Some thoughts on saving, debt, deficits, etc.
Paul Krugman links to Jeff Madrick’s list of the 10 worst economic ideas of 2011. I don’t think much of the list, but I’ll just focus on one item:
Germany is especially proud that it has exported its way to becoming the strong man of Europe. It has suppressed wage growth, used subsidies to make its products more competitive, and taken advantage of the fixed euro, set at too low a rate to maintain trade balances. It is determined to remain oblivious to the fact that such a model requires countries that buy its products to run deficits and therefore borrow lots of money. This is why export models are known as beggar-thy-neighbor models, and it is why Germany has a moral obligation to help bail out nations like Greece, Italy, and Spain. Export models are really debt models on a global scale.
Madrick comes close to incorporating 10 economic misconceptions into one paragraph. Exports don’t make one strong, as the Japanese have shown. Subsidies don’t give one an advantage in trade. Nor does the level of the euro (except perhaps in the short run, but that doesn’t explain Germany.) Germany’s model doesn’t require other countries to run up lots of debt. It’s certainly not a beggar-thy-neighbor model, indeed I don’t think such a thing exists. Germany has no moral obligation to bail out the PIGS. Export models aren’t debt models. Even if every country in the world ran budget surpluses, places like Germany would still run trade surpluses. Here’s a quote from a new piece I wrote for The Economist:
It makes sense for a fast growing economy to borrow against the future, as when Korea ran deficits during the 1970s and 1980s. Or take a developed country like Australia. It absorbs a large flow of immigrants, who may borrow to buy a house against their future income within Australia. Indeed some current account deficits don’t even represent borrowing, at least in the ordinary sense of the term. Consider the case where Australians buy cars from East Asia, and pay for the cars by selling vacation condos on the Gold Coast to wealthy Asians. In many respects this is ordinary trade, except that the products that are built with Australian labour (the condos) never leave the country.
Australia hasn’t had a recession since 1991, despite running large current account deficits for that entire period. The Australian deficits are neither undesirable, nor unsustainable. Australia has lots of land, and Asia has a huge emerging middle class to buy condos located on that land. And Australia has almost no national debt. So why are trade deficits viewed as such a problem?
Australian national debt has recently risen to about 20% of GDP, whereas Germany’s is closer to 80%. Export powerhouse Japan is higher still.
The PIGS made several mistakes. One was excessive public debt (except perhaps Spain.) But Germany and America and Britain also have excessive public debt. The other mistake was in joining the euro. That combination proved deadly. But the euro isn’t responsible for Germany’s surplus; all the northern European countries (Switzerland/Germany/Netherlands/Denmark/Sweden/ Norway) have big surpluses, usually bigger than Germany in relative terms. Four of those six aren’t even in the euro.
Krugman also links to Dean Baker:
In an article discussing House Speaker John Boehner’s performance in his job, the Post referred to his negotiations last summer with President Obama over, “the federal government’s swelling debt problem.” Newspapers interested in maintaining the separation between the news and opinion pages would have simple referred to the debate over raising the debt ceiling, which is what was at issue.
The debt has risen rapidly because of the recession that followed in the wake of the collapse of the housing bubble. Financial markets do not see the debt as a problem, which we know since they are willing to lend the government huge amounts of money at very low interest rates. There was no reason to interject this sort of editorial comment in a news story.
Here my disagreement (if that’s the right word) will be more subtle. I certainly agree that our big deficits don’t imply higher interest rates. Real rates are determined in global markets. But a large public debt can be a huge public policy problem even if rates are low. It means we must either stay in recession (to keep rates low), or recover, in which case the burden of the debt on taxpayers will suddenly become much higher. I’m “worried” that we won’t face that “worry.” I’m worried that we won’t recover, and that rates will stay low. So yes, the financial markets are predicting exactly what Baker says, but that’s extremely bad news.
[I’m not sure Baker disagrees, this is meant to be another spin, not a rebuttal.]
I also think there is a touch of naivete in Baker’s criticism of the press, although one could find 100 similar examples in my criticism of the press (so consider the following to be philosophical musing, not a critique of Baker.)
Baker also complains that the financial markets don’t fear deficits. Yes, and the financial markets tell us that the economy is not in a liquidity trap, every time they respond strongly to hints of Fed stimulus (QE2, etc.) But the press thinks we are. And we constantly hear the press talk about how the sub-prime crash caused the Great Recession, as if it’s an assumption so obvious there’s no reason to even justify it. Yet the financial markets (and the economic consensus) were not predicting a big recession as of mid-2008, even though the sub-prime fiasco was fully understood. There are all sorts of ways that the financial markets tell us we are wrong, but we pay little attention.
Yes, the WaPo blindly assumed debt is bad, but our press coverage is saturated with hidden assumptions about causality, and about morality. We talk about “unfavorable” trade balances, even though economic theory provides no reason to view surpluses as better or worse than deficits. We talk about “good inflation news” being lower inflation, even when the Fed is trying to raise inflation from excessively low levels. And except when the housing component of the CPI falls–then it’s “bad news.”
None of this should be any surprise, as humans tend shape their views of causality in a context saturated with notions of “good” and bad.” A few years ago I discussed a study by Joshua Knobe:
An experimental philosopher named Joshua Knobe reported some interesting findings in an interview on Bloggingheads.tv. (I believe this example is mentioned in his new book, Experimental Philosophy, but I am not sure. (And, no, the title is not an oxymoron.)) Knobe said that two groups of people were given two slightly different stories, and then asked a question. The first group heard a story where an engineer went to the CEO of a company with a project that he said would dramatically boost profits. But there was one drawback; it would seriously harm the environment. The CEO said “I don’t care about the environment, I only care about profits. Do the project.” For the second group, everything in the story was exactly the same except that project was said to actually help the environment. Again the CEO said “I don’t care about the environment, I only care about profits. Do the project.” In both cases the listener was asked whether the CEO intentionally hurt (or helped) the environment. Most people in the first group said the CEO did intentionally hurt the environment, but most in the second group said that he did not intentionally help the environment.
