Europe has a growth policy; it’s called “2% inflation”

I seem to recall Paul Krugman once arguing that when the central bank raises and lowers interest rates to keep inflation stable, then it controls aggregate demand.  If rates are stuck at zero then fiscal policy becomes important.  The ECB has recently been raising and lowering interest rates to keep inflation at 2%.  That means Europe has a growth policy, if by “growth policy” you mean aggregate demand policy.   The only fiscal stimulus that works under that sort of regime is supply-side initiatives.

The French just elected Leon Blum Francois Hollande, who is committed to fiscal policies aimed at boosting AD and reducing AS.  Good luck with that.

PS.  I have lots of grading this week, which is slowing down blogging.  I will eventually address the Hamilton and DeLong posts that people have asked me about.


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50 Responses to “Europe has a growth policy; it’s called “2% inflation””

  1. Gravatar of Major_Freedom Major_Freedom
    8. May 2012 at 05:39

    I seem to recall Paul Krugman once arguing that when the central bank raises and lowers interest rates to keep inflation stable, then it controls aggregate demand. If rates are stuck at zero then fiscal policy becomes important. The ECB has recently been raising and lowering interest rates to keep inflation at 2%. That means Europe has a growth policy, if by “growth policy” you mean aggregate demand policy. The only fiscal stimulus that works under that sort of regime is supply-side initiatives.

    If by inflation it is meant price inflation, then a 2% inflation policy is not actually an aggregate demand policy, because it presumes that supply is rising, when in reality supply could fall (as in a depression with large quantities of idle resources), and so even with 2% price inflation, AD = P * S = 1.02 * S could fall, if S falls by roughly more than 2%.

    The French just elected Leon Blum Francois Hollande, who is committed to fiscal policies aimed at boosting AD and reducing AS. Good luck with that.

    Reducing AS? That is madness. What idiot in their right mind would purposefully seek to reduce the supply of real wealth, and believe they are making people’s lives better off? This is like saying war, because it destroys real wealth, makes people better off.

  2. Gravatar of W. Peden W. Peden
    8. May 2012 at 05:57

    I don’t think that Francois Hollande AIMS to reduce AS as such. However, if he was to actually carry out his election pledges, then that would be the effect.

    Hollande wants a France that works less, with fewer incentives, and with more barriers to production. Sounds like reducing AS to me, even though a remarkable number of people don’t realise the ocnnection.

  3. Gravatar of anon anon
    8. May 2012 at 06:16

    I think Hollande’s election is bad news in general; however, some of his proposed policies may raise AD in France, even as they thereby decrease it in other EU countries. The Eurozone problem is that its economy is poorly integrated, so they get more AD than they’d like in core states, and less in the periphery. Partly as a result of this (and the unwillingness to “inflate the good performers”), the ECB policy is tight enough that market expectations are closer to 1.3% in the very short term (2y; also, 5y, 7y, 10y). That’s terrible, and much worse than the US.

  4. Gravatar of Jaap de Vries Jaap de Vries
    8. May 2012 at 06:18

    I dont think Draghi will make the same mistake as Trichet did. I’m not sure whether you are pointing towards the retirement policies or the ECB raising interest rates when inflation increases.

  5. Gravatar of Rien Huizer Rien Huizer
    8. May 2012 at 06:23

    Scott,

    You are right on both counts (ECB policy effect on macro policy space and France’s implied policy). So what is your problem?

  6. Gravatar of Morgan Warstler Morgan Warstler
    8. May 2012 at 06:24

    Scott, while you are grading…

    Since the field of economics is stagnation right now…

    I’m sure you feel we should print more A’s, really inflate those achievement marks, get more kids revved up and loving economics, so they drop out of their Feminist Studies, English, and Art History majors.

    Glad to help.

  7. Gravatar of James in London James in London
    8. May 2012 at 07:13

    It is possible Hollande could do the “right thing” in giving the ECB more freedom to ease directly, or indirectly by turning the EFSF/ESM into a bank with borrowing rights from the ECB, a sort of shadow central bank. He could do this while faling to introduce the additional supply side constraints for which he has campaigned. Stranger things have happened. Exactly what did FDR campaign for in 1932?

  8. Gravatar of ssumner ssumner
    8. May 2012 at 07:18

    MF, Yes, I know what inflation is.

    W. Peden, I suppose I was being sort of sarcastic. If Hollande isn’t trying to drive the rich out of France so that his party will get more votes, then he’s not very bright.

    anon, Good point.

