Pop macroeconomics

Very few people understand economic theories such as supply and demand, the quantity theory of money, comparative advantage, AS/AD, etc.  As a result, if journalists explained things using these economic concepts, their readers would be hopelessly confused.  Thus even the elite news media tends to rely on some version of what Paul Krugman once called “Pop Internationalism.”  It’s hard to blame them, but unfortunately this analytical apparatus uses economic terms in a very different way from how economists use the terms.  So while their readers can follow the articles, I cannot.  Here’s an example of pop macroeconomics from the Wall Street Journal:

The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor””a glut that presents several challenges as policy makers struggle to stoke demand.

“What we’re looking at is a low-growth, low-inflation, low-rate environment,” said Megan Greene, chief economist of John Hancock Asset Management, who added that the global economy could spend the next decade “working this off.”

The current state of plenty is confounding on many fronts. The surfeit of commodities depresses prices and stokes concerns of deflation. Global wealth””estimated by Credit Suisse at around $263 trillion, more than double the $117 trillion in 2000″”represents a vast supply of savings and capital, helping to hold down interest rates, undermining the power of monetary policy. And the surplus of workers depresses wages.

Meanwhile, public indebtedness in the U.S., Japan and Europe limits governments’ capacity to fuel growth through public expenditure. That leaves central banks to supply economies with as much liquidity as possible, even though recent rounds of easing haven’t returned these economies anywhere close to their previous growth paths.

“The classic notion is that you cannot have a condition of oversupply,” said Daniel Alpert, an investment banker and author of a book, “The Age of Oversupply,” on what all this abundance means. “The science of economics is all based on shortages.”

I’m not quite sure what the WSJ means by “glut” or “stokes demand” or “oversupply” or “vast supply of savings and capital” or “surplus” or “abundance” or “surfeit of commodities” or “working this off” or “shortage.”  Yes, some of these terms are also used by economists.  For instance, we use the term ‘shortage’ to refer to a situation where quantity supplied exceeds falls short of quantity demanded.  But obviously “the science of economics” is not “all based on shortages.”  The authors obviously mean something entirely different.  Wealth also has a clear meaning in economics, but it is not something that “represents a vast supply of savings and capital, helping to hold down interest rates.”

When they say, “stokes demand” I’d guess they mean boost AD.  But if so, why would a “glut” of commodities make it more difficult to boost AD?  And exactly what does a “glut” of commodities mean?   Does it mean a surplus, reflecting a price above equilibrium?  Then why doesn’t the price fall?  Commodities usually trade in auction-style markets.  And what is “oversupply?  Is it increased supply, or a surplus?  If the “classic” model says you can’t have oversupply, then what’s wrong with the classic model?  We are not told.

Producers have their own share of the blame. In a lower commodity price environment, producers typically are reluctant to cut production in an effort to maintain their market shares.

In some cases, producers even increase their output to make up for the revenue losses due to lower prices, exacerbating the problem of oversupply.

“Generally, this creates a feedback cycle where prices fall further because of the supply glut,” said Dane Davis, a commodity analyst with Barclays.

If the price were artificially held above equilibrium, then it would not fall.  If it falls, then presumably price is determined by the forces of supply and demand.  In that case a “supply glut” presumably means an increase in supply.  But the most notable thing about the world economy in recent years is the extremely slow pace of increase in the aggregate supply curve. Thus even during a period of falling unemployment in the US (2009-15), real GDP growth has been quite slow, and the trend rate of growth (the rate LRAS shifts right) is even slower.  It’s even worse in Britain, the eurozone, and Japan.

Even if governments have the capacity for more fiscal stimulus, few have the political will to unleash it. That has left central banks to step into the void. The Federal Reserve and Bank of England have both expanded their balance sheets to nearly 25% of annual gross domestic product from around 6% in 2008. The European Central Bank’s has climbed to 23% from 14% and the Bank of Japan to nearly 66% from 22%.

In more normal times, this would have been sufficient to get economies rolling again,

This is a rather odd way of making the point.  Yes, an increase in the monetary base is usually associated with a rise in AD. But it is not the case that an increase in the base/GDP ratio is normally associated with higher AD, in fact just the opposite. Higher base/GDP ratios are usually associated with monetary policies that stop economies from “rolling again.”

Here’s how I’d look at the global picture:

1.  The data suggests that global productivity growth is slowing, as is global growth in the labor force.  The global AS curve is still shifting right, but more slowly.  The Wicksellian equilibrium real interest rate is falling.

