Archive for the Category Australia


How likely is another Great Recession?

If you only have time for one post today, make it David Beckworth’s very important post showing that the Fed is edging in the direction of level targeting, indeed something not too far away from NGDPLT.

Tyler Cowen recently linked to my previous post:

5. Is another Great Recession just around the corner?  Well, is it?

I’m not sure what qualifies as a “Great Recession”.  I suppose 1893-97, the 1930s, the 1980-82 double dip, and 2007-09 are the most plausible candidates, at least since 1860.  So perhaps once every 40 years or so.

So let’s suppose I’m right that the “housing bubble” did not cause the Great Recession.  In that case, the fact that we are having another housing price boom is not particularly worrisome.  It doesn’t increase the odds of another Great Recession.  So let’s say the odds are roughly 1 in 10 that another Great Recession will occur in the next 4 years, based on past performance.

Can’t we forecast better?  I’m not sure, as the additional information we have cuts both ways.

1. Perhaps the slowness of the recovery makes it more likely that the expansion has more room to run.  Or perhaps we’ve learned something from the previous debacle.  Australia hasn’t had a recession in 27 years; no reason we can’t beat the record of the previous US expansion, which was 10 years.

2.  On the other hand, big recessions are more likely at the zero bound and we are likely to hit the zero bound again in the next recession.  So perhaps another Great Recession is now more likely than usual.

If I had to guess, I’d say point #1 is slightly more persuasive than point #2, but I don’t have a high degree of confidence.  Where I am confident is in stating that the housing bubble did not cause the Great Recession, and thus the current housing price boom (very similar to 2001-06), does not make another Great Recession highly likely in the near future.  Unless I’m mistaken, the bubble-mongers should be predicting another Great Recession in the near future.

PS.  I am amused to see commenters say, “it wasn’t the price bubble, it was blah, blah, blah.”  Deep down they know that the bubble theory is wrong, and they are looking for a way out.  Unfortunately, that’s rewriting history.  At the time, people were saying the problem was the price bubble.  They were saying that those prices were obviously unsustainable.  (Even though Canada, Australia, Britain, New Zealand, etc., did sustain them.) Kevin Erdmann has convincingly shown this “unsustainable” view is wrong, and more importantly he did so long before prices had recovered.  I’d have more sympathy for the other side if in 2012 they had not said “prices were obviously crazy in 2006”, but rather had said, “prices in 2006 might be rational at a given interest rate, and hence if rates stay low and rents keep rising I would expect prices get right back up to bubble levels.”

PPS.  My opponents are like astrologers.  When I say to an astrologer, “OK, lets take data on a million people, based on the sign they were born under, and correlate it with personality data.  It’s an easy test.”  They respond. “It’s more complicated than that, there’s all sorts of other factors to consider.”  Well I’m a Libra, and we don’t believe in those sorts of excuses.

Don’t expect the future to be like the past

Garrett MacDonald directed me to a interesting article by Paul Donovan, chief economist at UBS.

What can we forecast about next year?

Among the many interesting points, this caught my eye:

The ups and downs of the economic cycle may be less violent than they used to be. Recessions are probably less recessionary in the future (see the July Chief Economists comment “Will recessions be less recessionary in the future”).

I often point out that the US business cycle has some very bizarre features:

1.  Expansions never last more than 10 years.

2.  There are no mini-recessions.

The first is bizarre because recessions seem to occur randomly, not according to any fixed cycle.  Expansions do not die of old age.  You’d expect some expansions to just randomly drag on for more than 10 years.  The second is bizarre because you’d expect that whatever process causes recessions (some sort of shock?) would create far more mini-recessions than sizable recessions.  Think about how there are far more small earthquakes than big earthquakes.  Instead, the United States NEVER has mini-recessions, defined as an increase in the unemployment rate of more than 0.8% and less than 2.0%.  That’s just bizarre.  (And even the one 0.8% increase was due to the unusual 1959 nationwide steel strike—normally there is almost no increase in unemployment beyond random noise, unless unemployment soars much higher.)

Before you respond with good reasons why these patterns are not bizarre, I’d like to point out that other countries such as Britain and Australia do have economic expansions that last much more than 10 years, and they do have mini-recessions.  So the US really is a very weird place.  But for some reason American economists don’t seem to pay much attention to this weirdness.

I’m on record as predicting that this will be the longest expansion in history, the first that extends for more than 10 years.  Now I’d like to go on record predicting that we will see some mini-recessions in the next few decades.  I don’t see any reason why we haven’t had them; other countries have them, so why can’t we?

Here’s another interesting point:

Economics can generally predict central bank policy. This is hardly surprising. Central banks – at least, the good central banks – are run by economists.

