Bringing market monetarism down under
My trip to Australia started off at a Centre for Independent Studies conference outside of Brisbane. It’s a classical liberal think tank where business people, pundits and policymakers meet to discuss ideas. I presented the MM message and lots of people seemed interested. Francis Fukuyama also spoke there. It was the first time I’ve met him, although I’m a fan of The End of History and Trust.
As of today, it looks like the center-right coalition in Australia is likely to win the election in 10 days, joining similar parties in New Zealand, Canada and Britain. Because America does not current have a center-right party, I don’t expect to see a center-right victory here in the near future.
I was particularly impressed with the talk given by the representative from the New Zealand government (Bill English) but will admit to knowing little about that place, other than that that their people live in Hobbit-style dwellings.
On a more serious note, the people at CIS were excellent, and seemed somehow more “reasonable” than similar groups in the US. I was really impressed with the talk given by Stephen Kirchner. Stephen is sympathetic to many of the ideas espoused by market monetarists, but has a slightly different take on the success of the RBA:
The new market monetarists argue Australia was a poster child for NGDP stabilisation during the financial crisis, but I interpret things differently. Prior to the onset of the financial crisis, inflation was out of control (CPI inflation running at 5%) and nominal GDP growth was running in the double-digits. The financial crisis saved the RBA from having to induce a domestic recession to bring inflation under control. The RBA was most successful when international conditions were doing the work for them.
No wonder they call it the lucky country. I’ve added Stephen’s blog to my blogroll, and recommend that you take a look at it.
Then it was on to Sydney where I almost gave a talk at the RBA. At least I was in the same building, and some RBA people attended. But the talk was actually sponsored by the Economic Society of Australia. (I’d like to thank Zac Gross for inviting me.) I had a very productive conversation afterwards with some of the RBA people, including one who had worked at the Fed and knew a lot about it. I was vigorously challenged by some really smart people, but I came away more convinced then ever that I am on the right track. I’m pretty sure that there are no hidden flaws in my argument, rather that even Ben Bernanke himself would likely defend current policy against my criticism on the basis of arguments that I’ve considered and found non-persuasive. BTW, the RBA’s (dual) mandate is literally carved in stone on the marble wall of their lobby.
I was told that Australia had 20 good years for policymaking, under both parties (in my view it was mostly Labour), but that the current government squandered some of the successes over the past 6 years. Their fiscal stimulus was completely unnecessary, even using Paul Krugman’s criterion (don’t use fiscal stimulus until rates hit zero.) Fortunately for Australia, the current Labour government took office with almost no public debt, and thus the gross debt is still only 30% of GDP. The likely new center-right government has promised a maternity leave benefit that is so absurdly extravagant (up to $75,000) that even the Labour Party is opposed. A bit of “compassionate conservatism” is on the way.
Overall I was very impressed by Australia. The airports seem very convenient (no horrible TSA system, just a few friendly blokes that wave you through.) Returning to American airports I felt I was in a third world country. At Dallas I almost missed my connection despite the fact that there was a 2 hour layover. Australia surely has the highest living standards among all countries with more than 20 million people, perhaps 10 million. It’s third on the Heritage free market list, trailing only Singapore and HK.
It’s nice to see countries with relatively low tax levels do well (Australia, Singapore, Switzerland, etc.) even using the standard criteria of liberalism. It makes me think that many of the problems liberals attribute to America’s low tax ideology (failed areas like Detroit, etc), are actually caused by unrelated public policy mistakes. I saw one blogger recently imply that Singapore was some sort of conservative dystopia because it has “inequality.” This is a country with essentially no slums, excellent public education, great environmental policies, universal health care, etc, etc. But because 17% are millionaires there is more “inequality” than some place where everyone is dirt poor. Liberals used to care about poverty back in the 1960s, the change in emphasis to “inequality” (between the middle class and rich) is really a disgrace.
PS. My first taxi driver said he was from the South Island of New Zealand. So did my second taxi driver. Then I took a bus and started chatting with the driver—yup, the South Island. American taxi drivers usually come from some sort of hellhole in central Asia or Africa, where there is a civil war going on. God help the people of the South Island. (Yes, I know about the earthquake.)