2.  In some areas (particularly the eurozone) AD is too low because money was far too tight around 2011-12, leading to high unemployment.

I’m not sure what all the “glut” discussion adds to this.  But maybe that’s because I’m an economist who doesn’t live in the real world.  Or at least that’s what my commenters keep telling me.

HT:  Ken Duda



17 Responses to “Pop macroeconomics”

  1. Gravatar of benjamin cole benjamin cole
    28. April 2015 at 05:41

    It is too bad that the Wall Street Journal somewhat botched this article.

    Underneath all the mixed verbiage, there is a good idea: That the world’s industries are capable of producing much more, and rather easily.

    Answer: Print more money.

    Side note to Scott Sumner: the most recent issue of The Economist magazine points out that the employment rate in Germany has increased to 75 percent from 65 percent in the last 12 years.

    To hell with demographics. Tighten disability rules in the United States, and blow the doors off the Federal Reserve.

    And remember: In 1992, when inflation was 3% percent in real GDP growth was 4%, Milton Friedman said, “Print more money.”

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2015 at 05:53

    Then again, we sometimes get sound analysis from the FT;


    “The amounts of shale gas that were being uncovered [in 2002-06] were just astonishing,” says [Mark] Papa, now a partner at the private equity firm Riverstone Holdings. “It was very obvious that there had been just a huge breakthrough in technology, and the amounts of commercial gas available in North America were absolutely mind-boggling.”

    Papa’s revelation came in January 2007, when he was presenting at a Goldman Sachs conference alongside a couple of EOG’s rivals, listening to them talking about their vast discoveries and their prospects for rapid growth.

    “It struck me like a lightning bolt,” he says. “There were so many companies finding so much gas”‰.”‰.”‰.”‰And I thought: ‘You know, the gas price in North America is about to be ruined for the next 30 to 40 years.’ And I sat there on this panel, looking at the two CEOs on my left and my right, and I thought: ‘I wonder if they realise what has just hit me.'”

    In October of that year, at the annual meeting of EOG’s divisional managers in Scottsdale, Arizona, he spelt out the implications of his insight.

    “I hate to tell you this, guys,” he remembers telling them. “You have to go back to your divisions and tell your geologists to stop finding gas “” stop finding the component they’ve been looking for for the past 40 years of their careers “” and immediately switch to finding shale oil.”

    EOG used to be called Enron Oil and Gas.

  3. Gravatar of Kenneth Duda Kenneth Duda
    28. April 2015 at 05:55

    I am 80% sure that the point these “reporters” were trying to make is that if we could just convince producers to produce less, then prices would start to rise a bit, and then the Federal Reserve could raise interest rates, and then the economy would be back to normal, but unfortunately, in this state of “oversupply”, that’s not going to happen — producers will just keep producing and lower their prices (deflation! It’s their fault!), greedily trying to maintain market share in an “oversupplied” market, so the Federal Reserve will have to hold rates at zero, trying to find someone willing to buy up all of this “surplus”, which means us rich dudes can’t extract the rents on our money-wealth the way we’d like.

    It sure is hard to be rich these days. (sarcasm alert for the sarcasm challenged)


  4. Gravatar of ssumner ssumner
    28. April 2015 at 06:09

    Ben, Good points.

    Patrick, That’s a good article.

    Ken, You might be right. That’s such a crazy theory it never even occurred to me they might have been thinking that less AS would make it easier to boost AD. But then this article was written for non-economists, and hence all the models in my head actually get in the way of understanding their points.

    There were also “over-production” theories of the Great Depression, at a time when production had fallen by 30%

  5. Gravatar of JG JG
    28. April 2015 at 06:26

    “For instance, we use the term ‘shortage’ to refer to a situation where quantity supplied exceeds quantity demanded.”

    I could be misunderstanding, but this is backwards, right?

  6. Gravatar of Econymous Econymous
    28. April 2015 at 06:42

    In the world the WSJ paints here, helicopter drops seem like a huge and obvious free lunch. If the problem is that there is just too much unpurchased stuff being produced and this is causing deflation, then wouldn’t handing everybody a pile of printed money quickly solve everything?

    This is purely academic; I agree that their story is nonsense anyway.

  7. Gravatar of Anthony McNease Anthony McNease
    28. April 2015 at 06:47

    There is a tremendous amount of capital sitting in “cash” on balance sheets. Cap Ex has been disappointing for, well for years really. Startups are down so much that more are closing than opening. Favorite investments include Treasuries, REITs, high quality fixed incomes like preferreds, and blue chips. There is very little risk taking. Productivity is slowing due to the reluctance to upgrade via Cap Ex and due to the lack of startups.