As I recall many commenters tried to justify this asymmetry, although I didn’t find any of their explanations to be at all convincing. Here’s what I think was going on. Readers immediately understood that their thinking about causality exhibited the same asymmetry as the people in Knobe’s study. Of course my readers tend to be much brighter and more logical than average. So they were outraged that I seemed to accuse them of “human tendencies,” whereas they saw themselves as being as strictly logical, like the character Spock in Star Trek. How dare you insinuate that I’m human!
Being a good economist is all about learning when one should think autistically, and when one should not. If I ever figure it out I’ll let you know.
PS. If you’re wondering whether the Australian case applies to the US, consider this:
Former Citigroup chairman Sandy Weill listed his 6,744-sq-ft apartment at 15 Central Park West for an astonishing $88 million in November, promising to donate the proceeds of the sale to charity.
Now comes news that Ekaterina Rybolovleva, the 22-year-old daughter of Russian billionaire Dmitriy Rybolovlev, is buying the condominium. Rybolovleva is currently studying at an undisclosed U.S. university and plans to stay in the apartment when visiting New York. According to a source familiar with the sale, she paid the full asking price of $88 million, setting a record for highest individual transaction in New York City history.
Here is the official statement from her representatives:
A company associated with Ekaterina Rybolovleva, daughter of a well-known businessman Dmitriy Rybolovlev, has signed a contract to purchase an apartment at 15 Central Park West, New York. The apartment is a condominium currently owned by the Sanford Weill Family.
Ms. Rybolovleva is currently studying at a US university. She plans to stay in the apartment when visiting New York. Ms. Rybolovleva was born in Russia, is a resident of Monaco and has resided in Monaco and Switzerland for the past 15 years.”
Australia’s not the only “lucky country.”
Tags:
23. December 2011 at 13:56
Interesting that you bring up the point about people putting things in “good” vs. “bad”. Tyler Cowen posted about his Ted talk on storytelling (including the popular “good” vs. “bad” narrative) being transcribed just yesterday: http://marginalrevolution.com/marginalrevolution/2011/12/they-have-transcribed-my-tedx-talk-on-stories.html
It is an interesting point and something that I hadn’t give much thought before.
23. December 2011 at 14:24
Scott you said,
“Here my disagreement (if that’s the right word) will be more subtle. I certainly agree that our big deficits don’t imply higher interest rates. Real rates are determined in global markets. But a large public debt can be a huge public policy problem even if rates are low. It means we must either stay in recession (to keep rates low), or recover, in which case the burden of the debt on taxpayers will suddenly become much higher. I’m “worried” that we won’t face that “worry.” I’m worried that we won’t recover, and that rates will stay low. So yes, the financial markets are predicting exactly what Baker says, but that’s extremely bad news.”
I appreciate you clarifying that big deficits imply high interest rates. My assumption is that most who are deeply “worried” about deficits don’t know this. Yet clearly you think that deficits do matter-as opposed to what Cheney once said.
Forgive my being obtuse but I’m not clear what it is about deficits that you find worrisome…
When you say, “It means we must either stay in recession (to keep rates low), or recover, in which case the burden of the debt on taxpayers will suddenly become much higher. I’m “worried” that we won’t face that “worry.” I’m worried that we won’t recover, and that rates will stay low. So yes, the financial markets are predicting exactly what Baker says, but that’s extremely bad news.”
I’m still unclear what the worry is. If we recover why would the debt burden be much higher? Isn’t a large part of teh current deficit the recession itself-both the reduction in tax revenue, and the “automatic stabilizers?” No doubt the stimulus contributed partly to this too, but the point is that with a return to growth, the defifict would shrink.
This is the problem that I along with people like Baker, Madick, and Krugman have with austerity. First it makes the budget deficit the most important issue-we don’t care about even unemployment and low growth as much as we do about a budget deficit(putting to one side the fact that you see the remedy for unemployment and weak growth solely on the monetary side).
But even if you buy into this budget deficit cutting strait jacket austerity is self defeating there too as it lowers growth which therefore lowers tax receipts and raises the deficit therefore it is an endless spiral of lower growth, higher deificts, more austerity, rinse, repeat.
23. December 2011 at 14:26
Scott obviously the above sentence was meant to read, “I appreciate you clarifying that big deficits don’t imply high interest rates. My assumption is that most who are deeply “worried” about deficits don’t know this.”
LOL
23. December 2011 at 16:33
I just finished reading Krugman’s book from the early ’90s, Peddling Prosperity. Almost all of the book is spent excoriating the very same mistakes which Madrick makes in discussing Germany. Krugman literally says there’s nothing great about exports, subsidies don’t really boost exports, and so on. My guess/hope is Krugman linked to Madrick because he approves of Madrick’s other 9 points — there is no way in hell a guy who won the Nobel for his work in trade could possibly approve of these arguments about Germany.
P.S. Scott I think your first link goes to the wrong Krugman post.
23. December 2011 at 16:36
post hoc ergo propter hoc, one of my favorite latin phrases.
happy holidays.
23. December 2011 at 17:52
If Germany becomes less competitive for some reason, and monetary policy remains inflexible as it is, then isn’t it true that Germany either reduces its savings rate or else its starts to import part of the recession the PIGS are experiencing? Sure, I guess this would only be true “in the short run.” But isn’t the problem that the ECB is making sure this “short run” lasts a long, long time?
23. December 2011 at 19:22
you seem to be misquoting Madrick
His TITLE is, (bad idea #3)
Export growth models are sustainable
yet you say
Madrick comes close to incorporating 10 economic misconceptions into one paragraph. Exports don’t make one strong,
???
