    -Ken

    Kenneth Duda
    Menlo Park, CA

  25. Gravatar of ssumner ssumner
    2. December 2014 at 09:03

    Everyone, I forgot to mention that Ben’s first comment is a good one–the Germans were far less obsessed with inflation a few decades back.

    Ray, He’s actually favored it for quite some time. I have a reply I’ll post later at Econlog.

    Steven, Policy was expansionary relative to Europe, but certainly not in an absolute sense.

    I don’t believe economies need more oil to grow.

    Ken, Those are good points. I actually wrote a response this morning, but it won’t be posted until later in the day (over at Econlog.) See what you think. In some ways I like your response better–maybe I’ll do a second post later.

  26. Gravatar of Don Geddis Don Geddis
    2. December 2014 at 09:53

    @MF/Geoff: “I am primarily a person of [bad] ideas … There are a lot of stupid dimwits out there [like me].

    Once again, I agree with you wholeheartedly. I may not have understood all of your rant, but these parts came through loud and clear.

  27. Gravatar of TravisV TravisV
    2. December 2014 at 11:03

    Prof. Sumner,

    Is “The Midas Curse” actually going to be published in 2015? See below:

    http://www.cato.org/publications/cato-online-forum/more-bang-buck-surprisingly-cost-effective-way-boost-growth

  28. Gravatar of Steven Kopits Steven Kopits
    2. December 2014 at 11:30

    If you believe economies don’t need more oil to grow, Scott, then that puts you in the bear camp, with an expectation of low oil prices for some time. It’s the equivalent of calling a recession in Norway or the bankruptcy of, say, SeaDrill.

    Here’s today’s post on the issue. Lots of feedback from industry: http://www.prienga.com/blog/2014/12/2/will-we-see-100-oil-again

  29. Gravatar of Dawson Dawson
    2. December 2014 at 13:07

    could falling oil prices exacerbate deflationary trends and complicate payment of obligations etched in nominal $? seems like there’s a lot of debt out here

    seems that more dakka is in order from the CBs

  30. Gravatar of Adam Platt Adam Platt
    2. December 2014 at 13:19

    Dawson,

    There’s an important difference between real price declines based on supply (such as oil prices right now) and monetary deflation. The real question is, why is the Fed tightening (by ending QE3 and bringing interest rate increase expectations forward) when the overwhelming likelihood seems to be that it will undershoot its own inflation target and nominal GDP is still way off its pre-recession trajectory?

  31. Gravatar of ssumner ssumner
    2. December 2014 at 13:28

    Travis, That’s up to Independent Institute, I finished the book a long time ago.

    Steven, No, I’m not in the bear camp, I believe in the EMH and hence have no opinion on oil prices.

    Dawson, Deflation does not make it harder to repay debt, falling NGDP does.

  32. Gravatar of TravisV TravisV
    2. December 2014 at 21:47

    Ben Carlson, a smart guy, needs enlightenment!

    “What Caused the Great Depresssion?”

    http://awealthofcommonsense.com/caused-great-depresssion

  33. Gravatar of W. Peden W. Peden
    3. December 2014 at 03:01

    Keynesianism loses yet another convert-

    “But shadow chancellor Ed Balls criticised Mr Osborne for failing to “balance the books”.”

    http://www.bbc.co.uk/news/uk-politics-30291460

    I suppose that marks the end of the “Keynesian Resurgence” as a political phenomenon, and since it was never a theoretical phenomenon…

  34. Gravatar of W. Peden W. Peden
    3. December 2014 at 03:02

    “Labour said the chancellor had failed to keep his 2010 general election promise to clear the deficit.”

    Astonishing, isn’t it?

  35. Gravatar of W. Peden W. Peden
    3. December 2014 at 03:08

    Although, to be fair to Labour, they’re not the only ones making such noise-

    “Plaid Cymru’s Treasury spokesperson, Jonathan Edwards, has criticised the UK government’s “austerity experiment” which he said had led to “abject failure to balance the books”.”

    The Coalition has failed to balance the books, because it tried to raise taxes and cut spending. This makes the “Keynesian stimulus plus 2% inflation target” logic of Ed Balls seem like genius.

  36. Gravatar of Philippe Philippe
    3. December 2014 at 05:02

    W. Peden, low growth (or recession) will make it difficult to balance the budget, due to reduced tax revenues. The argument is that ‘austerity’ policies constrain or reduce growth. As such it’s not illogical to argue that the government’s austerity policies led to a failure to balance the books.

  37. Gravatar of W. Peden W. Peden
    3. December 2014 at 05:10

    Philippe,

    Constrain or reduce growth by what channel? And what do you mean by ‘austerity’? In a UK context, this means reducing the size of the budget deficit.

  38. Gravatar of W. Peden W. Peden
    3. December 2014 at 05:12

    (Meaning: you’d have a point if this meant an AS channel, but that requires evidence that reducing the budget deficit in the UK context has resulted in a shift of the LRAS curve to the left.)