PPS. Back in 2010 I pointed out that the Australian housing “bubble” still hasn’t burst. That’s still true today. Also true in New Zealand, Britain and Canada. America is the outlier; bubbles usually don’t burst over a time frame where bubble predictions would be useful. Yes, prices will eventually fall, as free markets always move up and down. Even markets with no bubbles.
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28. August 2013 at 19:13
Scott, didn’t even know you were in Aus, kicking myself!
Too wrapped up in the local profit reporting season…
I would have loved to hear you talks, glad you enjoyed your time here.
We (Australians) moan a lot about Australia, but I’ve travelled fairly extensively to other first world countries & don’t think any country has a higher median standard of living, when all factors are considered – Tony
28. August 2013 at 19:15
[…] from the Money Illusion, Scott Sumner discussing his recent trip to […]
28. August 2013 at 19:48
I attended Scott’s talk and he was very convincing. I think he even managed (through plenty of generous follow-up discussion) to get some of the sceptical RBA types to see his side of the story. And sorry to rub it in, Tony and fanboys, but Scott even took me out for lunch afterwards!
But Scott, I noticed a lot of blank looks when you mentioned the “old school Monetarist hot potato effect” and indeed it’s not something that I was ever taught. Who’s the best to read on this?
I got onto this blog through Stephen Kirchner’s blog. His posts are typically very succinct and incisive but increasingly rare. Stephen’s twitter account is also worth keeping an eye on: https://twitter.com/insteconomics
28. August 2013 at 20:25
Please come to New Zealand next time you are down under Scott!
28. August 2013 at 20:29
Interesting post.
Boy, Kirchner saying Aussie’s inflation at 5percent was “runaway.” Not a “mite high” or “trending in the wrong direction.” But “runaway.”
I can remember when economists were happy with anything under 5 percent. Somehow the whole gauge has shifted. And with ZLB becoming the guest who stayed and stayed…is this the right attitude anymore?
Sumner says the econ profession consensus is the central bank norm too.
I wonder if it is the other way around…that a central bank fixation on inflation has infected the econ profession? Since central banks have a key role in disseminating and reacting to monetary policy thinking….
Does the Pentagon influence defense thinking, or the other way around? I would say the Pentagon sets the tone….
28. August 2013 at 21:33
Thanks again for coming down under Scott. Your seminar was really well received.
28. August 2013 at 21:38
Damnit. According to this story, “The White House hasn’t been vetting Ms. Yellen”
http://online.wsj.com/article/SB10001424127887324324404579041372610806110.html
28. August 2013 at 22:21
Rajat, would recommend Leland Yeager for discussion of the hot potato effect. Ed Nelson also had a lot to say about it in his work for the BoE’s MPC, including a derivation of NK macro models from quantity theory relations.
28. August 2013 at 22:51
It’s 2:45 am here in Boston, and I see that not too many Americans are commenting on my post yet. When will you people wake up!
Seriously, thanks for the comments and I enjoyed meeting Stephen, Zac, Rajat, and the others on my trip. Now if only I could sleep.
Sorry I missed you Tony.
Nick, I visited the North Island in 1991 and loved it. I will definitely visit the South Island next time.
Ben, The central banks may well be more influential than I first thought.
29. August 2013 at 00:29
This is interesting, Scott. An over the hill Keynesian doesn’t think MM works.
http://johnquiggin.com/2013/08/26/a-note-on-the-ineffectiveness-of-monetary-stimulus/
29. August 2013 at 00:44
Hey, I think it is utopia, not “dysutopia”! They are the ones who are worried about the inequality, and very seriously so.
29. August 2013 at 01:45
Scott
I love being jetlagged. I get up early in the morning and i have an excuse for staying in at night. Use it while you can!
Also, what did you notice about prices in Australia compared to the US? Food, clothes and alcohol seem more expensive in Australia, even after you consider wages. i think rents are also quite high in Australia. Puts the “high” minimum wage in perspective. I’m in the UK now and I’ve noticed that the minimum wage here of £6 something goes nearly as far as Australia’s of $16 something, but your real income is still probably a bit better in Australia. The most expensive country (for tourists) i’ve been to is Sweden. But their wages must be high because their living standards are so high. I’ve heard Norway is even worse.