In the past I’ve argued that economists don’t blame central banks for recessions because central banks follow the consensus of economists, and economists don’t want to blame themselves.

Economists should not make forecasts.

In the past, I’ve argued that good economists don’t forecast, they infer market forecasts.

PS.  Here are 6 British mini-recessions, in each case with the unemployment rate rising by about 1%.

And here are three recent mini-recessions in Australia, in each case with unemployment rising between 1% and 2%:

Off topic:  Did Jesus once say: “Blessed are the beta males: for they shall inherit the earth”?  Scanning the recent news headlines, it almost seems like his prediction is coming true, after 2000 years.

PS.  Here’s an excellent USA Today editorial on Trump. The press has been way too soft on him.

Why Australia hasn’t had a recession in 26 years

In previous posts I pointed out that Australia had avoided recession for 26 years by keeping NGDP growing at a decent clip.  Some commenters suggested that it wasn’t monetary policy; rather Australia was a “lucky country” benefiting from a mining boom.  That theory made no sense, because if your economy depends on highly volatile commodity exports then you should have a more unstable business cycle than countries with large and highly diversified economies.  In any case, recent data completely blows that theory out of the water:

Stephen Kirchner directed me to a very interesting article discussing the views of Warwick McKibbin, who used to be a governor at the Reserve Bank of Australia:

Former Reserve Bank of Australia board member Warwick McKibbin says the world’s central banks should switch to a system of using official interest rates to target nominal income growth to ensure huge household and government debt burdens are unwound safely. . . .

“Inflation has been a good intermediate step because it tied down price expectations and gave people confidence that central banks wouldn’t deflate away their assets,” he will tell a major economics conference in Sydney on Wednesday.

“That’s important when you have high inflation,” as was the case in the 1970s, 1980s and early 1990s.

“But you can still have the same credibility if you do have a very explicit income target, which is really growth plus inflation,” he says.

In Australia, he suggests, that would mean the Reserve Bank would attempt to keep nominal gross domestic product growth – which is essentially a measure of how much the economy is paid for the goods and services it produces – at about 6 per cent.

Australia has a population growth rate of 1.4%, and so there is no question that Australia’s NGDP growth rate should be higher than in the US rate (pop. growth = 0.7%), and much higher than in Japan (falling population).  Nonetheless, I think 6% is a bit high, I’d recommend something closer to 5% for Australia.  On the other hand even 6% would be far better than the sort of policy enacted by the Fed, ECB and BOJ since 2008.

Professor McKibbin, from the Australian National University’s Crawford School, acknowledges that in practice the Reserve Bank already pursues an “ambiguous nominal” income growth target because the formal 2-3 per cent inflation target is only applied “over the cycle”

This supports the claim of various market monetarists, who have suggested that Australia was a covert NGDP level targeter during the Great recession.

I’ve argued that the greatest advantage of NGDP targeting for countries like Japan is that it can reduce the burden of the public debt.  McKibbin makes a similar argument:

“What will matter over coming decades will be nominal income growth because the sustainability of high public and private debt-to-income ratios will need higher nominal income growth than in the past.

Interestingly, even a 6% target would seem to call for monetary tightening right now:

According to his proposed income targeting scheme today’s Reserve Bank cash rate of 1.5 per cent is probably too low given nominal GDP rose in the first quarter by 2.3 per cent from the previous three months, and by 7.7 per cent from a year earlier. “Right now the central bank has probably got loose monetary policy by nominal income standards and you’d expect they’d be tightening policy according to this rule because nominal income growth is rising quite quickly.”

Wait, that can’t be right.  My critics say Australia was just a lucky country benefiting from a mining boom.  It can’t possibly be doing well now that mining investment is collapsing.  Or am I missing something?

The Economist describes how smart countries handle re-allocation out of declining sectors:

As the mining boom petered out, the Reserve Bank cut its benchmark “cash” rate from 4.75% in 2011 to 1.5%. The Australian dollar fell steeply (it is now worth $0.76, compared with a peak of $1.10 six years ago). The cheaper currency and lower interest rates have allowed the older and more populous states of New South Wales and Victoria to keep the economy bustling. Property developers are building more houses, farmers are exporting more food, and foreigners (both students and tourists) are paying more visits: Australia welcomed 1.2m Chinese last year, a record.

Re-allocation doesn’t cause recessions, tight money does.

In the past, I’ve argued that Australia might want to target total compensation of employees, rather than NGDP.  That’s because changes in the price of mineral exports can cause big swings in NGDP, without having much impact on the labor market.  Over the past 12 months, employee compensation in Australia rose by only 1.4%, far below the 7.7% rise in NGDP.  You don’t see those sorts of discrepancies in the US.  So maybe Australia doesn’t need tighter money.