    Jaap, Yes, they have been moving rates up and down to keep inflation near 2%. Also some lending operations as well.

    Rien. I don’t follow you question. I thought the point of my post was quite obvious. What confuses you? The Europeans are talking about the need for a growth policy, and they already have one—unfortunately it’s a low growth policy.

    Morgan, Will do.

  9. Gravatar of dwb dwb
    8. May 2012 at 07:18

    true: but it seems the measure of central bank incompetence is high too.

    20% unemployment, what a mess. no wonder the neo-nazis got something like 7% of the vote.

  10. Gravatar of ssumner ssumner
    8. May 2012 at 07:19

    James, French politics is often done that way. In France the rhetoric is almost always to the left of the actual policy (which itself is somewhat to the left.)

  11. Gravatar of ssumner ssumner
    8. May 2012 at 07:20

    dwb, Commenter 123 will tell you that the ECB has been highly successful in meeting its sole mandate of 2% inflation. I don’t completely agree, but that may be how the ECB looks at it.

  12. Gravatar of Major_Freedom Major_Freedom
    8. May 2012 at 07:22

    Morgan:

    I’m sure you feel we should print more A’s, really inflate those achievement marks, get more kids revved up and loving economics, so they drop out of their Feminist Studies, English, and Art History majors.

    Excellent idea. After all, the devaluation of currency “works.” Econ profs should start to devalue grades as well. And if we end up at an upper bound for hiring newly graduated straight A students, the DofE can enact a negative grade rate policy, until we’re back to trend.

    To anyone who thinks about going against this, you don’t understand the problem of sticky hiring, and how it is possible to get stuck in a below trend equilibrium when there is a lack in aggregate A grades.

    If employers won’t hire B+ students, if they hoard too many job vacancies waiting for grades to rise, thus resulting in an aggregate fall in new hiring, then that means they are signalling to the DofE that the demand for A grades has gone up.

    This is why the optimal solution is for the DofE to enact a policy where more A grades are issued. I’ll pull out of my arse that 5% annual growth of A grades is preferable.

  13. Gravatar of Becky Hargrove Becky Hargrove
    8. May 2012 at 07:23

    Morgan,
    I have just the quote for you, from Friedrich Hayek, who had this to say about good economics: “It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistant application of subjectivism.”

    Or…beauty is in the eye of the beholder, and the for profit knows that. Do you know what tomorrows’ best selling product is? Hint, neither do I! Yes, the studies you mention are associated with non profit. But they also make money in the realm of the for profit, and the degree of GDP differential between the two in terms of said non or for profit we have not measured or truly analyzed.

  14. Gravatar of OGT OGT
    8. May 2012 at 07:24

    As I typed in a previous comment thread, I think boosting nominal income in the Eurozone will be tried right after everything else fails, or else the Euro will fail. We are getting closer and closer to the everything else having failed.

  15. Gravatar of Major_Freedom Major_Freedom
    8. May 2012 at 07:31

    ssumner:

    MF, Yes, I know what inflation is.

    My issue isn’t with your understanding of inflation. It’s the false equivalence between a price inflation policy and an aggregate demand policy.

    2% price inflation policy is not an aggregate demand policy, because the aggregate demand associated with this could fall if supply is less than what would be necessary to get AD to rise.

    For example:

    Year 1

    S = 1000 goods

    AD = $1000

    Thus

    P = $1 per good

    Year 2

    Desired P = $1.02 per good.

    S = 975 (say)

    Thus

    AD = P * S = $994.50

    In other words, even though the price level P rose by 2%, AD still fell, because S fell from 1000 to 975. (This could happen in a depression).

    When you said a price inflation policy “means” it is an AD policy, you presumed that S keeps up with D, when it might not do so.

  16. Gravatar of Jon Jon
    8. May 2012 at 07:37

    Linking this post and the last one: Peter diamond is notoriously wrong on AS policies. Why should he be elevated to the Fed and given further credibility-by-credentials?

    We need people on the FOMC who both want to manage AD to trend and can communicate how macroeconomics actually works–discouraging fiscal policy measures and encouraging legislative changes to improve efficiency.

  17. Gravatar of Benjamin Cole Benjamin Cole
    8. May 2012 at 07:39

    I wonder if in the USA people realize what a supply side policy would entail.