23. December 2011 at 19:27
Perhaps the people questioned intuitively know that a lack of accountability, aka limited liability, leads to reckless behavior, otherwise known as moral hazard or poor incentives, leading to a classic tragedy of the commons, except that the situation was entirely created by government policy.
23. December 2011 at 19:52
And our public debt would not have risen that much if the Federal Government had had more confidence in the RBA. ANU Economist Warwick McKibbin (who served on the Board for 10 years) criticised the fiscal stimulus as too large for a small open economy with a floating exchange rate (on the other hand, he thought borrowing to rebuild flood damaged/destroyed infrastructure was perfectly reasonable).
Australia has run current account deficits, with few interruptions, for a very long time.
23. December 2011 at 23:04
I think you’ve been fighting straw men. The article isn’t very clear, but the basic thrust is right.
Germany and France sponsored a common currency, the Euro.
The smaller countries felt they would be at a disadvantage if their neighbors joined and they didn’t. In this they were clearly right.
Germany was in effective control of Euro interest rates.
Low interest rates were fine for Germany, but led to loose money in less productive countries. Spain, for instance, had negative real interest rates.
The result in some countries was a real estate bubble.
Germany also ran a large trade surplus within the Euro zone, which had to correspond to equal trade deficits in the other Euro countries. Trade deficits are a more serious problem within a currency union. Citing other forms of trade deficits proves very little.
These trade deficits were met by borrowing from Germany at nominal or even negative real rates. It is hard to imagine a political system which faced with a need for money and a loan offer at negative real rates, wouldn’t take the loan.
Different countries had different mixes of loan takers. In Spain and Ireland cheap money caused a real estate bubble. Ireland was unwise in standing behind its banks. Greece squandered it in public sector salaries. Italy’s problem was its pre-Euro debt and a crisis of confidence driving up their borrowing costs.
This mess was a completely predictable result of German policy – their bat, their ball, their game.
For Germany to say that everyone should have emulated them is stupid or disingenuous. Everybody in a currency union can’t run a large trade surplus and set interest rates to suit them. Half the class will always be below average.
Moreover, if it all falls apart, they go down with the ship. They have bankrupt banks a large and growing national debt.
24. December 2011 at 11:46
[…] as Scott Sumner has pointed out in a recent post: Yes, and the financial markets tell us that the economy is not in a liquidity trap, every time […]
24. December 2011 at 13:29
If we recover why would the debt burden be much higher?
The debt *service* burden will be much higher.
The long term future interest rate projected by the SS Trustees for US debt is 6%, based on historical norms. The interest rate today is near 0%. US debt held by the public accruing interest is $10.4 trillion and rising fast.
With recovery interest rates will rise back to normal levels. You do the math.
the point is that with a return to growth, the defifict would shrink.
With the debt still growing. And the debt service cost still growing.
24. December 2011 at 14:49
Emulating Germany is easy for southern countries…
They just don’t get to consume as much.
To survive, they have to cut their regulations, drop their labor costs, lower their corporate taxes, cut back on their social safety net, and generally act like the South Carolina or Texas of Europe.
There is no discussion, they just don’t get to be the way they want to be.
Who cares?
Why do you care?
Seriously, I can’t see a single thing wrong with elder Greeks eating less, travelling less, getting lower quality health care, etc.
24. December 2011 at 16:31
It’s more than about southern consumption: Southern Europe has a major competitiveness problem, and it really isn’t about having very well paid employees: Look at Spain’s mileuristas: Young people with college educations working in the field that they studied, yet make 1000 euros a month or less. The competitiveness problem comes from very low trust: The employee does not expect better work to be rewarded, and the employer expects the employees to do as little as humanely possible to do their job. of course they have low productivity! The same low trust leads to choosing suppliers because they are good friends, instead of because they provide good quality at a good price. It’s the kind of behavior we’d call corrupting if it happened in the public sector.
So how can, easily, a country change its work culture to promote good work and efficient management?
24. December 2011 at 20:38
Morgan –
The differences between South Carolina and Spain go to the heart of the problem. South Carolina is part of a real federal government and Spain is not.
In return for their state’s having to balance its budget, it gets a safety net including Social Security, FEMA, substantial transfer payments from richer states and the right to send a guaranteed number of hogs to Washington to log roll and feed at the federal trough. It also shares with the other states perfect labor mobility. People can vote with their feet.
In return for letting Germany set their interest rates to inflationary lows and giving up the ability to devalue a currency or have a meaningful monetary policy, and facing significant barriers to labor mobility within the EU Spain gets what?
A common currency to trade in, forced inflationary interest rates and a lock in as a low productivity net importer (which they could avoid with an appropriately valued currency)cursed with the time bomb of free money.
Productivity isn’t just how hard people work. The Germans work considerably fewer hours per year than the PIIGS, and have a considerable welfare state.
The difference is a more educated work force, and more physical and financial capital. The solution isn’t for a bunch of lazy layabouts to get to work. It’s to exit France and Germany’s Euro trap without a financial catastrophe.
The Euro was an addictive drug – fun at first, but now not so much. Even the Germans weren’t total winners. Their banks are a few hundred billion Euros under water, and their national debt is 80% GDP, no better than the PIIGS.
Ever closer union, like the earlier eastern European “socialism” is a classic example of failed central planning – an undemocratic attempt to impose a ridiculous political theory on the nations of Europe culminating in an insane 300 page “constitution”.
25. December 2011 at 03:22
Peter N, I must say you’ve gotten to the heart of the matter. Your two comments nailed it, particularly the reference to “straw men.”
25. December 2011 at 08:38
Miraj, Yes, that was a great talk.
Mike Sax, You are still failing to understand my argument. Krugman used to complain about the Bush deficits being a big problem. My argument is the same, so you can’t cite Krugman against me.
