Now there are two. First a quick reply to Mike Kimel.
Here are his first complaints:
This by itself has a bunch of errors.
1. I agree that adjusting for inflation is un-necessary. That doesn’t mean you don’t want to do it. I picked the first measure I came upon that looked reasonable. Inflation adjusting in a single currency and PPP generally produce the same results. Apparently they aren’t doing it for Sweden to US comparisons for the years he picked. Very odd.
2. I am not Angry Bear. That’s the name of the blog. Several people post regularly at Angry Bear. Rdan, the site owner, is kind enough to put up my posts when I write one. But calling me Angry Bear is like me calling The MoneyIllusion.
3. To which Ivory Tower would he suggest I return? Last I checked, Sumner is the one whose bio says something about spending the last 27 years teaching at Bentley. Nothing wrong with that, of course. And for what its worth, I did the adjunct for five years too, which is the closest I’ve come to being an Ivory Tower guy. But I’ve been in the private sector – working for a Big 4 firm, two Fortune 500 companies, and as a consultant under my own shingle – since leaving grad school. So please, spare me.
1. No, constant dollar adjustments do nothing to correct for PPP, or changes in PPP over time. Indeed the only reason you need PPP adjustments in the first place is because real exchange rates change over time. The real value of the Swedish krona seems to have appreciated since 1980.
2. Mike’s right about that, I wasn’t familiar with that website and didn’t notice the multiple authors.
3. He’s half right there. The ivory tower comment was meant to be a lame joke. Sorry if I sounded arrogant. He’s right, I am at little known Bentley, not Princeton like Mr. Krugman. I didn’t think he’d mind as he made the following rather arrogant comment in his first post:
Without looking at the countries, its obvious to me, a non-ivory tower guy, that the data on Sweden on wrong. He shows Sweden’s GDP per capita as a % of US’ GDP per capita dropping from 1980 to 2008 from .868 to .794.
Wouldn’t someone normally ask which series I used, before suggesting to his readers that my data was false? Kimel continues:
Argentina was not doing well in the early to mid-90s. That was a, well, a Money Illusion. See, they sold off all the state owned enterprises (and the strangely enjoyable to look at water building ) and then lived high on the hog off the money.
I disagree. The question Kimel raises is whether the growth in output was driven by supply-side factors or demand-side factors. Wikipedia claims that RGDP growth averaged nearly 6% between 1991 and 1998. That’s pretty high and pretty sustained for a demand shock. But you don’t need to trust me, just look at the inflation numbers. Demand shocks raise inflation and supply shocks reduce inflation. Between 1991 and 1998 Argentina’s inflation rate fell from 171% to 0.9%. I think we can safely assume it was supply-side driven growth. If they had switched from their currency board to inflation targeting in 1998, their subsequent history would be much better. But of course countries only switch away from successful policies when they run into trouble. Instead the subsequent deflation and depression (when the dollar appreciated in real terms) opened to door to the left.
“I have no idea why a country with statist policies in the 1980s and 2000s and a deflationary monetary policy in the late 1990s, would be expected to do well.”
And yet, he bats not an eye in his first post when he points out that Japan and the US grew about the same. But Japan is probably more statist (think the Ministries) now than privatized Argentina, and the trend away from statism was certainly greater in Argentina during the 1980 to 2008 period than in Japan. As to deflationary monetary policy – exactly how long has Japan’s interest been about zero? So shouldn’t Japan count as a loss in Sumner’s book?
The last point’s easiest. Near zero rates don’t represent easy money, but rather the effects of deflationary monetary policies (the same occurred in the US during the 1930s.) In one sense Kimels’ right, deflationary policies shouldn’t have a long run impact on growth. But because he is so determined to show Argentina’s a good example of neoliberalism, he overlooks his strongest argument, which is that Argentina’s recently grown rapidly under statist policies. Let me respond to the argument he should have made. I see that growth as analogous to the recovery under FDR. Impressive when compared to the previous severe deflation, but nowhere near as rapid as it should be. The new government has done things like confiscate private pensions, so it is very negative in the long run in terms of the incentive to save and invest. But they also did something good, they devalued to peso. This led a rapid recovery, as you’d expect after a severe deflation. Indeed they went too far in devaluation, and saw excessive inflation (which they have tried, but failed, to cover up). This is the demand-side growth that Kimel (inaccurately) claims occurred in the 1990s.
I also think Kimel misunderstands my argument. I am not claiming that bad economic models grow more slowly than the US, I made a much more complicated argument:
Normally poorer countries can growth faster than richer countries, by adopting state of the art technology. That’s why China grows much faster than the US would if we adopted the same policies. Much of Japan’s growth until 1990 reflected this catch-up process. I don’t think this view is controversial. But if the country has a less productive economic model than the US, it will level off at a point below the US GDP per capita. Most countries have done this, indeed as Reihan Salam points out they have slightly regressed since 1980 (or 1990 for Japan.) That’s why I thought it interesting to look at Britain. Here is a country that moved to a much more efficient economic model, and thus was able to catch up somewhat during a period that most other developed countries stopped catching up to the US.
The surveys I’ve seen suggest that Argentina is much more statist than Japan. Heritage has Japan at 19, Argentina at 135. The Fraser Institute has Japan at 28 and Argentina at 105, so either way it’s pretty hard to claim Argentina is the freer economy. I admit these are highly subjective, but those are pretty big gaps, and they spell out all the criteria they use for each category if you care to check. BTW, the Fraser data is 3 years older, which may explain why they have Argentina slightly higher. Things are getting worse down there.
But that’s trivial. A bigger problem is that Argentina’s deflationary monetary policy could be summed up in one word: dollarization. The currency was pegged to the dollar, and the rest was a collection of details (some of which made life miserable for the average person in Argentina).
