Archive for February 2014


Oh, so it’s stimulus you need

I am viewed as being an opponent of fiscal stimulus, but I’ve always argued that an employer-side payroll tax cut would “work.”  It just seems kind of pointless.  If it’s a lower W/NGDP ratio that you need, just boost NGDP!  Christina Romer has also advocated this sort of payroll tax cut.  It lowers a country’s labor costs in much the same way as a currency devaluation.  If you add on a VAT increase it can even be revenue neutral, which keeps the Very Serious People on board. Since it’s supply-side, no monetary offset problem.  What’s not to like?  Larry sent me the following.

When French President Francois Hollande unveiled a plan in November for a business tax credit and higher sales taxes as a way to revive the economy, he was implementing an idea championed by economist Gita Gopinath.

Gopinath, 41, a professor at Harvard University in Cambridge, Massachusetts, has pushed for tax intervention as a way forward for euro-area countries that cannot devalue their exchange rates. “Fiscal devaluation” is helping France turn the corner during a period of extreme budget constraints, former Airbus SAS chief Louis Gallois said in a business-competitiveness report Hollande commissioned.  .  .  .

“Gita is already a major star, at the top of her cohort in international macroeconomics and still rapidly growing as a scholar,” Rogoff said in an e-mail. “Her empirical work on price rigidities is simply stunning and has had everyone going back to the drawing boards. Her theoretical work on international debt and default defines the state of the art in the field,” he said, calling her strategies for the euro zone to achieve internal devaluations “very influential.” .  .  .

The paper examines a “remarkably simple alternative” that doesn’t require countries to abandon the euro and devalue their currencies, Gopinath said. By increasing value-added taxes while cutting payroll taxes, a government can create very similar effects on gross domestic product, consumption, employment and inflation.

The higher VAT raises the price of imported goods as foreign companies pay the levy. The lower payroll tax helps offset the extra sales tax for domestic companies, reducing the need for them to raise prices. Since exports are VAT exempt, the payroll-cost saving allows producers to sell goods cheaper overseas, simulating the effect of a weaker currency, according to the paper.

The policy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue, Gopinath said.

I’m glad her ideas are getting attention, but I can’t help wondering why this took so long.  If it’s higher inflation they want why not just do monetary stimulus?  The ECB was raising interest rates as late as 2011 in an attempt to reduce inflation. When I recommended easy money for the eurozone all sorts of European commenters would come over here an insist that Europe doesn’t need inflation, their problem are “structural.”  “Mind your own business.”  Now we learn that they do need higher inflation.

Unless I’m mistaken this is the sort of policy that only makes sense if you have a dysfunctional central bank that refuses to do the right thing, and hence you must do an end run around that institution.

PS.  I suppose some will cite the “one-size-fits-all problem,” but that doesn’t apply to the eurozone, as even German inflation is down to 1.0%.  They all need higher inflation.  (Actually higher NGDP growth.)

PPS.  The article might be difficult for non-economists.  Just to be clear, the higher VAT approach doesn’t give you any permanent boost to trade, just a boost until nominal wages adjust.  VAT does NOT favor exports over imports.

PPPS.  I see Krugman’s going from Princeton to CUNY.  Bernanke’s joining Brookings.  Woodford left Princeton for Columbia.  I’d say losing Woodford, Bernanke, and Krugman slightly weakens their monetary econ program.  But they still have Lars Svensson.  And Svensson is still writing great posts.  I love the way Britmouse describes the Svensson post:

Via Mr. Svensson, still methodically attacking the madness.

Never reason from a quantity change (unless you coined the phrase)

Here’s an interesting claim:

Trillions upon trillions of dollars have been pumped into the financial system by the Federal Reserve, European Central Bank and the Bank of Japan. Five years ago, if you knew how much stimulus central banks would push, would you have guessed that we would be in a disinflationary environment characterized by continuous deflation pulses? Would you have thought gold would be below $2,000? Most likely, no one five years ago could have possibly thought that deflationary pressures would remain as strong as they have been in the system today.

No one?  What about Paul Krugman and I?  It’s discouraging when the people who got it wrong don’t pay any attention to the people who got it right.