    -Progressive consumption taxes.
    -Wipe out the ethanol program.
    -Radically curtail military-homeland security and VA outlays.
    -Eliminate the vast federal subsidy of rural areas.
    -Cut welfare spending (although it is not a large part of federal outlays).
    -Raise Social Security retirement age
    -Adopt euthanasia for Medicare patients who are terminally ill and aged
    -Opening up our borders to immigrants

    An even tougher nut to crack are various obstructive state and local governments, who insist on licensing professions and trades, regulating whole industries such as alcohol, and limiting real estate development.

    In short, the likelihood of structural impediments being quickly torn down is zero. These are sacred cows of out political parties. As you can see, the GOP may even be worse than the D-Party.

    This is what makes Scott Sumner’s approach so important. It is practical, it can happen immediately.

    It will take generations, and maybe never, before we get the structural reforms we want.

    Below is list of largest federal agencies, by employment, financed by income and capital gains taxes. Where should we cut?ӬӬ

    Defense 3,200,000
    Veterans Affairs 240,000 Ҭ
    Homeland Security 200,000
    Treasury 162,119 Ҭ
    Justice 124,870 Ҭ
    USDA 100,000 Ҭ
    DOT 100,000
    Health and Human Services 62,999 Ҭ
    Interior 57,232 Ҭ
    Commerce 41,711 Ҭ
    NASA 19,198 Ҭ
    EPA 18,879
    State 18,000 Ҭ
    Labor 16,818 Ҭ
    Energy 14,000 Ҭ
    GSA 14,000 Ҭ

  18. Gravatar of Steve Steve
    8. May 2012 at 07:42

    Hollande is EurObama.

    His campaign slogans: “change starts now” and “give back hope”.

    The question is whether he is smarter than Obama. If he is, he will shift to the right and push back against Germany and the ECB. If he is not, he will try to push through social spending programs, thus worsening the French current account and joining the GIPSI sovereign crisis nations.

    http://www.connexionfrance.com/Hollande-Sarkozy-president-election-euro-Tulle-Bastille-13668-view-article.html

  19. Gravatar of dwb dwb
    8. May 2012 at 07:45

    dwb, Commenter 123 will tell you that the ECB has been highly successful in meeting its sole mandate of 2% inflation. I don’t completely agree, but that may be how the ECB looks at it.

    I see (for example PK’s lovely charts) that suggest UE is strongly correlated with country-by-country austerity yet yes, people in the ECB think its been highly successful (because wages are downwardly rigid) so yes, it probably looks as though they’ve hit their target.

    I think if we measured shadow inflation which acounts for the fact that wages are rigid – then I think it would show that there is in fact shadow deflation going on.

    I think that the incompetence of the ECB (and to a certain extent the Fed) is to fail to recogzine that wages are rigid and merely take the inflation #s at face value.

  20. Gravatar of Becky Hargrove Becky Hargrove
    8. May 2012 at 07:46

    Off topic, but some here like the Institute for Justice. They have a new video about licensing: in the 1950s one in 20 needed a license to work. Today, it is one in three. Louisiana is one of the worse offenders.

  21. Gravatar of anon anon
    8. May 2012 at 07:54

    “I think if we measured shadow inflation which acounts for the fact that wages are rigid – then I think it would show that there is in fact shadow deflation going on.”

    NGDP is closely related to “shadow inflation”, in that sense; so NGDP level targeting does not have that particular problem

  22. Gravatar of Benjamin Cole Benjamin Cole
    8. May 2012 at 08:38

    Becky-

    Not off topic at all. The topic is structural impediments. Many are encrusted into local and state governments.

    A little one: Some counties in North dakota, where an oil boom is underway, outlaw farmer putting more than five residential trailers onto their lots.

    Ergo housing shortages.

    And these are right-wing GOP’ers.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. May 2012 at 08:52

    Scott,
    2% *headline* inflation is *not* a “growth policy.” Not when half of the eurozone is already back in recession and eurozone unemployment is on a sharp upward trajectory.

    I’m in favor of anything that loosens the German right’s headlock on ECB policy. So that means undermining Merkel and the CDU every step of the way.

    This weekend’s accomplishments:
    1) Get rid of Merkel’s French allies (check)
    2) Vote gained for anyone or anything in Greece with a pulse that opposes policies suported by Merkel (check)
    3) Cost CDU control of Schleswig-Holstein and drive FDP down still closer to extinction (tentative check)

    (I don’t care if Merkel is in favor of mama, apfelstrudel und Volswagen. If she’s for it, I’m ‘agin’ it.)

