The continent that brought us the glories of the renaissance and the enlightenment . . .

. . . seems incapable of understanding that the following two statements cannot both be true:

1.  The eurozone needs to move away from austerity to boost growth.

2.  The ECB cannot do monetary stimulus because of its inflation mandate.

Statement 2 might be false, in which case the ECB should do monetary stimulus to boost growth.  Or it may be true, in which case ending austerity will not boost growth (due to monetary offset.)  But either way, the European consensus seems to be making an EC101-level error in logic. How a continent of 500 million highly educated people could make such a costly error without almost anyone noticing is beyond my comprehension.

PS.  I suspect inflation is running below 2% in the eurozone, and hence the ECB can ease.  So at a minimum 2 is false.  I don’t know enough about the ECB to comment on 1.

PPS.  Miles Kimbell and Yichuan Wang have a very good essay on the Rogoff and Reinhart study.  As always, I remain an agnostic on debt and growth.  (Glad to see those two guys working together at Michigan.)

PPPS.  David Beckworth has a very good new piece on low interest rates (in the National Review Online.)

PPPPS.  I was asked about this Paul Krugman post.  Even if you assume that tight money raises bond prices (income and expected inflation effects dominate), the qualitative result is the same—a strong recovery best matches the picture. But keep in mind that exchange rates are a “it takes two to tango” variable. Some of the dollar’s strength comes from the BOJ being more expansionary than the Fed. So I’d guess that the Fed’s shift toward easier money in late 2012 (or less contractionary if you prefer) plays some role in the picture Krugman describes.



39 Responses to “The continent that brought us the glories of the renaissance and the enlightenment . . .”

  1. Gravatar of marcus nunes marcus nunes
    30. May 2013 at 06:35

    This french academic is even worse. He thinks that monetary policy should remain tight (inflation target) and that austerity should also remain in place. To him “there´s no euro crisis, it´s a debt crisis”!

  2. Gravatar of Andy Andy
    30. May 2013 at 06:43

    We here in Europe are noticing. Even former pro-austerity politicians here in Finland are talking about stimulating economy more aggressively. But it all comes down to Germany: they are obsessed with inflation, and if Merkel doesn’t approve, nothing will be done. It seems that for the third time in past century Germany doing its best to destroy this continent.

  3. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. May 2013 at 06:46

    Why did Krugman ignore fiscal policy in that table he created?

  4. Gravatar of Chun Chun
    30. May 2013 at 07:04

    Vivian: deep down Krugman may not be Keynesian.

  5. Gravatar of mpowell mpowell
    30. May 2013 at 07:11

    I think it is wise to avoid making too many specific recommendations for Europe. The EU is a pretty strange arrangement and it has only been around for a while. So you don’t have a lot of historical experience to look at, known properties from other monetary systems don’t necessarily apply and we already know that macro models don’t have the power to project what will happen in new situations. I am confident that a combo tight fiscal-monetary policy will lead to a very slow recovery (if it comes at all), so I would think a more relaxed monetary policy would help, but there are issues there. One big issue that I have not seen discussed much is, how do you conduct open market operations in the EU? Whose national debt would you buy? From an effectiveness perspective, I guess you would buy Spanish and Italian debt. But there are also fairness issues at play. If that debt is effectively retired, that represents a fiscal transfer from the EU as a whole to those countries. And that’s obviously a problem (though maybe it’s an acceptable cost). On the other hand, how is it fair for the Spanish and Italians to pay higher interest on their debt when they are not allowed to inflate compared to the low interest paying Germans or even default? Maybe the correct answer is that the ECB should be willing to buy and hold enough sovereign debt to bring yields somewhat in-line with one another, and I think this might work reasonably well for most of the EU nations. But what about Greece? I can easily imagine them continuing to run 10% deficits into infinite and at that point, this policy would simply represent a continuous fiscal transfer to Greece. It seems like if you’re going to have an EU, you need your partners to exhibit a level of ‘responsibility’ that one could not presently expect from the Greek society/state.

  6. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    30. May 2013 at 07:43

    Sorry, Scott, but as written, they are consistent and likely true.

    The result is that Eurozone needs monetary stimulus, but that need will not be met.

    A lot of work is being performed by the word “cannot” in statement 2, which is a major source of “talking past each other” in debates.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. May 2013 at 07:52

    Quite a contrast between the Miles Kimball/Yichuan Wang paper and Krugman’s blogging. One is scholarly the other political hackery.

  8. Gravatar of J J
    30. May 2013 at 08:11

    Luis Coelho,

    So the ECB will not loosen policy from where they are now. But you believe that if inflation rises due to fiscal policy, the ECB will not tighten policy? What then is preventing the ECB from being more expansionary absent fiscal expansion?