If you had told me in 2009 that the Fed would still be doing massive QE in 2014, I would have realized that one of two events had occurred:

1.  The Fed had decided it was a good time for hyperinflation.

2.  The economy remained weak, nominal rates remained stuck at zero, and hence the Fed was still trying to use unconventional stimulus.

After about 2.8 seconds of deep thought, I would have concluded that the second outcome was more plausible, and of course I would have been right.  Am I reasoning from a quantity change? Check the post title.

Because people were wrong about QE, they try to make up for it with even wronger explanations of what went wrong:

But accommodative policy has not been enough. The ultra-bearish argument is simple: deflation takes hold in developed economies, and no amount of central bank action can counter it, as Japan knows all too well. If central banks can’t reverse deflationary pressure and unlimited money printing is not enough, then the hard work is on commodities. Should industrial commodities perform well and increase in price, cost-push inflation could reverse disinflationary behavior.

No amount of action?  As Japan knows too well?  Ever hear of Abenomics?  What about the sort of “action” we see in Argentina, Venezuela, India, Iran, Turkey, etc?  Closer to home, isn’t Australia continuing to hit its (2% to 3%) inflation target?

I suppose you could argue that the eurozone is falling below its inflation target. But surely it must be doing all it can:

European Union statistics office Eurostat estimated on Friday that consumer prices in the 18 countries sharing the euro rose an annual 0.8 percent this month. That was the same rate as in January and December, after readings of 0.9 percent in November and 0.7 percent in October.

Economists polled by Reuters had forecast inflation would slow to 0.7 percent. Fears the bloc may be at risk of deflation as it struggles to recover from its debt crisis have raised expectations the ECB will use interest rates or other policy tools to give the economy further support.

“The higher than expected inflation numbers reduce the chances of an ECB rate cut at next week’s meeting, and we maintain the view that … the central bank will keep rates on hold,” said Nick Kounis, head of macro research at ABN AMRO.

So no rate cut in the eurozone.  Even though unemployment is 12%, and even though inflation is 0.8%, and even though the inflation target is 1.9%, they decide current policy is just fine.

What about Germany?  Wouldn’t monetary stimulus be bad for Germany?

Figures on Thursday showed annual inflation in Germany, the euro zone’s economic powerhouse, easing to its lowest level in 3-1/2 years in February at 1 percent.

But what about German unemployment, isn’t that quite low?  Wait a minute, I thought you completely insane eurozone hawks told me unemployment doesn’t matter, and that the ECB should focus like a laser on 1.9% inflation.  So doesn’t that mean money is too tight for even Germany?  Make up your minds.  If you are going to be crazy, at least be consistently crazy.  No one likes an unpredictable crazy person.

Putting one’s own house in order

Here is S.C. over at Free Exchange:

Mr Osborne believes that substantive macroeconomic cooperation is neither desirable nor feasible. He’s right about the latter. He’s less right about the former.

Was the Fed merely the trigger for emerging-market troubles–troubles they should instead blame on their own shortcomings? The evidence for this view, Mr Osborne said, is that some emerging markets have been hit harder than others. That is true, and instructive. But it does not acquit the Fed. Its decisions can and do hurt emerging economies. Yes, their injuries vary. But that does not necessarily mean the injuries were self-inflicted.

And does the pursuit of national resilience add up to global resilience? Not necessarily. There are occasions when one country’s attempts at good housekeeping make it harder for other countries to be domestic goddesses themselves.

Let’s think about the phrase “attempts at good housekeeping.”  The Fed’s tapering moves seem to have hurt some emerging markets. How do we know this? One piece of evidence is that EM stock markets fell on the news.  But if that evidence is reliable (and I suspect it is) isn’t it also worth noting that tapering rumors hurt US stock prices as well?  Does this mean the decision to taper will hurt the US economy?

In my view the answer is pretty clearly “yes,” although I base that on other factors as well, not just US stock prices.  If S.C. had said “good housekeeping” rather than “attempts at good housekeeping,” I would have been much more skeptical of the claim.