    Next weekend:
    Elections in North Rhine-Westphalia

    If Merkel and the CDU decide they’re willing to compromise on reforming eurozone economic policy before they’re shown the door, great. But all indications are they have a Bunker mentality and it will take massive hordes of Stimulists descending on the Brandenburg Gate before they submit.

  24. Gravatar of Hjalmar Schacht’s echo – it all feels a lot more like 1932 than 1923 « The Market Monetarist Hjalmar Schacht’s echo – it all feels a lot more like 1932 than 1923 « The Market Monetarist
    8. May 2012 at 09:43

    […] Scott Sumner today compares the newly elected French president Francois Hollande with Léon Blum. I have been […]

  25. Gravatar of Charlie Charlie
    8. May 2012 at 09:58

    Can fiscal policy be stimulative in France even if the ECB is inflation targeting in the eurozone as a whole? France could achieve a higher inflation rate, while other countries faced a lower inflation rate, which netted out to 2%. It seems in the presence of frictions for movement across European countries, France could even raise NGDP per capita. Is it possible?

  26. Gravatar of 123 123
    8. May 2012 at 10:09

    Scott,
    Some time ago you have complained that the ECB doesn’t care about the unemployment and growth. Well, the focus of the latest ECB monetary decision press conference was the growth. This is what Draghi said:

    “It is of utmost importance to ensure fiscal sustainability and sustainable growth in the euro area. Most euro area countries made good progress in terms of fiscal consolidation in 2011. While the necessary comprehensive fiscal adjustment is weighing on near-term economic growth, its successful implementation will contribute to the sustainability of public finances and thereby to the lowering of sovereign risk premia. In an environment of enhanced confidence in fiscal balances, private sector activity should also be fostered, supporting private investment and medium-term growth.

    At the same time, together with fiscal consolidation, growth and growth potential in the euro area need to be enhanced by decisive structural reforms. In this context, facilitating entrepreneurial activities, the start-up of new firms and job creation is crucial. Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.

    In this context, let me make a few remarks on the adjustment process within the euro area. As we know from the experience of other large currency areas, regional divergences in economic developments are a normal feature. However, considerable imbalances have accumulated in the last decade in several euro area countries and they are now in the process of being corrected.

    As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.”

    He also said:
    “n this context, let me make a few remarks on the adjustment process within the euro area. As we know from the experience of other large currency areas, regional divergences in economic developments are a normal feature. However, considerable imbalances have accumulated in the last decade in several euro area countries and they are now in the process of being corrected.

    As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.”

    He also said:

    “The second area is what we can do at the euro area level to create jobs, basically by increasing investment and enhancing infrastructures. There are many proposals, such as increasing the European Investment Bank (EIB) action and redirecting the EU funds towards the low income areas. When we talk about infrastructure and fiscal consolidation, it is certainly much better to consolidate through the reduction of expenditure, especially current expenditure and not capital or investment expenditure, rather than through increases in taxes.”

    He also said:
    ” I was hinting at the 1980s as a time from which we could learn some lessons, but the 1970s were years of very high deficits and we basically all found ourselves, more or less to the same extent, in a situation of high inflation and recession. It was called “stagflation” at the time. We learned that to get out of that situation we needed to carry out structural reforms, that basically increasing current spending, and stopping fiscal consolidation would not be a great help. I hinted at different ways of introducing stimulus in the economy when I was talking about the growth pact. There are lots of measures that could stimulate job creation in the private sector, and there are a certain number of measures at European level that could address the infrastructure spending issue. And again, on the subject of fiscal consolidation, I always say that it is much better to consolidate by reducing current government expenditure, rather than via a contraction in expenditure in infrastructure or investments, or raising taxes. Unfortunately, countries often found themselves in urgent situations, where they basically had no time and therefore had to do the easiest thing, which is to raise taxes and reduce capital and investment expenditure. But even though this can be understood to be a short-term measure, it should be corrected in the medium term.”

    He also said:
    “As I said before, we have to create jobs. Who is going to create jobs? The private sector creates jobs and some would be created by the public sector through spending on infrastructure. These are jobs that could be sustained. The youth unemployment versus the average unemployment is a different issue, and I think I briefly commented on this before. That has to do with distortions in the labour markets, which caused the youth segment of the labour market to be flexible, while the rest of the labour market is completely and fully protected. This means that every time you have a decrease in economic activity which causes unemployment, this unemployment hits the youth segment more than the rest of the labour market. Now we are all aware and agree that this has very serious long-term social consequences, and it is something that should be addressed. That’s why I mentioned before labour market reforms as one part of the growth compact, provided that they have the three requisites flexibility, mobility and equity.”