  9. Gravatar of Geoff Geoff
    30. May 2013 at 08:27

    “The continent that brought us the glories of the renaissance and the enlightenment….

    ….also brought us, at the same time, the ideology of the modern state as the incarnation of liberty.

    And as a result, western society, which is founded on enlightenment principles, also contains states, which now control the money supply, and mistakes by them result in harm on millions of people.

    Imagine instead a plurality solution to protection and security, as well as money. Then we wouldn’t be having this discussion about the 2,839,642,398th failure of central planning.

    Do you know why there are so many failures? It’s because so many people thought exactly like Dr. Sumner: Central planning can work if only there were smarter people in charge, performing smarter activities, and abiding by smarter rules of conduct. The current generation in charge are intellectual failures. The next generation will not make the same mistakes.

    Such hubris. Over and over. While the rest of us are exploited, just so that arrogant intellectuals with few moral scruples can test us like lab rats.


  10. Gravatar of TravisV TravisV
    30. May 2013 at 08:49

    Dear Fellow Utilitarians,

    What is a good response to this criticism of utilitarianism?

  11. Gravatar of Don Geddis Don Geddis
    30. May 2013 at 09:04

    If you liked Kimball & Wang’s analysis of Rogoff & Reinhart, then be sure you don’t miss their link to Stephen Colbert’s take on the same topic.

  12. Gravatar of Edward Edward
    30. May 2013 at 09:15

    Travis V

    this is why I always consider myself to be a rule TRI-utilitarian. In other words, the measuring stick should not just include “happiness”, it should include other things, like life and liberty. Happiness, while worthwhile, is an extremely vague concept, whereas saving people’s lives, and making sure there are rules to preserve aggregate freedom is much more objective

  13. Gravatar of Bill Tucker Bill Tucker
    30. May 2013 at 09:29

    mpowell ~ There is nothing irresponsible about running deficits and in fact, they are a way of life. Running huge surplus and low wages is a ridiculous way of managing economies. It is predatory and invites disaster applying business practice to national economics. When you cannot export, pray the domestic market can ‘afford’ your goods. The EU as a euro currency is finished. There is no way to rebalance other than 60~70million unemployed into a stagnant global economy, not growing because the EU isn’t. They are finished, there is no time left to turn it around, if they could.

  14. Gravatar of TravisV TravisV
    30. May 2013 at 09:30


    Thanks! I gotta organize my own personal thoughts on the subject.

    First, I think that we can use economics to look at the real world and find what actually makes people happy and what doesn’t. Moving patterns, willingness-to-pay, revealed preference, etc.

    Most fundamentally, I believe that technological progress generally increases utility. It makes a range of intellectual pursuits available, and hard, boring physical labor less necessary.

    The Chinese are free to choose whether to live on their ancestral farms or in the technologically advanced city. The fact that so many have voted with their feet to move to the latter is a good example of revealed preference.

  15. Gravatar of Edward Edward
    30. May 2013 at 10:07

    Travis V,


    Revealed preference is informative and important, but what to do when people’s preferences clash? That’s why you need rules to protect freedom.

    Also, preferences change.

  16. Gravatar of J J
    30. May 2013 at 10:31


    But, ultimately, why does liberty matter? This runs into some of Rawls’ ideas. Since so many things are uncertain and interpersonal utility comparisons don’t really make sense, we have to aim at other targets, such as liberty.

  17. Gravatar of J J
    30. May 2013 at 10:32


    Do you read David D. Friedman (son of Milton Friedman)? I bet you would agree with a lot of his ideas.

  18. Gravatar of Geoff Geoff
    30. May 2013 at 11:48


    Yes, I agree with most of what Dr. Friedman has to say, with the exception of his “market failure” examples.

  19. Gravatar of mpowell mpowell
    30. May 2013 at 12:07

    Bill – I agree with you in general. It is okay to run continual deficits. But the debt/GDP ratio has to be stable over the long term at some level (and probably less than 1). For the EU to work (for real!) the ECB would have to trust member governments to maintain their debt/GDP ratios over the long term while offering them the forebearance of sovereign debt purchases to keep their interest rates in line during recessions (like the current one) where a zero rate target is not enough stimulus. But Greece has never shown the ability to maintain a stable debt/GDP ratio over any significant amount of time. They have always just defaulted when the ratio grew too large. And even in the euro, they were running massive deficits before the recession. In those circumstances, ECB purchases of Greek debt simply represent fiscal transfers.