I said the deficits are not a problem if rates stay low. But will they? If they do we are in big trouble (recession). If they don’t we are in big trouble (debt service).
As far as austerity, I’m opposed, I favor vigorous stimulus. I’d add that I favor the only type of stimulus that actually works—monetary stimulus.
Johnleemk, Thanks I’ll correct it. Madrick’s other points are also full or errors.
dwb, Same to you.
Shane, I don’t think their savings rate has anything to do with how prosperous Germany is. It’s all about NGDP and wage levels (in a cyclical sense).
And of course their economic model is a long run sense.
ezra, In the very first sentence he says exports made Germany strong.
JoshINHB, Yes, they probably do intuitively know that, which is why they answered the question wrong, it’s why they (wrongly) thought one action was more “intentional” than the other.
Lorenzo, I agree. Since they weren’t at the zero bound even Keynesians like David Romer would not approve of their deficits. No fiscal stimulus was called for, even using the Keynesian model.
Peter N, You said:
“The smaller countries felt they would be at a disadvantage if their neighbors joined and they didn’t. In this they were clearly right.”
Britain, Switzerland, Denmark, Sweden, and Norway stayed out. How are they at a disadvantage? (Even before the PIGS crisis?)
Peter N, Low interest rates do not produce real estate bubbles, highly unstable NGDP growth does.
You said;
“Germany also ran a large trade surplus within the Euro zone, which had to correspond to equal trade deficits in the other Euro countries.”
That’s a complete non sequitor. You might just as well say “the PIGS ran large trade deficits, that means the others (Germany) had to run surpluses.” Then Germany is not at all to blame–it had to run surpluses!
bob, I agree about the southern countries having those problems. It’s one reason they need their own currency.
25. December 2011 at 17:07
We talk about “unfavorable” trade balances, even though economic theory provides no reason to view surpluses as better or worse than deficits.
As one of the Internet-Austrians, let me say that I wholeheartedly agree with that statement.
25. December 2011 at 19:53
The idea of the euro was simple – a deutschmark for everyone who signed up. With deutschmark interest rates for everyone. And it worked, for a while.
But it married together different political economies. The PIGS countries relied on competitive devaluations to compensate for their institutional failings. Germany had long accepted the institutional demands of a “hard” currency (think Ludwig Erhard’s “bonfire of the regulations“).
Germany and co are net exporting because they have the institutional back-up to be competitive given the value of the euro (especially within the eurozone): the PIGS countries are net importing because they do not. Which is fine if you have the future productive capacity (and current debt-servicing income) to back up the required importing of capital. But they don’t because of the ECB’s policies’ effect on their current income and their institutional failings on their future productive capacity. It comes back to institutional differences (common currency bad) and current income (ECB monetary policy bad). The financial crisis (lender of last resort needed) is a product of the interaction of ECB policy with institutional differences and failings. With different countries suffering different levels of intersection of these problems.
Scott warns us not to reason from a price change: perhaps we should not reason from a trade balance either.
26. December 2011 at 02:34
“Subsidies don’t give one an advantage in trade.”
Yes they do, which is why the developing countries should do away with farming subsidies. When you tax your citizens and pass on the proceeds to corporations as subsidies, the corporations have an advantage over their overseas competitors, period.
“Nor does the level of the euro (except perhaps in the short run, but that doesn’t explain Germany.)”
Yes it does. That the euro is “too strong” for the south means that it’s “too soft” for the north. When you keep your currency “too soft”, you are endowing industry with the purchasing power of your consumers, because germany participatig in the euro means that Germans can spend less for imports while their corporations quote effectively lower real prices i.e. you are indirectly subsidising industry, i.e. you are deriving a trade advantage.
“Germany’s model doesn’t require other countries to run up lots of debt. It’s certainly not a beggar-thy-neighbor model, indeed I don’t think such a thing exists. […] You might just as well say “the PIGS ran large trade deficits, that means the others (Germany) had to run surpluses.” Then Germany is not at all to blame-it had to run surpluses!”
It works both ways. Surplus countries are to blame for their surpluses, deficit countries are to blame for their deficits. The eurozone is based on convergence of inflation and interest rates and we have an agreement that we do that through targeting a 2% level of inflation euro-wide. In absence of fiscal transfers and bail outs, if inflation rates diverge, imbalances build up. In this sense, the Germans by keeping wages stagnant for a decade, they achieved a 0% inflation rate. Greece by letting wages go wild achieved a 4% inflation rate. France did neither and achieved a 2% inflation rate, just like every euro country should have done. So, yes, it works both ways, Germany is to blame for undershooting the inflation target and Greece for overshooting it. And while Germany has not caused the trade deficit of the south, it has participated in the buildup of imbalances.
Bottom line: while Germany has no moral obligation to bail out the south, because both were equally involved in building the imbalances, it has a moral obligation to bail out the French, because France kept its inflation rate in check while Germany didn’t.
To that i’d add that “moral obligation” above is used in a very very narrow sense. Because if we use it in a wider sense it pretty much has to bail out everyone except the Japanese.
So
26. December 2011 at 04:37
Bob, Peter, Sax….
Productivity GAINS are what matter.
A country that kicks ass at 7%, and then eats the seed corn, and get 0% will quickly lose investor / market confidence – like any company whose stock price drops when the jig is up.
On the flip side, it only takes one super serious year, real changes begat real gains FAST. Everyone sees it, money floods in.
So PLEASE stop with the equivocation meant confuse other readers…
Admit! Repent!
Greece just needs to EAT IT, do the things they do not want to do, and the corner is turned overnight.
—-
Greece CAN BE South Carolina, and when they are Europe will be far more competitive with the US, until the US goes the full monty adopts something like a Balanced Budget Amendment.