  27. Gravatar of Morgan Warstler Morgan Warstler
    8. May 2012 at 10:20

    Benji,

    Are you familiar with my Guaranteed Income plan?

    http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

    ——-

    You can apply the same premises across all of the government.

    First, take Defense / HS off the table. We’ll get to that last.

    Turn the whole government into an Internet based platform, that (besides defense) its main mission is to take in money (PCT is great), and transfers the bulk of that money to states without any strings, preferably on a population based metric.

    Each state and each city has before it a host of “apps” (think salesforce.com) that they can deploy, written by private third party developers, that reflect different methods of doing business.

    The presumption here is that 100% of public employees and all citizens will interface with government via smart phones.

    Public employees live transparently, if you want a government job your records will audited. We will ASSUME you are likely to abuse your power, and build the system to catch you from the start.

    If you are covering your own nut, you generally live with more data protection than we have even now. Tax fraud is hard, when cash isn’t around.

    If you aren’t covering your own nut, see my Guaranteed Income plan.

    Congressmen, exist not to pass laws, which are written in wiki-form at the city-state level, but mainly to be live front faces to their district, if they run them like a DMV they get thrown out.

    All the partisan power resides at local level, and people move where they are most comfortable.

    Everything from your driver’s license to SS card, birth certificate, to your taxes, your medical reports, your fishing licenses, all your monthly bills, all of it…. is on this device.

    Everything from fixing potholes to delivering food to the elderly, anything you can think of a human touch social service is performed by private agents (see my Guaranteed Income plan).

    Defense spending goes down, because once the public employees have been gutted, the many conservatives who only support GUNS, because they do not want to give your more BUTTER, will now get to choose: Guns of “keep my money.

    Their greed will bring peace.

    ——-

    Couple of points:

    1. this is of course the future, it is inevitable. I’m doing nothing here original accept drawing a line out from where Internet tech is today on the same trend path as the last 20 years.

    2. the point of this is to get you really thinking through what a government looks like when you START with a Internet platform, and only add live humans when the tech can’t do the job, but since all humans are directed BY THE NETWORK, you still don’t need public employees doing most of these jobs.

    —–

    In that model, arguments like “markets aren’t perfect, Government must support science!”

    well, I disagree with you, but since rent seeking is so very very hard… and since the platform is built, and all research is done publicly, all technology developed is open source and in real time, very very quickly, the government is just paying for equipment, let qualified low bidders do live research and letting millions of hobbiest tinkers follow along- just like Sumner does with his blog to the Fed.

    It ALMOST becomes entertainment.

    Anyhoo, I could cut 75% of the employees at the Federal, State, and Local level and let the remaining 6M get paid a lot more.

    Off course it wouldn’t be those 6M people, they’d get replaced by higher quality guys who came out for the bigger salaries.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. May 2012 at 10:25

    Short Draghi:
    “Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.”

    Shorter Draghi:
    “It’s not my problem. You go do something about it.”

    Shortest Draghi:
    http://ronaldrogers.files.wordpress.com/2011/05/what-me-worry.jpg

  29. Gravatar of 123 123
    8. May 2012 at 10:27

    Scott, the best moment in the press conference was when the journalist asked Draghi: “I have a question regarding a comment made by the French President, Mr Sarkozy, in his debate with Mr Hollande last night. He basically took credit for the LTROs, saying that he sold the idea to the German Chancellor, Angela Merkel, at a gathering in Strasbourg on 24 November – which was two weeks before the Governing Council meeting when it was decided. I was just wondering, is that true? Did you speak to either of them two weeks before it was decided by the Governing Council? And, if so, where does that leave the ECB’s treasured independence?”

    You should see Draghi’s smile when he heard that question (at 53 min.):
    http://www.youtube.com/watch?feature=player_embedded&v=a0c5KMEA_mk#!

    The US equivalent would be Romney arguing during debates that he will press Bernanke to print more money, and Obama will retort how he has persuaded Nancy Pelosi not to object to QE2.

  30. Gravatar of 123 123
    8. May 2012 at 10:37

    @Mark A. Sadowski

    +1

    Although I’d compared him to a “Mission Accomplished” photo. And he clearly looked worried during press conferences before the LTRO started working.