  20. Gravatar of TravisV TravisV
    30. May 2013 at 12:10


    My line of thinking is that a utilitarian should be inclined to err on the side of no government intervention. Maybe that inclination sufficiently addresses the question of liberty / freedom.

    However, one should be open-minded enough to allow that the benefits of certain government interventions outweigh the costs. That’s how you justify property rights, military spending, traffic laws, state-employed police, a carbon tax, etc.

    The evidence indicates that the benefits of those interventions overwhelmingly outweigh the costs. Of course, the really hard questions are things like universal health care, etc…..

  21. Gravatar of james james
    30. May 2013 at 12:24


    If you have massive unemployment then why would ending austerity increase inflation?

  22. Gravatar of Edward Edward
    30. May 2013 at 12:59

    Travis V,

    Of course.

  23. Gravatar of MW MW
    30. May 2013 at 13:34

    Apparently there is an asteroid called QE2 that is about to visit earth. It also has a moon. I feel there is a joke there somewhere.

  24. Gravatar of ssumner ssumner
    30. May 2013 at 15:48

    Andy, Yes, but as Marcus’s previous comment shows it’s not just the Germans. If the other 16 members of the ECB want monetary stimulus, they certainly have the votes. Indeed you could do a great deal of monetary stimulus without pushing inflation above 2%.

    Vivian, Maybe he’d prefer not to think along those lines. Wouldn’t expansionary fiscal policy explain things?

    mpowell, You said;

    “One big issue that I have not seen discussed much is, how do you conduct open market operations in the EU? Whose national debt would you buy? ”

    Hmmm . . . don’t you think the ECB should have thought of that question before the euro was created?

    Buy government debt in proportion to GDPs.

    Luis, Sorry, but they both can’t be true.

    Travis, That was a joke.

    James, Because SRAS curves slope upward. But even if I am wrong, my point stands. Both one and two cannot be correct.

    MW, Asteroids have moons?!?!

  25. Gravatar of Lorenz Lorenz
    31. May 2013 at 00:11

    maybe of interest though not directly related
    This is an incredibly untimely message.
    No wonder economists have such a hard time making their case to the public.

  26. Gravatar of Ashok Rao Ashok Rao
    31. May 2013 at 04:23


    Intriguing paradox. Wrote a post about it, and I think I learned in the process (at least about my real beliefs): you might be interested.

    A synopsis:
    “The story of Abenomics is so saturated in today’s blogosphere that I’ll avoid any serious detail. But its victory doesn’t stem from any action as much as Shinzo Abe’s perseverance and conviction, bordering on a threat to central bank independence itself. Markets didn’t soar soon after his victory because he got together with the Bank of Japan (BoJ) to print some of ’em yens. Rather, his party’s overwhelming victory suggested that he could and would threaten BoJ incompetence and hence independence if necessary. Remember, the BoJ had actually tried “exotic” action before, but no one believed it would credibly tolerate inflation. We (and I mean liberals) want to measure monetarism by how fast a man’s feet are moving and how long his strides are (monetary base and interest rates). We tend to ignore whether he’s running on ice (BoJ pre Abe), gravel (SNB), or a vertical hill (ECB).”

    “But the problems facing SNB and BoJ are very different from the Fed. And still more different from the ECB. Both SNB/BoJ (and the Fed too) are national banks. Even if central bank independence is far more cemented today than during the disaster of Arthur Burns, it’s clear that political forces play a big role. The primary concern of SNB and BoJ is economic prosperity in their respective countries. If the Fed was ever hurting America, Congress would step in. Neither are not crippled by a fallacy of composition.

    The ECB faces distributional and compositional challenges: Germans are unwilling to tolerate above-trend inflation to help their Greek “kin”. Markets understand this political, cultural, and social bind and are hence unwilling to believe that the ECB can optimize long-run growth for the Eurozone as a whole.

    But wait, “whatever it takes” you say? The ECB – as the chief guardian of, well, the Euro – credibly promised to stabilize markets (and, ipso facto, did) last summer when it seemed EZ breakup was a serious possibility. I, perhaps counterintuitively, argue that this betrays its fundamental flaw. Eurozone nations are now thrust into an uncomfortable purgatory. If political situations deteriorate so as to threaten ECB’s existence, the bank promises to keep the currency together. But it cannot credibly commit to an economically optimal policy, Maastricht be damned. In this sense, it’s a little like a gold standard.”