Note: it doesn’t have to be a BBA, as I have noted here, and Scott has heartily agreed… adopting NGDP level targeting will DRAMATICALLY FORCE the US public sector to deliver the productivity gains that the private sector. Imagine gvt. delivering 3-5% every single year!
Remember this, liberal softies, Scott’s real agenda is JUST AS BRUTAL on public employees as I am:
Under a level target (4% is much preferable to 4.5%), every time the government deficits spends, that creates calorie-less NGDP growth, and the FED swoops in a raises rates on the real private sector business economy.
We quickly get a very visible enduring EITHER / OR choice between extra government spending or extra private sector spending….
Under Scott, every single year is Bill Clinton buckling to Alana Greenspan in 1993.
EVERY SINGLE YEAR.
26. December 2011 at 19:54
Hey Morgan, you said:
“Remember this, liberal softies, Scott’s real agenda is JUST AS BRUTAL on public employees as I am”
“Under Scott, every single year is Bill Clinton buckling to Alana Greenspan in 1993.”
Morgan is this meant to make “liberal softies” more trusting of Scott? I do suspect you’re right but I don’t know if you’re helping him.
If the goal of NGDP targeting is to make the world South Carolina, then we don’t need it.
As far as your claim that what matters is productivity gains, even if that were so, how is making the world South Carolian the way to get us there? If you assume that it is always a question of the lower the wages the higher the producitivty gains you are wrong.
If you can raise producitivty by increasing unemployment and/or lowereing wages-which one of these gets you more excited Morgan?-then obviously it’s not in the interest of the average American though perhaps in the interest of a want to be master of the universe like yourself.
26. December 2011 at 22:44
“‘Germany also ran a large trade surplus within the Euro zone, which had to correspond to equal trade deficits in the other Euro countries.’
That’s a complete non sequitor. You might just as well say “the PIGS ran large trade deficits, that means the others (Germany) had to run surpluses.” Then Germany is not at all to blame-it had to run surpluses!”
I believe I answered this – “their bat; their ball; their game.”
The party who forced the other party is the one who controlled the monetary policy. The Euro was overpriced for the lower productivity countries, but they were denied the economic tools to solve the problem. If they had been in charge and set ECB interest rates at 8% to control inflation, what would Germany’s situation been? Not very good, I think. If they had been able to do this and had done so, would you say they had forced Germany into a recession?
My point isn’t so much that Germany was to blame for current mess (at least until they decided to aggravate it by brinksmanship),as it is that I find their claim to moral superiority and a right to dictate policy to their wastrel inferiors offensive. The evidence doesn’t support it. I don’t see why they and only they deserve an exemption from moral hazard.
I think they would profit from a closer look at the period 1920-1933. They might learn some things that seem to have escaped them.
“Low interest rates do not produce real estate bubbles, highly unstable NGDP growth does.”
Negative REAL interest rates don’t cause bubbles? Offering people free money doesn’t encourage asset inflation? You’re kidding, right? Low NOMINAL rates prove nothing, but that’s quite different.
In any case, in Spain you have a 110% increase in NGDP (in Euros) over 8 years post-Euro while real GDP increased at around 3% a year. This should have been met by an increase in nominal interest rates.
27. December 2011 at 06:32
Sax,
I want you to understand that level targeted NGDP is antithetical to progressive factions but it is not antithetical to progressive ideals.
Meaning, level target NGDP forces the govt. to become as productive as the private sector. That means public employee unions eat it.
BUT, when public employees eat it, we do get end user citizens (read poor people) MORE FREE STUFF… because some of the money not spent on public employees goes where it is supposed to go.
Sax, I advocate a Guaranteed Income system that auctions the unemployed in $1 per hour auctions… I talk about it quite a bit here, Scott supports that…
I WANT you to know what you are getting yourself into, moving to a level target NGDP is really based on outright admittance that Fiscal Stimulus (as gvt. deficit spending) does not work.
Yes, I want you and yours to admit it, but more to the point, I want to make sure you understand that when the GOP finally does Scott’s plan and it works… that it really works BECAUSE it does these things to progressive factions.
27. December 2011 at 07:39
Morgan I see no proof that anyone in the GOP is aware of NGDP. They’ve all but sent out a subpeona for Ben Bernanke’s arrest for QE2 and you think they can wrap their mind around NGDP?
What’s ironic is you’re telling me and the other liberals that this is inimical to our ideals-maybe not smart, but I guess you feel you’re a straight shooter. I know you qualify between “progressive ideals” and “progressive factions.”
Yet clearly you have failed to convince your own GOPers about what you’re telling me. If NGDP is the road map to making the public unions eat it and putting us all on the South Carolina Model then you should be making this case to Paul Ryan, Eric Cantor, and Boehner not “liberal softies” like us.
Now when you say this, “I advocate a Guaranteed Income system that auctions the unemployed in $1 per hour auctions… I talk about it quite a bit here, Scott supports that…”
You just to elaborate more. You mean the unemployed will be auctioned off as the slaves once were? I know I can trust you wont be shy in explaining such a system. And can you tell us when Scott advocated that?
Cheers. In a way you’re even kind of growing on me Morgan. Can’t say why.
27. December 2011 at 11:27
Wait Sax… this helps Scott:
“If NGDP is the road map to making the public unions eat it and putting us all on the South Carolina Model then you should be making this case to Paul Ryan, Eric Cantor, and Boehner not “liberal softies” like us.”
Scott KNOWS this argument, he WANTS to first win your side over… he thinks it is good strategy.
The REALITY is this: the GOP is FINE with overly aggressive monetary policy when they are running the show… just look at the Fed since 1980.
The news story goes like this:
“The economy rebounded today with President Romney/Gingrich/Perry cutting gvt. spending on public employees, silencing the EPA and ending Davis-Bacon.
“In other news, the Fed announced it was pleased with the new fiscal position, and as such is adopting a hands off monetary policy it predicts will be far less inflationary over the next ten years.”