29. August 2013 at 02:41
Scott,
I’m glad you’ve had such a good time.
“It’s nice to see countries with relatively low tax levels do well (Australia, Singapore, Switzerland, etc.)”
I think Friedman was right to make us look at government spending as a % of GDP as the best crude measure of the cost of government. On that measure, Singapore, Hong Kong and the Republic of China (also known as Taiwan) are leagues ahead of the rest of the developed world at less than 20% and Switzerland & Australia are both doing well at 33%. South Korea is doing a little better than the Swiss and Aussies.
Keynes apparentely said that >25% of national income was too much for government to spend. So Singapore is meeting Keynes’s criterion, while Australia and Switzerland have some way to go.
Via tax or debt or printing money, all government expenditure must be paid for.
29. August 2013 at 02:59
I was teaching in deepest, darkest, Murray Valley of Victoria on Monday, so not able to make it. (Being in a small business having a cyclical cash flow pressure does tie you down.)
If we could predict turning points we would not have bubbles. Lots of bubble folk don’t seem to be able to get their heads around that.
I don’t remember now, but it is possible I got to this blog through Stephen Kirchner (who I first met about 20 years ago). I am not convinced that he is right that the RBA would have required a recession to push inflation down, but, hey, he has more academic qualifications on this than moi.
Yes, I agree, the US’s problem is other public policy mistakes. If anything, it is probably trying to spend a little too much through its federal government for its size and diversity. As I argue here
http://skepticlawyer.com.au/2013/08/21/states-as-coordination-problems/
A bit of a ramble–I got diverted on the social role of religion as an alternative coordination mechanism–but the notion that diversity gets in the way of having a higher tax-expenditure trade off is got to eventually.
29. August 2013 at 03:40
Ouch and ouch!
Can we expect to see some more posts on those arguments in future, then? (Sorry, I know you’re very busy at this point.)
Scott, do you have any thoughts on the mining (“Resources Rent”) tax, or perhaps the likely implementation (or even the choice of) Rudd’s emissions trading scheme?
29. August 2013 at 04:56
This is a good write up of Australia. Reminds me of your posts on China. As someone with little travel opportunities it is nice to read something about another country from an economic perspective rather than sightseeing American tourist.
29. August 2013 at 04:58
Also I’m very curious as to the relative purchasing power of Australians compared to Americans. Do they have a crisis of unemployed and underemployed college grads? Are the birth rates plummeting? Inquiring minds too lazy to google want to know.
29. August 2013 at 05:10
“As of today, it looks like the center-right coalition in Australia is likely to win the election in 10 days, joining similar parties in New Zealand, Canada and Britain. Because America does not current have a center-right party, I don’t expect to see a center-right victory here in the near future.”
By rest of world standards, the Democrats are a centre right party so you’ve already seen your victory.
29. August 2013 at 05:20
Australia surely has the highest living standards among all countries with more than 20 million people, perhaps 10 million.
Really, Scott. Higher than that of the U.S. and Canada? In exchange rates or purchasing power parity?
29. August 2013 at 05:21
I suppose it’s all a matter of perspective
, but it seems to me that there is no center-left party in America. There is a center-right party. It is called the Democratic Party.
29. August 2013 at 05:41
Hooray?
“Q2 GDP Got Revised Way Up to 2.5%”
http://www.businessinsider.com/q2-2013-gdp-estimate-2013-8
29. August 2013 at 05:43
re: PPI. I’m just back from (south of) Perth. The McDonalds dollar menu is two dollars (specifically the cost of a “value” double cheeseburger) (Australia-wide). A mid-priced dinner for four at the equivalent of Applebee’s is $200 AUD. A clutch of grapes in the middle of WA wine country is 2x what it costs in Melbourne, and 2x what grapes imported from CA cost (note that Australian vineyards use (and are designed to use) automation to pick grapes, since they lack the farm workers). Interestingly a Coles’ broiled chicken costs 11 AUD, and at a U.S. Safeway, about 9 USD. A power strip costs $12 AUD at Target (and $5 USD here), and both come down the same manufacturing line in Shenzhen.