  27. Gravatar of Jean Jean
    31. May 2013 at 04:42

    Scott, Andy above has it right. If the BuBa (Bundesbank) says jump, the ECB says ‘how high?.’ It is in the Maastricht Treaty that no money transfers will be allowed between nations.
    Demand was always low in Germany, and they are still doing mercantilism. The creation of the euro allowed German firms to sell their wares to the periphery, and now Merkel is desperately trying to recover ‘German’ money to shore up German banks. The Germans believe they are loaning money to Greece, whereas most of the rescue money is going to German banks, while Greek parents are giving their children to charities, because they can’t buy any food.
    This is not going to end well.
    Trivia fun fact of the day! Germans have won enough Nobel prizes to place third in the world – only once has a German won the Nobel for economics (yes, pedants, I know the prize is not a Nobel).

  28. Gravatar of TravisV TravisV
    31. May 2013 at 04:45

    This post by David Glasner has me seriously worried about equity markets…..

    “Is Japan a Currency Manipulator?”

  29. Gravatar of Ashok Rao Ashok Rao
    31. May 2013 at 04:56

    Travis, David Li’s indictment of Abenomics is really annoying. I’ve heard him, he’s just a Chinese jingoist. Very little attention to economics other than China’s rise. Him and Niall Ferguson together argue that China will *dominate* the 21st century. You don’t have to be a Chinabear to doubt this.

    The irony of China telling Japan to liberalize it’s labor and capital market.

    And talk of “earned recovery”. He seems to ignore most of the impact will be through domestic demand and not exports.

  30. Gravatar of ssumner ssumner
    31. May 2013 at 05:25

    Lorenz, Yes, untimely. I actually agree with Selgin about good and bad deflation, but I disagree with what he had to say about QE. I don’t see it blowing up bubbles.

    Ashok, I disagree. The BoJ did not try to inflate on previous occasions. No fiat money central bank has ever tried to inflate and failed.

    Jean, That doesn’t really address my argument. I’m saying the ECB should not say “how high?” The fact that the do has absolutely no bearing on the point I am making here. Don’t confuse positive and normative arguments.

  31. Gravatar of Ashok Rao Ashok Rao
    31. May 2013 at 05:29

    Are you suggesting markets thought the BoJ would *not* tighten as soon as it fell out of deflation?

  32. Gravatar of Ashok Rao Ashok Rao
    31. May 2013 at 05:37

    Or that, for this matter, the biggest reason behind Abe’s initial success wasn’t anchoring expectations? SNB – same thing.

  33. Gravatar of J J
    31. May 2013 at 06:04

    Professor Sumner,

    I’m sure you don’t want to tie yourself down, but can you describe what would be evidence of a liquidity trap?

  34. Gravatar of Becky Hargrove Becky Hargrove
    31. May 2013 at 07:11

    Thanks so much for the Selgin link. Good and bad deflation are very important distinctions, but there is still a tremendous blind spot as to the lack of innovation, technological gain and economies of scale as applied to construction, which skews the results of all production gains. Therefore it is untimely indeed to speak of a cap on growth which still gives an aggregate preference to less innovative forms of production, in spite of the gains of technology in communications and media. The crowding out effect of less innovative growth can actually cut back more productive forms of economic growth.

  35. Gravatar of mpowell mpowell
    31. May 2013 at 08:02

    Scott – hey, I didn’t say they did a good job forming the EU, I was just asking the question!

    Do you have a reason for buying debt in proportion to GDP? Does it matter for effectiveness? Do think it matters from a fairness perspective?

  36. Gravatar of ssumner ssumner
    31. May 2013 at 08:05

    Ashok, No, I’m suggesting the markets thought they would tighten. And of course they did.

    J, OK, let’s go with a negative 2% interest rate on reserves, announces a policy of level targeting of NGDP, and the central bank buys assets equal to 200% of GDP. And still fails to boost NGDP growth expectations up to target.

    I’m happy to tie myself down.

  37. Gravatar of ssumner ssumner
    31. May 2013 at 08:08

    mpowell, I didn’t mean to criticize you, I was criticizing the ECB. Sorry if it sounded harsh. Of course it’s never too late to set up an EFFECTIVE ECB.

    No particular reason to buy debt as a share of GDP–it seemed like it might be less controversial.

    BTW, It’s not clear they need to buy any debt–a policy of NGDPLT might be better.

  38. Gravatar of Jean Jean
    31. May 2013 at 08:10

    Scott, I’m just trying to point out that one of the most economically illiterate countries in the entire EU is ‘in charge’ of the ‘rescue.’ I have a suspicion that Merkel is more interested in saving German banks than saving ‘Europe.’
    The differences between ‘Das Rheinland Modal’ and anglo-saxon style capitalism are really huge.

  39. Gravatar of ssumner ssumner
    2. June 2013 at 05:48

    Jean, Yes, we both agree that current policy is bad, and needs to be changed.

Leave a Reply