In my view the so-called “one-size-fits-all” problem is greatly exaggerated.  I don’t deny it exists, but in the majority of cases I’ve looked at policies that have negative effects on other countries also have negative effects on the home country.  The ECB’s tight money policy has certainly been bad for Greece and Spain, but it’s quite likely that it has also harmed Germany and the Netherlands.

When the Fed makes a dramatic move, US stock prices often respond strongly.  Does anyone recall a single clear case where the response of foreign equity markets went in the opposite direction from US markets?  I can recall lots of cases where the foreign market responses were obviously in the same direction, and a few that were perhaps ambiguous.  But overall I’d say that “what’s good for the US is good for the EMs” is a reasonable assumption to make.  I’d have to see some pretty strong evidence to the contrary to overcome the presumption that the US should focus on keeping its own house in order, and should not get involved in international cooperation on monetary policy.  Can anyone cite a clear case (under floating rates) where cooperation was needed?

On the other hand many people who favor cooperation are also opposed to the recent tapering decision.  I believe they are right about the tapering, but that’s because I suspect the decision also hurt the US economy.

Aziz on monetary offset

Here’s John Aziz replying to a Ramesh Ponnuru piece discussing monetary offset:

But Fed policy wasn’t exactly tight during the stimulus. First, by the time the stimulus was enacted, the Fed had already dropped interest rates to zero, and it kept them there. Second, the Fed engaged in quantitative easing throughout the stimulus. By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes, reaching a $2.1 trillion in June 2010. That’s hardly tightening.

Ben Bernanke said (in 2003) that neither interest rates nor the money supply are good indicators of the stance of monetary policy.  Instead he suggests that NGDP growth and inflation are best.  By that criterion monetary policy after 2008 was the tightest since Herbert Hoover was President.  So Aziz is wrong in saying that policy was expansionary.  But I’d cut him some slack here, as obviously most people would agree with him, not Bernanke and I.  Indeed Bernanke would no longer agree with the Bernanke of 2003.

But this is not acceptable:

Now, Ponnuru’s argument isn’t that the stimulus caused the Fed to tighten, but that it would have been looser had there been no fiscal stimulus. But with the economy deeply, deeply in the dumps in early 2009, with unemployment soaring and consumer prices deflating, the Fed was already throwing the kitchen sink of experimental monetary policy at the economy and was doing so before the fiscal stimulus started. The hypothesis that the fiscal stimulus limited the Fed in any way is just not supported by the real world record of what the Fed did.

Even Bernanke would not agree with that.  He’s consistently indicated that the Fed could have done more, but simply chose not to.  The concern was “costs and risks” of unconventional stimulus. Actually there aren’t any costs and risks of acting, the costs and risks apply to not acting, something that the doves understood very clearly in the 2008 transcripts.  In any case, one option for 2009 would have been forward guidance, a tool that was not really utilized to any significant extent until late 2012.

Another option was level targeting, which would have been far more effective than the actions that the Fed actually did take.  Bernanke once recommended that the Japanese engage in level targeting.  Why does Aziz think Bernanke would not have done that sort of policy in an emergency situation where the Congress failed to act?  Bernanke almost certainly would have said; “if Congress won’t do its duty the Fed will have to save the economy from depression; we’ll do level targeting of the price level along a 2% track from 2008.”  And guess what, the expansionary impact of that announcement would have exceeded the effect of the ARRA.

But central bankers, like all humans “” especially operating in experimental domains like unconventional monetary policy “” get things wrong. Falling into a Japan-style trap of years of deflation “” something the United States has avoided “” would have been a much larger possibility without the relatively small amount of fiscal stimulus the United States had.

All I can say here is that if you want to argue for the efficacy of fiscal stimulus, you really don’t want to mention a country that did by most conventional measures one of the largest fiscal stimulus programs in world history, with one massive deficit after another, and an enormous amount of wasteful infrastructure spending on unneeded projects, and ended up with the worst performance of AD in all of modern world history, an NGDP that is actually lower than 20 years ago.  If you had told any economist in 1993 that 20 years later Japan’s NGDP would be lower than in 1993 they would have put you in a lunatic asylum.  And if you added that this would have occurred despite years of deficits running 10% of GDP, which drove the national debt up to 200% of GDP.  . . . well I think it’s fair to say that “old” Keynesian economics (which was already on the ropes in 1993) would have immediately collapsed.  And yet despite all that, and despite the spectacular failure of the 2013 austerity to do what the Keynesians predicted, the belief in the efficacy of fiscal stimulus refuses to die.