PS.  David Beckworth has a new policy paper on NGDP and the knowledge problem facing policymakers.  As usual, David includes some nice graphics.


The Complacent Century

Looking backwards, it’s possible to see a number of turning points in the political zeitgeist.  America moved toward (left wing) liberalism around 1964, then swung back toward (right wing) neoliberalism in the late 1970s, and then toward nationalism in recent years.  And these were worldwide trends, with nationalism also on the rise in Europe, Russia, Turkey, India, China, Japan, and many other places.

Tyler Cowen pointed me to an article that suggests another turning point, which many people missed at the time.  The new millennium ushered in an Age of Complacency:

The eminent political economist Ross Garnaut says the Great Australian Complacency, as he calls it, took hold of the political system from 2000. This locates it halfway through the Howard era.

How can he be so specific? Because, after John Howard and Peter Costello enacted their landmark reform of the tax system in 2000, they lost interest in further reform, on Garnaut’s reckoning.

And this marked the end of not only Howard-Costello reforms but an entire generation of near-continuous reform efforts that started in the years of the Hawke-Keating governments.

As is so often the case, people put far too much weight on specific local factors when thinking about these changes.  Thus America’s move toward liberalism was not triggered by the Kennedy assassination, nor was the neoliberal era triggered by the elections of Thatcher and Reagan.  These were worldwide trends.

The Aussies have done very well in recent decades, and have a right to be complacent.  But the same thing happened in the US.  Here is government spending as a share of GDP, which rose sharply after 2000:

I know what you are going to say; “That’s due to special factors—G/GDP rose due to the 2001 recession and 9/11.

There is some truth in that, but it’s not the whole story.  G/GDP did not fall back when we recovered from the recession.  And indeed both Bush and Gore were promising bigger government than Clinton—the country was getting tired of neoliberalism by 2000.  Soon we would have Sarbanes-Oxley, a big new Federal education program, and a massive expansion of Medicare.  And that was under a GOP President—once Obama took office we moved even further towards big government.  And yet if you read pundits on the left all you hear about is endless “austerity”, which is nowhere to be seen in the data.

The UK was not hit by recession in 2001, nor was it impacted by 9/11.  But at almost exactly the same time the Labour Party got tired of austerity, and began rapidly boosting government spending:

You need a trained eye to read these graphs properly.  The G/GDP ratio usually tends to be somewhat countercyclical, rising during recessions and falling during booms. The sharp rise in the UK’s G/GDP ratio after 2000 was an exception, and is a tell tale sign that fiscal policy was dangerously out of control.

This might suggest that neoliberal reforms require economic distress, so that the public will see the need for changes.  But of course the economic distress of the 1930s led to the exact opposite—the rise of statism.

Rather, it seems that neoliberal reforms require both economic distress and a perception that the problem is caused by bad government policies.  The stagflation of the 1970s is one example.

Neoliberal reforms can also be triggered when countries are doing poorly relative to their neighbors.  Thus back in 2004 the Germans compared their 11% unemployment rate with the 5% rate in the UK, and concluded that excessively high labor costs were the problem.  This led to one of the last successful policy reforms of the neoliberal era.  Today, those amazingly successful reforms are politically unpopular in Germany

PS.  Over at Econlog I comment on the two (rumored) new Fed picks.

Scott Alexander on the Holocaust

[My good post today is at Econlog.]

Scott Alexander has an excellent post discussing Hannah Arendt’s book Eichmann in Jerusalem.  I’d like to discuss a couple points:

What eventually happened we all know too well. Other countries started closing their doors and refusing to accept Jewish refugees. Despite hearing this story a hundred times, the version in Eichmann in Jerusalem was new to me. I had always thought of countries as closing their gates to a few prescient people trying to flee Nazi Germany on their own, or to a few stragglers who managed to escape. The truth is on a much greater scale: the Nazis were willing to let every single Jew in Europe leave, they even had entire bureaucracies trying to make it happen – and the rest of the world wouldn’t cooperate. The blood on the hands of the people who wouldn’t let them in is not just that of a few escapees, but the entire six million.

Scott emphasizes that the primary blame lies with the Nazis.  They did the murdering.  Nonetheless, the decision not to admit Jewish refugees did have horrendous consequences.  At the time, the “America First” movement was quite popular, somewhat anti-Semitic, and very isolationist.  In fairness, I probably would have been isolationist back then, but I’d hope I would not have been anti-refugee. (Interestingly, Trump has revived the term “America First”.)