On my GI plan:
http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/
27. December 2011 at 11:28
Link 2:
http://biggovernment.com/mwarstler/2011/01/31/guaranteed-income-part-ii-a-real-end-to-illegal-immigration/
27. December 2011 at 19:17
So you admit that the GOP only hates the Fed when it could help a Democratic president? It’s the same reason why we only hear all this breast beating about deficits when there is a Democratic President-Reagan gave us a huge deficit but Clinton had to fix it. Bush gave us another huge deifict but at the time like Cheney said, “Reagan proved deficits don’t matter.”
However with Obama in the White House they matter again. Yeah what your saying sounds right-right now the GOP is playing Operation Tank the Economy. You don’t even pretend to do euphemism, maybe that’s what I like about you. Others GOPers would try to act like this is not what they’re doing.
27. December 2011 at 19:43
Sax, I’m far smarter than that…
I’m not just admitting it.
I’m saying the strategy is unbeatable.
It is unbeatable because there is a fundamental flaw in liberals trying to buy votes with other peoples money… the advantage goes AWAY if the right SPENDS IT ALL.
Look, until 1980, the right was simply too dumb, they actually tried to worry about saving money – which left money for the left to buy votes.
Once they wised up, they changed their strategy.. and the left is screwed with their pants on, over and over.
There is a way out for the left, but in the process their core public employee faction gets destroyed.
27. December 2011 at 20:30
Well we’ll see if it’s unbeatable. It has been effective till now I’ll grant you that-Jude Wanniski was the one to come up with the new conservative strategy he called it the “two santa claus” theory.
Still if liberals would smarten up and realize that in a way Cheney was even right they’d be out of the strait jacket. Of course what Cheney meant was “Reagan proved defcits don’t matter when a Republican is President.”
The Democrats have kind have been tricked by the “success” of Clinton’s surplus. Now even their vanity makes them feel good about deficit cutting-“yeah we proved the Republicans wrong we’re the real deficit hawks” yeah I agree it has until now been unbeatable.
Basically the Republicans learnt to cut taxes and not care if it causes a deficit or not. The Democrats have to unlearn caring about it at least not so much.
27. December 2011 at 22:31
“Greece just needs to EAT IT, do the things they do not want to do, and the corner is turned overnight.”
This is totally wrong. East Germany did all those things that Greece should do and does not want to do and they are -today- experiencing the same living standards as Hungary. Why? Because producers in east Germany have to quote prices in euros.
Don’t get me wrong, the Greek public sector needs to eat it as you say, on the basis of fairness, but that would not “turn corner overnight”. If you accept that a sudden drop to NGDP causes a depression, lowering public sector wages will lead to a further drop in NGDP and will make the situation even worse, unless that drop is offset by monetary policy.
There are two completely different problems that you have mixed up. First, what is the wage that a government employee should make, I don’t deny that you can argue reasonably that they should be lower. What I deny is that solving this issue will resolve the economic issues. Expansionary monetary policy that would restore NGDP at its pre-07 trend WOULD solve the economic problems, but it would do so regardless of whether you paid the public sector less or more. These are two separate issues.
Issue 1, i.e. public sector wages needs to be resolved on the basis of whether they are unfairly high.
Issue 2, i.e. the state of the economy needs to be resolved on the basis of whether we have the appropriate monetary policy to keep NGDP at trend.
It is perfectly possible to solve either of these issues without touching the other. The case of Eastern Germany and Ireland is for me sufficient evidence that you can solve issue 1 but not issue 2. The cases of Sweden and Norway (where public sector wages are too high but the economy is doing great, thank you) is for me sufficient evidence that you can also resolve issue 2 but not issue 1.
So you are either unconvinced by the evidence (why?) or simply mixing up two separate issues.
28. December 2011 at 06:14
Issue #1: public wages must be LOWER (almost “unfairly” so), so that ALL of the best and brightest go into the private t be sector.
Similarly, regulations must be written to step gingerly around the private sector, essentially focusing on simplicity and fair refereeing rather than seeking complex solutions that increase the needs for more public sector.
Issue #2: A country that does #1, WILL SUCCEED (even if all countries do the same) in raising living standards, and as I have shown above, and Scott continually suggests himself (he has his own reasons) a level targeted NGDP encourages #1 to happen.
These things are tied together, Scott makes a hash (out of strategy) out of arguing #2, but in fact we could do without level targeted NGDP with something like a Balanced Budget Amendment.
All roads lead to Rome. All roads lead to a public servant that is the servant of the private sector. All roads lead to raising up inventors and entrepreneurs.
ONLY TECHNOLOGY GAINS defined as productivity gains truly increase human living standards.
Don’t riddle yourself past that fact.
28. December 2011 at 07:10
Morgan I have good news: your very insightful comments have given me a new post. Don’t worry-I plug your website and your guranteed income proposal
http://diaryofarepublicanhater.blogspot.com/2011/12/sumner-krugman-and-credibility.html
28. December 2011 at 08:30
“A country that does #1, WILL SUCCEED (even if all countries do the same) in raising living standards”
Yes, with a few minor caveats:
The government has to survive the experience so as to carry it to its conclusion.
Your statement is true in the long run. As Keynes observed, in the long run were all dead.
The country has to survive the experience. Often, you get instead the man on the white horse.
People, if they can’t vote the austerity government out of office, will vote with their money and their feet, as we see happening in Greece. This leads to currency controls, and I think you’ll agree that’s a very bad thing.
Greece is the perfect example to stress test your theory. Their structural problems pervade the entire economy.
Getting anything done requires bribery.
Nobody pays taxes.
The government isn’t organized to collect taxes, since being a tax collector is a political sinecure, not a functional job.
Since everybody gets some sort of government handout, there’s an opposition constituency for any cuts.