PS.  Ramesh Ponnuru has another excellent post, this one on policy in 2008.

PPS.  I can’t wait to see the transcripts from the meeting where they discuss NGDP targeting.  But will I live that long?  Commenter Lorenzo says the Reserve Bank of Australia releases the transcripts after just a few weeks.  It allows outsiders to give the central bank constructive feedback. Maybe our central bank doesn’t need any advice.

Noah’s snark?

I’ve consistently made the following arguments about Abenomics:

1.  The data suggests that the new BOJ policy has raised inflation, and inflation expectations.  There is a mountain of evidence on that point.

2.  Japanese inflation is likely to fall short of 2% (except for the sales tax bounce) unless the BOJ takes further steps.  That’s less clear than the first point, but seems a reasonable way to read market indicators such as long term bond yields.

3.  It really doesn’t matter whether they hit 2% inflation, they shouldn’t even target inflation. Rather what matters is if they can move NGDP growth into positive territory–at least 2% to 3%.  It’s still unclear if they will achieve that, but they’ve made progress.

Many commenters sent me a Noah Smith post that correctly pointed out that the more reliable “core-core” inflation rate is only running about 0.7%.  Mark Sadowski pointed out that just three weeks back Noah Smith had a post that showed the core-core rate had recently risen, and was at the highest rate since the 1990s.

Noah concluded with this odd assertion:

So basically, Abenomics has not yet shown that a central bank can hit a 2% inflation target after a long period of deflation. That proposition remains an article of faith. Perhaps the target will be hit…perhaps not. (Of course, if it’s not hit, expect a few supporters of monetary easing to say that the Bank of Japan was just not committed enough to hitting it…)

As I said, I never expected Japanese inflation to hit 2%, but I’m more interested in the question of whether the failure to do so would indicate that the BOJ did not do enough.  Hmmm, let me think about it.  Let’s see . . . I’m probably not a complete moron.  So yes, I guess I’d have to say that if inflation falls short of 2.0% then the BOJ would not have done enough to hit 2.0%.  After all, if doing X moved inflation up to the highest levels since the 1990s, then it stands to reason that doing 10X or 100X would boost inflation even more.  If moving the yen from 80 to 100 to the dollar boosted inflation, then it stands to reason that pegging the yen at 100 million, or 100 trillion to the dollar would do the job.  If not, how about 100 quintillion yen to the dollar?  (I stole this argument from John Locke–I only steal from the best.)

Or maybe I made a mistake somewhere.  The NK model says “overheating” causes inflation.  So if a currency peg of 100 quintillion to the dollar didn’t lead to overheating, then I guess it could not boost inflation above 2%.

Perhaps I’m overreacting to an italicized word (enough), but I couldn’t help thinking that there was a bit of snark directed at those who would claim that a failure to hit 2% inflation was due to insufficient monetary stimulus.  What else could it be due to?  Japan has the world’s largest budget deficit outside Egypt and Venezuela.

Perhaps a more interesting question is whether the reason Japan did not do enough (should it fail to hit 2% inflation) was that there were political barriers to currency debasement.  Say they worried that the US would send in the Marines if the yen was pegged at 100 quintillion to the dollar.  But as far as technical barriers, I’m pretty sure that if the Zimbabweans found a way, the Japanese could as well.  They aren’t morons.

PS.  The earlier Noah Smith post that Mark linked to ends as follows:

Monetary policy skeptics will doubtless still find no end of reasons to denigrate Abenomics, but so far their warnings have not been borne out.

Yes, that’s MUCH better.

PPS.  Just want to make it clear that Noah is not a moron–indeed he’s smarter than me.  Nor is he a phony.  I always try to inject a bit of humor into Noah Smith posts, and the Batman reference was already used.  Keeps me sane.

PPPS.  John Locke is definitely not a moron.