My commenters seem to believe that what’s right is determined by public opinion polls:

First of all, quinnicapac, Rasmussen, and Reuters all ran polls that showed the majority of Americans supporting the ban of immigrants from those 7 countries. In fact, those 7 countries were also on Obama’s list as countries that wouldn’t qualify under the visa program. So here is the question: is this a democracy where peoples voices get heard, or is this a place where only few get to decide policy?

With that in mind, it’s worth noting that there was far stronger support for rejecting Jewish refugees fleeing Hitler.

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I wonder what Steve Bannon and Steve Miller think about the decisions made in 1940?  And I wonder how they think future historians will judge their current actions?

Scott also notes that the Nazis in Denmark tended to “go native”.  That is, they adopted the local attitudes of the Danes, which tended to be somewhat sympathetic to the plight of the Jews (at least by contemporary standards.)  Scott makes many good points, including this one:

Third, at least during World War II conscience was a collective phenomenon. Why did some countries’ citizens cooperate almost universally with the Final Solution, while others resisted it at every turn? “Culture” is inadequate; there’s not much light between Danish and German culture, but the two countries acted in opposite ways. I’m tempted to credit single individuals; Hitler setting the tone for Germany vs. King Christian setting the tone for Denmark – but do people really respect their leaders that thoroughly? Or is this backwards causation; a country like Denmark would end up with a King like Christian, a country like Germany would elect a Fuhrer like Hitler? I don’t know. The alternative is to posit one of those chaotic networks where tiny differences in initial conditions can compound and lead to very different end states. Arendt herself offers little, beyond saying that Italy saved its Jews out of “the automatic general humanity of an old and civilized people”. Yeah, well, Japan was an old and civilized people too, and we know how that turned out. But what other possibilities are there? All I can think of is maybe looking into the pre-existing anti-Semitism level, but I don’t know if that just passes the explanatory buck.

I think he’s right to be agnostic on this question, but I can’t help pointing out that there actually are significant differences between Danish and German culture.  When I studied neoliberalism back in 2008, I found that Danish culture doesn’t just show significantly more civic virtue than German culture, but by some measures it is well ahead of any other country in the world.  Thus I do find it interesting that Danish culture seemed to make German officers at least somewhat more empathetic than did the cultures of other European countries.

One reason I like immigration is that I don’t share the alt-right view that it is a zero sum game.  I don’t think immigrants will make America worse, I think (in many cases) America will make immigrants better.  One good example is the huge flow of immigrants from southern Italy to America. Southern Italy has perhaps the least civic virtue of any developed economy.  And yet Italian Americans have done quite well.  When I was young there were still concerns that Italian Americans would not assimilate, and the Mafia was widely feared just as terrorists are feared today. Today the concerns about Italian assimilation have almost vanished.  I don’t even recall the last time I heard anyone speaking about the Mafia in anything other that a film history context.  I’m sure the Mafia is still out there, but it’s clearly not as important a part of Italian American culture as it used to be.

The strength of American civic virtue is one reason why I fear Trump much less that many others, even as my contempt for him is unsurpassed. I could see the next Russian leader being just as bad as Putin.  Ditto for the Philippines.  On the other hand, our next President will be far less of a demagogue than Trump.  There’s a reason why Putin is far more popular than Trump.  America will change Trump much more than Trump changes America.

Lorenzo sent me an article about Trump making a complete fool of himself in phone conversations with the leaders of Australia and Mexico.  Not only did he show himself to be a jerk by bragging about his recent victory, he came across as mentally deficient jerk by claiming that he won a very strong victory, when everyone knows he actually won the key states by razor thin margins. He also claimed that he attracted huge crowds for his inaugural address. Then he berated the Australian leader for a deal made with Obama, where the US would accept 1250 refugees out on some Pacific island.  As if this was the fault of the Australian leader, and not Obama.  (Of course I support Obama on this.)  And then this:

Mr Trump told President Peña Nieto in last Friday’s call, according to the Associated Press, which said it reviewed a transcript of part of the conversation: “You have a bunch of bad hombres down there. You aren’t doing enough to stop them. I think your military is scared. Our military isn’t, so I just might send them down to take care of it.”

What does that even mean?

Australia and Germany are two of our closest friends, and all Trump seems to do is antagonize them.  Meanwhile he keeps cozying up to Putin, while threatening to prevent China from occupying some small islands.  If there is a method to this madness I fail to see it.

I know that some intellectuals like to be contrarians, and claim that Trump has some sort of ingenious strategy.  For my part, as long as he behaves like he’s mentally deficient, I’m going to assume that he is in fact mentally deficient. Occam’s Razor, etc.