    But clearly the problem is that we just have too much stuff. [/sarcasm]

  8. Gravatar of Michael Michael
    28. April 2015 at 06:51

    I think a “glut” refers to a short-run equilibrium in which price is less than average cost, as can occur after a surprising negative shift in demand or the appearance of unexpected competitors.

  9. Gravatar of James “azmyth” Oswald James "azmyth" Oswald
    28. April 2015 at 07:10

    If it looks like nonsense, the most likely explanation is that it is nonsense. The WSJ does not have some secret economics that economists have somehow never heard of. They just have writers who have never seen the inside of an economics textbook.

  10. Gravatar of Cory Cory
    28. April 2015 at 07:59


    I thought the same thing.

  11. Gravatar of collin collin
    28. April 2015 at 08:52

    Doesn’t this sound like The Great or Secular Stagnation and we are complaining about the ‘Oversupply’ of capital, labor, commodities, and production? Obviously nothing as we heard this said in the 1848, 1890s and 1930s as well. Why is it so big and happening now?

    1) The world is relatively peaceful so we don’t have a ‘war’ to accelerate the creative destruction process.

    2) Capital is a lot more productive. In terms of investment spent, we are spending less on computers and programs but does anybody think we are getting less in return than 10, 20 or 30 years ago? The rollout of systems is significantly easier than it was 10 – 20 years ago. (My guess the China manufacturer of world has created benefits of scale in capital productivity.)

    3) The varying baby bust. Spending goes down once somebody turns 50 so it is impossible to create inflation in Japan and Europe.

    So what should the US do? Simple answer is stay away from wars that will drain our resources.

  12. Gravatar of Major.Freedom Major.Freedom
    28. April 2015 at 14:49

    Very few economics bloggers understand the concepts of economic calculation, the price system, and coordination in a division of labor.

    Readers of such blogs who come for the pursuit of knowledge, end up hopelessly confused and cannot but think in terms of crude aggregates that mask the underlying realities of production, prices and interest rates.

  13. Gravatar of ssumner ssumner
    28. April 2015 at 15:31

    Thanks JG, I fixed it.

    Econymous, Even better, just raise the NGDP growth target.

    Everyone, Perhaps the real problem is that they are moving from micro to macro without any model of how they are connected. AS/AD is totally unrelated to S&D. Even if firms are producing too much in certain industries, it doesn’t suggest too much is being produced in aggregate, a “problem” that only occurs when the unemployment rate is too low—like 1969.

  14. Gravatar of Gordon Gordon
    28. April 2015 at 16:27

    I wonder if the WSJ is pandering to the economic misconceptions of its readers in much the same way that Paul Krugman seems to pander to the economic misconceptions to readers of the NYT. A newspaper would fear losing subscribers if it kept saying things that its readers did not believe to be true.

  15. Gravatar of rtd rtd
    28. April 2015 at 22:29

    Speaking of your first sentence, I was recently replaying some of your older EconTalk audio with Russ Roberts and there was mention of your working on a book. Is this the still expected? Don’t tell me that I missed its printing.

  16. Gravatar of bill woolsey bill woolsey
    29. April 2015 at 04:08

    Consider Duda’s argument without the normative gloss.

    What is going to happen to interest rates?

    They are likely to stay low because low demand for commodities will keep inflation low.

    This means that central banks won’t tighten.

    Meanwhile, use the definition of capital as “funds available for investment.” There is lots of “capital” in the world, and so investors have lots of money parked in money market instruments.

    Wealth and savings can be used more or less as synonyms for “capital” in this sense.

    Remember, the reporter isn’t coming up with this out of whole cloth. He is reporting on what an economist has told him–a business economists–a forecaster.

    shortage–at the old price, there would have been a shortage, so the high price we have now is a shortage.

    surplus–at the old price there would have been a suprlus, so the low price we have now is a surplus.

    Normal price–relative amount of labor needed to produce a good relative to the amount of labor necessary to produce gold. Price above normal is caused by a shortage. Price below normal caused by a surplus. In the long run, the price will return to normal.

    OK. Just kidding. No one could be that backward.

  17. Gravatar of ssumner ssumner
    29. April 2015 at 06:06

    Gordon, Any successful newspaper must cater to its readers.

    rtd, In December, 2015.

    Bill, You had me worried for a moment. 🙂

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