Now, regardless of the reasons given, the effect of a peg is the same. And it turns out that among the success stories on Sumner’s list was Hong Kong, which has been operating with a similar currency peg for a lot longer than Argentina ever did. (BTW, the Hong Kong government had a cool little study looking at their peg and Argentina’s here.)
I agree with Kimel that the peg hurt Argentina, and agree that HK has done better with the same policy. But those two countries are about as different as any two countries can be. Yet even so, both suffered several bouts of deflation in the late 1990s and early 2000s, but of course HK’s economy (and labor markets) are vastly more flexible than Argentina’s. Even so, HK suffered high unemployment for a while, but toughed it out rather than shifting to a leftist policy. When the real exchange rate swung back in their favor, they boomed again. I don’t see what the problem is here. But this is where Kimel’s point about the long term effects of monetary policy (and AD) is correct. HK’s growth has not been severely impacted in the long term by the deflationary recessions that have occurred a couple times in recent decades (the same was true of the US in the late 19th century, another flexible economy.)
I’m not all that familiar with Singapore, but I do know the Singaporean central bank is kind of an odd duck in that they use monetary policy to regulate the exchange rate (which is a fancy way of saying they peg the currency, but move the peg). Which is another way of saying that on the big issue, they follow the same monetary policy that Sumner thinks is a no-no with Argentina. And of course, if you had to pick which of two countries, Argentina which sold off its state owned assets, and Singapore which didn’t, liberalized more in the last three decades its a no-brainer. Singapore, complete with its canings, has a more functional rule-of-law, but in his post, Sumner talked about how ” neoliberal reforms after 1980 helped growth.” Argentina had ‘em. I don’t know about Singapore. But he has Singapore as a success story, and Argentina not.
Kimel seems confused here. Singapore has an adjustable peg, which their government actually adjusts to protect the macro economy. Argentina had a currency board that was quite rigid. The systems are totally different. As for Singapore being more statist than Argentina, perhaps I should refer to the “giggle test” that Kimel mentioned in his last post. Singapore in #2 in the world in the Heritage rankings, I’d say that’s slightly freer than Argentina’s #135 ranking. Again, the rankings might be off, but that far off? (Fraser also has Singapore #2.)
Moving on (this is getting to be a pain in the neck) we have Chile, the other Latin American country on his list… and like Hong Kong and Singapore, also a success story. Now, both Argentina and Chile chucked their military overlords between 1980 and 2008, but the Chicago Boys like to point out they were doing their thing during the Pinochet years too. Put another way, whatever liberalization happened in Chile post 1980 (off the top of my head, I’m thinking mostly a big change to mining law in the 90s… but note that CODELCO, the state owned copper firm, still runs the big show) pales in comparison with Argentina selling off its state owned assets during the same period.
Let me just say this. The “top of Kimel’s head” doesn’t seem to contain much information on what is universally viewed as a very extensive set of neoliberal reforms in Chile. Fraser has them at #5, and Heritage puts them at #10.
Time for my “high-hanging fruit?”
And then there is another bear, this one named Spencer:
The objective of the Sumner post was to disagree with Paul Krugman and others about a break in trend in US economic growth because of the Reagan revolution. But rather than look directly at the US data he undertook a complex, convoluted approach that indirectly tried to demonstrate that there had been a break in US growth because of the reforms around 1980.
My question is why go to such an indirect methodology? Why not just look directly at the very good US data? So that is what I have done.
If that were my argument, then I agree the data he suggests would be much better. But it isn’t my argument. I agree that growth slowed in the US after 1980 (or perhaps 1973.) I did a whole post on this a few days ago. Indeed I think it slowed even a bit more than the US government admits, as I think they have puffed up growth data in recent decades with statistical tricks associated with adjusting for quality changes in areas like computer technology. So I think the Reagan story is even worse than Spencer suggests. My point is that growth slowed almost everywhere. I also claimed that in the less reformed economies it slowed more sharply, and the more reformed economies it slowed less sharply. There are several issues that need to be weighed in any comparison:
1. How free is the country’s economy?
2. How did that freedom change between 1980 and 2008?
3. What was the initial GDP/person level in 1980?
All have a bearing on the issue. I argued that normally poorer countries might be expected to gain on the US, if they had a similar model. Thus it is somewhat embarrassing that much of Europe, (and since 1990 Japan) are actually falling further behind. I thought comparisons like Britain/France and Chile/Argentina would be “apples with apples” comparisons, or at least as close as we could get.
I’m not going to quibble about his specific points about the long term US growth trends, since I think it is relative growth rates between countries that matter in a world where technological change is uneven. He may be right that the 1920s were merely catch-up to the 1907 peak–after all the economy was structurally similar in both the 1920s and 1907.
While I’m down on Libertarians, what about the recent argument by Bryan Caplan of George Mason University, who blogs at econlog.org. He recently argued that the decade of 1870’s was the peak for Libertarian freedom and economics. Maybe, but I wonder if he is even aware that economic historians label the 1870’s as the “Long Depression”. I find it really amusing that he so proud of what others call a depression — typical Libertarian. Since I am already banned from that web site for pointing out factual problems with their analysis I guess this comment will not make much difference.
This is a common misconception, as many historians confused the terms “deflation” and “depression.” Much of the 1870s was the good kind of deflation (supply-side) that Austrians like George Selgin discuss. I believe there was a depression in 1873, but overall real GDP grew rapidly during the 1870s.
BTW, come to my blog, I don’t ban anyone unless they use very bad language.
I hope I don’t find three angry bears at my doorstep tomorrow morning, I am running out of time!
HT: Marcus, Tom