There is no central land title registry. Non-lawyers aren’t allowed in the local ones.
As a result, ownership can suddenly appear out of nowhere given the right connections.
There isn’t much of a chance that Greece can pay down its national debt. The numbers just don’t work.
Say the government fires 50% of all of its employees, collects the taxes it’s owed (maybe they rent some tax collectors from Switzerland), and brings its bureaucracy out of its current state, which is what prevailed around the fall of the Ottoman empire (They hire IBM to create a modern government infrastructure). And suppose they start 2Jan2012.
Then if the government could survive 50% unemployment and crush strikes by every constituency organized enough to hold one and collect enough money to operate in the middle of a depression and not be voted out in favor of some demagogue, Greece might have a shot at your kind of solution.
I don’t think this is very likely. Instead we may get Albania with a better class of ruins, or NATO martial law, or…
28. December 2011 at 09:30
Sax, you are fun!
But really man, you need to re-jigger your caricature of me.
Let me help explain:
I write down my policy ideas and post them at Big Government a site very heavy on Tea Party folk.
The Tea Party really isn’t Republican, it is small govt. conservative… LIKELY even anti-military.
Yes I said it, deep down the Tea Party crowd, if you gave them a pure choice between KEEPING their money in their pocket or spending it on military – they’d call the boys home.
BUT, that’s not the choice. Instead, they have to choose between their money being spent on handouts to lazy people OR a giant strong ass kicking defense. They choose defense.
YOUR SIDE won’t give the Tea Party a pure choice, because if the money doesn’t get spent on military you WILL spend it on increasing public employee pay or the lazy (I’ll get to lazy in a second).
When you see Ron Paul, he’s actually able to get nods from Tea Party folk, but they know the world isn’t pure, but if it was, they’d be ok with not spending money on military…. but when Romney, Gingrich, Perry etc. fire up the patriotism thing and talk about a strong defense, people are NODDING to it, because they know they still have to pay the money.
Sax, I’m no Christian, I despise social conservatism, BUT I don’t view Christianity as a religion, I view it as a first really approach to capitalism. I’ll talk about this some other time.
I mention this because when you talk to the Tea Party, they are generally comfortable with basic lessons of Christianity, and to to me:
1. Beggars cannot be choosers.
2. Idle hands are the devil’s workshop.
These are supposed to be PROGRESSIVE IDEALS, meaning if the left just accepted that:
1. Everyone has to have a boss at least 40 hours a week.
2. Everyone has to have their time put towards private market ROI.
Then ALL the Christians would hold hands and agree with progressives that we MUST care for the poorest and weakest.
And since this means a FRUGAL GOVT., one that puts public employment below private employment, the Tea Party crowd, would no longer view military engagement as a great use of funds.
Essentially, once no one can make a good lucrative career of being a progressive, and flow controlling the tax payers money has no upside, and we put the DMV and SSA workers through the same brutal efficiency management of McDonalds and Wal-Mart…
The Tea Party crowd will be far more progressive, because frugality is a moral good to them. But ANY suffering that you can end frugally, they will support.
29. December 2011 at 07:39
Notice here Matty completely stumbles in understanding the ECB is following the Fed playbook:
http://www.slate.com/blogs/moneybox/2011/12/29/the_ecb_s_skimmer_bailout.html
The VERY Fed playbook I have been explaining to all and everyone.
29. December 2011 at 08:28
Morgan-
You did notice that the reason the ECB can do this is that the Fed is lending them them the money, right? A $3.5 trillion ECB balance sheet – no problem. BTW it’s headed to $5 or $6 trillion.
29. December 2011 at 13:33
Peter,
You give a solid explanation of Greece, and the entire time I’m only concerned with whether the entrepreneurs, innovators, and inventors gain more power day-day-week-by-week.
What you describe sounds only slightly better than North Korea to me, and China sounds far better than your Greece.
Perhaps, Greece doesn’t deserve to be a state, and the move to globalism will definitely have some failed states in the process.
Ultimately, ending what you describe on the ground (and having been there doing business with an Internet start-up I’d say you are dead on accurate), is EXACTLY why I don’t care what happens to the “people” of Greece, I are what happens to the competent entrepreneurial types and their progeny.
WE WANT, and be “we” I mean the people who actually matter, EVEN GREECE to have to be burned to the ground in order to be saved.
You seem to think that the continued suffering of the best of what Greece has to offer is an acceptable outcome, it is not.
There may be shades of gray, but there is definitely black and white, and the white side, the good side, the great side, are the entrepreneurial market minded capitalists.
Everything doesn’t have to be a morality play, as long as my guys always win in the end.
31. December 2011 at 08:21
Thanks Craig.
Lorenzo, Good point.
orionorbit, This is a fallacy that we try to clear up when teaching international trade. Any cost advantage from subsidies is precisely offset by a cost disadvantage from taxes to pay for the subsidy. There’s no free lunch. I believe this is accepted by pretty much all trade economists.
You are also wrong about weak and strong currencies. The price level in Germany adjusts to keep the real exchange rate at equilibrium in the long run. The surplus is caused by saving/investment imbalances, not a misaligned exchange rate. That’s why countries like Japan and Switzerland kept running huge surpluses as their currencies got stronger and stronger. It was offset by lower inflation than their trading partners.
Peter, You need to review your history of the eurozone. Just a few years ago it looked like the euro was at the right level for the PIGS, and way too strong for Germany. The unemployment rate for Germany rose higher and higher during the period up to about 2005, peaking at nearly 12%. Germany had to reduce costs (inflation) to make its economy more competitive. And they did so. But these issues have NOTHING to do with trade surpluses, countries can have huge trade surpluses but are hopelessly uncompetitive because their real exchange rate is too high. Japan and Germany are two recent examples.