  39. Gravatar of W. Peden W. Peden
    3. December 2014 at 05:14

    Of course, you COULD try to argue that the fiscal multipliers are so large that an increase in spending would result in a fall in the deficit, but while not contradictory this is unproven and unlikely given studies of fiscal multipliers.

  40. Gravatar of Philippe Philippe
    3. December 2014 at 05:55

    “Constrain or reduce growth by what channel?” The various channels through which fiscal policy can affect the economy.

    “what do you mean by ‘austerity’? In a UK context, this means reducing the size of the budget deficit.”

    The aim of austerity policies is to reduce the budget deficit, but they might not work as planned due to the policies’ effects on the economy.

  41. Gravatar of W. Peden W. Peden
    3. December 2014 at 06:03

    “The various channels through which fiscal policy can affect the economy.”

    That’s not tremendously specific.

    “The aim of austerity policies is to reduce the budget deficit, but they might not work as planned due to the policies’ effects on the economy.”

    As I said, it’s an unproven big multiplier assumption, and one made without reference to things like the monetary policy reaction function.

    In fact, of course, the reason for Labour abandoning support of Keynesianism is that UK unemployment has fallen to its pre-crisis level, inflation is low (and so there are no official constraints on e.g. more QE) and the gap between wages and inflation is finally starting to close. The one thing they can “get” the government on is the size of the deficit, and so Keynes is being dropped rather unceremoniously in favour of “balance the books!” rhetoric. A rather sordid end to the Keynesian resurgence, if you ask me.

  42. Gravatar of Philippe Philippe
    3. December 2014 at 06:16

    “you COULD try to argue that the fiscal multipliers are so large that an increase in spending would result in a fall in the deficit”

    the deficit should shrink automatically as growth increases, due to increased tax revenues and reduced spending on things such as unemployment benefits. Also, the government can reduce discretionary spending in response to increases in private sector spending as the economy improves. So what you might see is a temporary increase in the deficit followed by a reduction as growth picks up.

  43. Gravatar of W. Peden W. Peden
    3. December 2014 at 06:29

    Philippe,

    (1) “the deficit should shrink automatically as growth increases, due to increased tax revenues and reduced spending on things such as unemployment benefits”

    Not strictly true, since you don’t make a structural/cyclical deficit distinction. And it will only increase if the effect on growth is greater than the reduction in tax revenues and/or increase in spending.

    (2) “Also, the government can reduce discretionary spending in response to increases in private sector spending as the economy improves.”

    Which was part of the Coalition’s plan. No-one is disputing that.

    (3) “So what you might see is a temporary increase in the deficit followed by a reduction as growth picks up.”

    Maybe, but under Labour’s old spending plans, we were supposed to still be at the “increase in the deficit” stage right now. So what’s their objection to “not balancing the books”?

  44. Gravatar of Charlie Jamieson Charlie Jamieson
    3. December 2014 at 07:06

    We should now consider seeing ‘fiscal policy’ as the same as ‘monetary policy’ in that deficit spending must be financed going forward by the central bank.
    Traditionally we see deficit spending as being used to boost the economy, and then we balance the budget when times are good. But now we are in a structure in which deficit spending is needed to support non-working people (primarily retired, but also disabled and those unable to work.). So deficit spending cannot goose the economy, only maintain the status quo. For a time.

  45. Gravatar of TravisV TravisV
    3. December 2014 at 07:17

    Christopher Mahoney: “Prepare For The Coming Economic Boom”

    http://seekingalpha.com/article/2722555-prepare-for-the-coming-economic-boom

  46. Gravatar of Adam Platt Adam Platt
    3. December 2014 at 07:31

    http://www.marketwatch.com/story/if-deflation-is-so-terrible-why-are-spain-greece-growing-2014-12-03?page=2

    This article full of so many fallacies my head is going to ‘splode. Apparently this writer has never heard of Nominal GDP, wage stickyness, mass unemployment, or the fact that Spain and Greece are growing from a dramatically lowered base. He also misunderstands the difference between deflation and price declines due to supply.

  47. Gravatar of Philippe Philippe
    3. December 2014 at 07:39

    “So what’s their objection to “not balancing the books”?”

    The coalition claimed that their policies would balance the budget and generate growth, and they accused Labour of proposing irresponsible policies. But the coalition have failed to meet their own targets. The argument is that the coalition’s policies don’t work, at least not as claimed, and that the coalition made claims or promises they couldn’t keep.

  48. Gravatar of Charlie Jamieson Charlie Jamieson
    3. December 2014 at 07:45

    The Market Watch article is a result of confusion defining deflation. I think one side is defining it as falling prices and the other as the contraction of the money supply.