Would love to sponsor some work to figure out where the money goes. I don’t think it’s (all) taxes or profits for the local shopkeepers. I worry that it’s actually a lack of competition. I’d be willing to sponsor (CIS?) and others research to understand what is going on – for such a blessed country they should be the leading example of the wealth and prosperity for all that free enterprise by a free people can create.
29. August 2013 at 05:53
Saturos, as a fellow Aussie, I would be interested to hear your thoughts about US versus Australian standards of living for wage earners. Personally I cannot fathom how US citizens can survive on the minimum wage. I earn at least 3000 a month, after taxes, working around 35 to 45 hours a week in hospitality and at woolworths (Australia’s version of walmart) in jobs where no prior education or experience is necessary. With this, I can afford a 2 bedroom flat (I split rent with my partner) on the edge of Adelaides parklands, fifteen minutes walk from downtown. For the rent we pay, we could easily afford a three bedroom house with a backyard in the suburbs.I save at least 1000 dollars each month. But I am certain that if I had equivalent jobs in the United States, I would be living hand to mouth, or, more likely living with my parents.
29. August 2013 at 05:55
http://blogs.wsj.com/economics/2013/08/29/five-takeaways-from-gdp-revisions/?mod=WSJBlog
Five Takeaways from GDP Revisions
29. August 2013 at 08:38
John, Someone told me he viewed a drop in rates from 15% to 5% during a period of sharply declining NGDP growth as “easy money.” Say it ain’t so!
Tyler, I was referring to another blogger, who commented on your post. Or did I misunderstand your comment?
And “dysutopia?” Is that an alternative spelling or did I miss an inside joke?
Grim23, Price are higher because the AUS$ is very strong right now.
W. Peden, I actually prefer the Heritage approach to that of Friedman. Heritage ranks even Denmark in the top 10.
Lorenzo, Thanks for the link, and I would have liked to meet you. Maybe next time.
Saturos, The arguments have to do with the problem of central bank credibility, the risks of level targeting, the unreliability of market indicators, that sort of thing. Nothing that hasn’t been debated extensively in my comment section. I think the most interesting comment was that my assumption about conventional wisdom circa 2007 (Bernanke, Friedman, Mishkin, McCallum, Svensson, etc) was wrong. These guys were not the conventional wisdom, as i assumed. The average economist thought liquidity traps were very real. Maybe I should do a post on that.
Benny, Purchasing power is lower than in the US, except at the bottom end. Unemployment is low. Don’t know about the birth rate, but population growth is fast.
Chris and Larry, True in one way but not another. The Dems really were center right under Clinton, but no longer. You can’t be center right unless you push market reforms in at least one dimension.
David, Not higher GDP per capita in PPP terms, but higher living standards (in my view). That’s partly based on luck, they have nice weather. Canadians have to spend a lot of money just heating their homes. Congestion and crime and poor governance reduces living standards in America. America also has more poverty. Australia has much higher wages at the low end.
But obviously this is subjective, if you like cold weather . . .
TravisV. Those numbers always bounce around. What I keep emphasizing is that if you look at a wide range of indicators then 2013 is a carbon copy of 2012. Zero fiscal multiplier. Monetary offset.
Ari, It’s mostly the strong dollar, prices were not high in 1991.
Simon, Good point.
29. August 2013 at 09:33
Did you meet any Chileans while down there?
29. August 2013 at 13:00
[…] Scott Sumner at the Money Illusion on a recent trip to Australia: […]
29. August 2013 at 14:48
Patrick, No, but I’d like to visit Chile.
31. August 2013 at 06:00
re: strong AUD. It is strong – I started doing business in Australia in late 1999.. when the AUD was around 50 US cents. But AUD price ratios have remained the same thru its rise (perhaps sticky in the way you describe wages). Something is making prices as sticky as wages. I suspect the lack of competition, perhaps cartelization of some market segments.
Be interesting to have some statistics on lifestyle equivalents. various wealth quintiles against travel, entertainment, eating out, better quality food, wine, etc. between U.S., Canada and Australia – and perhaps Germany and Britain.
31. August 2013 at 06:30
Ari, Good point, I suspect Britain lags Australia in living standards, I’ve lived in both places.