3. January 2012 at 03:45
Scott, thanks for pointing out the fallacy but I don’t get why it’s relevant here. It’s very clear from my post that I don’t believe Germany is eating “free lunches” as I acknowledged in my original post that whatever trade advantage VW and Siemens achieve has to be paid by the German taxpayer. The only way I can make sense out of the first paragraph in your reply is if what you wanted to say was something like “since the subsidy advantages will eventually be repaid by the taxpayer they don’t matter”, but if this is indeed what you were trying to say it’s very very far from the consensus of what trade economist think on the issue (unless Krugman doesn’t qualify as “a trade economist”).
The second paragraph in your post is even harder for me to understand. You say that the price level in Germany adjusts to keep the real exchange rate in LR equilibrium (defined by 2% inflation), which did not happen; inflation in Germany in the last 10 years was substantially bellow 2%, so no the price level has not adjusted to its long run equilibrium value. If it did we wouldn’t be in the mess we are in. Yes, I agree that the surplus was caused by S/I imbalances, but i don’t see how it invalidates my original position which was:
1. Once a year the German government plays the referee between unions and corporations negotiating wages.
2. A fair referee will target a fair outcome where wages are set so that prices rise at 2%.
3. In the last 12 years the German government allowed real wages to stay at 1999 levels, which led to the S/I imbalance you are referring to (because income was diverted from consumers to savers). The German government could have told its corporations to pay fair wages (like it had been doing in the previous 50 years) but it didn’t, instead ALL productivity gains in the past 10 years were distributed as profits (hence the oversupply of S) and were used to finance price cuts (check the NOMINAL quoted price differences of say German vs. French cars in the past 10 years and you will what I mean).
4. If Germany had the DEM (like Japan has JPY and Switzerland CHF) these imbalances wouldn’t build up because simply, DEMGRD would rise to restore equilibrium in Greek-German trade. But in the euro this can’t happen, you end up with a EUR that is too weak for Germany but too strong for Greece.
5. The EU governments had a deal to keep inflation at 2% and Germany failed to achieve it. So even though they are not morally culpable vs. Greece who also failed to achieve it, they ARE morally culpably vs the French, who made sure that their prices were rising at a 2% rate.
Now of course I could be wrong in 1, 2, 3, 4, and/or 5, but I don’t see how your point about S/I imbalances contradicts any of these points. And the data are CLEARLY against your assertion that the post euro price level in Germany exhibits a revert-to-equilibrium behavior. This was a result of the German Government being as bad a referee as the Greek Government, so even in your extremely narrowly defined version of morality, the German government is morally culpable versus those that actually did achieve the price level rise they were supposed to, i.e. the French.
3. January 2012 at 13:25
orionorbit, I’m completely lost trying to understand your argument. I have no idea why the German government should aim for wage increases high enough to promote 2% inflation. I think wages should equilibrate the labor market. Because German unemployment has fallen from 11.5% to 6.5%, it seems the German wage policy must be moving wages closer to equilibrium, unless I’m missing something.
I didn’t mean to suggest that the German government could not boost exports with subsidies, I meant they couldn’t increase the CA surplus with subsidies.
You said;
“If Germany had the DEM (like Japan has JPY and Switzerland CHF) these imbalances wouldn’t build up because simply, DEMGRD would rise to restore equilibrium in Greek-German trade.”
I don’t follow–Switzerland’s surplus is much bigger than Germany’s, and Japan also has a huge surplus. These surpluses aren’t caused by mis-aligned exchange rates, but rather by saving exceeding domestic investment.
3. January 2012 at 14:38
Scott, OK, I get what you are trying to say and yes, wages should ideally equilibrate the labor market, so if German labor productivity grows faster than Greek, the German government should allow wages to rise faster than in Greek. Or at the very least they should be rising even a little, so that Greece doesn’t have to deflate in order to stay competitive. What happened was that in Germany, from around 1999, wages stopped rising, while productivity continued to rise. Pre-euro this sort of thing would not be a problem because the drachma would fall and restore competitiveness, but now it is.
Also I have no idea why you think the best way to check the hypothesis “wages move to equilibrate the labor market” is to look at the rate of unemployment, but to even consider this you first need a reasonable NAIRU estimate (6.5% isn’t, at least not for west+east germany) and your explanation needs to hold if you subject France, Italy etc to the same test, which doesn’t. A much simpler way is… well… to look at German real wages and see if they have been moving in line with productivity of labor.
What I should perhaps have made more clear is that I am not writing against your theoretical arguments, but simply responding to your assertion that the Germans don’t have any kind of moral obligation to contribute anything to help the eurozone, which is in my view wrong because the decision of the German government to side with corporations and keep nominal wages idle for a decade was as disastrous as the decision of the Greek government to side with public sector labor unions and let wages rise excessively.
When the German government says “nominal wages will stay where they are for 10 years”, it means that:
A. Inflation in Germany will be lower than the rest of the eurozone
B. German unemployment will be lower than in the rest of the eurozone
C. Profits corporations will rise faster than their eurozone competitors, because VW will not have to give its engineers the 3.5% rise that the engineers of Peugeot will get.
D. Wages are downside-rigid so the periphery would have a really hard time imposing deflation in order to stay competitive.
Oh and by the way thanks by pointing out that the Swiss surplus is much bigger than Germany’s, EXACTLY!! The Swiss have their own exchange rate, they can deflate themselves for the next 100 years if they like, because EURCHF would drop and restore balance. In the eurozone this can’t happen, the only way to maintain some balance is to make sure that wage growth is following more or less whatever the labor productivity growth is.
And I am not insinuating anything silly like “bad germans conspired to export their unemployment to spain”. All I am saying is that back in 1999 the Germans could have predicted that if they decided to keep wage growth at 0, then A B C and D above would follow, yet they did keep wage growth at 0. This was a very stupid decision, thus the Germans do have a moral responsibility to contribute to resolving this mess.