  49. Gravatar of Adam Platt Adam Platt
    3. December 2014 at 07:52

    Charlie,

    I don’t think it’s just a problem of definition. I think he honestly doesn’t understand that different reasons for declining prices have very different implications. The entire article demonstrates a series of extremely simplistic fallacies. The most glaring is looking at short-term gdp growth and ignoring the colossal long-term decline, as well as mass unemployment.

  50. Gravatar of SG SG
    3. December 2014 at 08:17

    From a NYT interview with Charles Evans:

    “I think that 2 percent is a pretty well-anchored longer-term expectation. When you look at indicators of what financial participants are actually thinking, it’s very difficult to come away with anything other than 2 percent as the objective and that they expect that we’re going to actually achieve that. But having said that, I am nervous about the fact that we’ve continued to underrun our inflation objective ever since we announced it in 2012 and going back before that. Six years is a long time to underrun. I think we have to get up to 2 percent. I think we have to average 2 percent over any future period of time. If it’s symmetric, you should be spending time above 2 as well as below 2, and close to 2 is what you’d like to do.”

    http://www.nytimes.com/2014/12/04/upshot/q-and-a-with-charles-evans-of-the-fed-low-inflation-is-primary-focus-.html?mabReward=RI%3A5&action=click&pgtype=Homepage&region=CColumn&module=Recommendation&src=rechp&WT.nav=RecEngine&abt=0002&abg=1

    God bless America!

  51. Gravatar of Brian Donohue Brian Donohue
    3. December 2014 at 10:39

    SG, outstanding link.

  52. Gravatar of Scott Sumner Scott Sumner
    3. December 2014 at 14:53

    Philippe, I long for the days when liberals would mock Laffer curve claims. Now they’ve taken over the Laffer curve argument, and made it their own.

    SG, Good, but NGDP would be even better.

  53. Gravatar of Philippe Philippe
    3. December 2014 at 17:59

    I didn’t present a Laffer curve argument.

  54. Gravatar of ssumner ssumner
    3. December 2014 at 18:07

    Philippe, I thought that you were claiming that tax increases slowed growth, which made the deficit larger.

  55. Gravatar of dtoh dtoh
    3. December 2014 at 22:18

    Scott and Phillipe,

    Just for the record, asymmetry of the returns on capital hugely affect the shape of the Laffer curver.

  56. Gravatar of Michael Byrnes Michael Byrnes
    4. December 2014 at 03:47

    Tim Duy is concerned that the Fed will misinterpret low long term rates

    http://economistsview.typepad.com/timduy/2014/12/ahead-of-the-november-employment-report.html

  57. Gravatar of Adam Platt Adam Platt
    4. December 2014 at 07:35

    The Wall Street Journal’s headline: “No New ECB Stimulus, Yet: President Mario Draghi said the governing council will decide early next year whether its current policies are sufficient to raise inflation toward its target, and noted the decline in oil prices may make that objective more difficult”

    Three fallacies in one sentence, amazing! 1. We don’t want “Stimulus”, we want the ECB to at least do what’s necessary stick to its target, which is wrong-headed and contractionary to begin with. 2. “whether its current policies are sufficient”, assumes that the current policy is expansionary and the only question is whether its sufficint, when in fact the current policy is contractionary. 3. “decline in oil prices may make that objective more difficult”. This fallacy has become so widespread that it seems to be simply accepted as fact in most mainstream business/economics media.

  58. Gravatar of TravisV TravisV
    4. December 2014 at 08:49

    Wow!

    “One of the Most Famous Rules of Investing Might Be Totally Wrong”

    http://www.businessweek.com/articles/2014-12-03/the-real-stock-market-risk-is-the-one-you-cant-see

  59. Gravatar of TravisV TravisV
    4. December 2014 at 09:24

    Jared Bernstein: “Warren v. Weiss: Both Sides Have a Point”

    http://jaredbernsteinblog.com/warren-v-weiss-both-sides-have-a-point

  60. Gravatar of Philippe Philippe
    5. December 2014 at 07:21

    Scott,

    the point I made is that tightening fiscal policy in the midst of a recession or weak economy can potentially be counterproductive as it can constrain or reduce growth and therefore reduce tax revenues. The argument that fiscal policy should be looser in a weak economy and tighter in a strong economy is pretty common. The Laffer curve argument, on the other hand, is about the potential disincentive effects of redistributive tax policies.

  61. Gravatar of ssumner ssumner
    6. December 2014 at 07:44

    Philippe, You said:

    “the point I made is that tightening fiscal policy in the midst of a recession or weak economy can potentially be counterproductive as it can constrain or reduce growth and therefore reduce tax revenues.”

    That’s exactly my point. Back in the 1990s Keynesians called that sort of argument “voodoo economics.” It was ridiculed. Now they’ve adopted it as their own.

    The standard Keynesian model has no provisions for austerity reducing tax revenues. The model has recently been “adjusted” to fit the facts. Yet Keynesians seem to deny that they’ve changed their mind about the potential for austerity to reduce tax revenues (an argument originally associated with Laffer.)

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