    This is what he said during the latest press conference:”Well, on another occasion I was asked whether I can understand the anger of people, especially young people; jobless, young people; poor, jobless, young people. And my answer was yes, I can understand it very well. Of course, when this takes a violent form I can only condemn this, but this doesn’t detract from our being understanding and even in a sense sympathetic.”

  31. Gravatar of Adam Adam
    8. May 2012 at 12:19

    Whose inflation is the ECB targeting, though? Couldn’t France boost it’s AD without necessarily sparking a policy response from the ECB, on the off chance they get lucky to not be the source of inflation that the ECB is tracking?

  32. Gravatar of Bonnie Bonnie
    8. May 2012 at 14:15

    @Ben:

    The structural problems here are even worse than imagined. As you may know, there are political benefits to taking over industries in a regulatory sense and creating lobbies that previously did not exist. It provides an endless source of money and a sense of purpose for politicians in general until they get tired of the work it creates and hand all the rule-making over to the executive branch to go off and find some other thing to take over to increase their influence and revenue stream. This has been going on for decades with almost nothing left untouched. In order to unwind all of that, the politicians have to shoot themselves in the foot, and I just don’t see it happening any time soon.

    It boggles my mind that the Fed would consider doing inflation targeting as its main purpose; it just doesn’t fit with what we’ve been doing, and I don’t think anyone ever told the politicians what it means. Perhaps if they knew that the cumulative effects of what they have been doing are more immediate and possibly brutal, they would put an end to what the Fed is doing right away. It’s not that I like that condition of politics. I do not. But that is the way things are, and if push comes to shove, the Fed would and should lose that round, at least until voters themselves wise up and demand economic efficiency.

    @123

    I don’t have a technical problem with what the ECB is doing. It is a very possible thing on paper, but because it takes a while to implement structural reforms and get results even when the entire body politic is behind the changes, the pain of having to change nation-state economies in rather dramatic ways on what really is a moments notice makes it nearly impossible to accomplish. Mao tried doing a similar thing with his “great leap forward”, and failed miserably at the cost of many lives because there is no way for a society and associated governments to learn required behaviors that produce good results in such a short time period. It is far more plausible to develop the desired economic state over time. I understand that if the ECB loosens up, these economies may never change because the necessity to do so will be diminished, but on the other hand, the expectation that they do it yesterday is not only unrealistic, but inhumane and is more likely to backfire in unpredictable ways.

  33. Gravatar of Jason Odegaard Jason Odegaard
    8. May 2012 at 14:37

    I think Scott was being sarcastic. Not sarcastic about the zero fiscal multiplier, but joking about the “growth policy”.

    Especially since the ECB seems to ignore AS declines, which can raise headline inflation but are not a reason to adjust the monetary policy stance. Which has been discussed 178 times on this blog.

  34. Gravatar of oli oli
    8. May 2012 at 15:48

    Scott,

    How would you respond to Rajan’s article countering some of the most common criticisms of Bernanke’s monetary policy? In particular, how would you reply to his point about localised household indebtedness?

    Thank you,

    Oli

    http://forums.chicagobooth.edu/faultlines?entry=51

  35. Gravatar of Morgan Warstler Morgan Warstler
    8. May 2012 at 16:26

    DWOLLA FiSync looks to take down ACH:

    http://blog.dwolla.com/ach-goes-real-time-with-fisync-free-for-banks-and-credit-unions/

    Imagine that. A nice free real time service for banks and credit unions.

  36. Gravatar of ssumner ssumner
    8. May 2012 at 17:00

    OGT, And I’d add that everything else failed long ago, it’s a question of how long it takes the VSPs in Europe to figure that out.

    MR, You said;

    “When you said a price inflation policy “means” it is an AD policy, you presumed that S keeps up with D, when it might not do so.”

    I made the assumption that it keeps up enough for 2% inflation–that is all.

    Jon, Because the Fed has nothing to do with AS policies. Look, I’m no Diamond defender–I said it was a bad choice when he was nominated. But he should have been approved in any case, because he’s far better than many who do get approved.

    Ben, Looks like defense is a good place to start cutting.

    Steve, That’s a good analysis.

    dwb, I agree about the shadow deflation.

    Becky, I love the IJ.

    anon, Yes, that’s a good observation. Often when people say “deflation” they really mean “falling NGDP.” They don’t mean “plunging prices for PCs.”

    Mark, By “growth policy” I meant “low growth policy.” I agree it’s a bad policy.

    Charlie, Maybe, but recall that the growth advocates want all the eurozone countries to increase fiscal stimulus. I’m more worried about the entire eurozone, than any single country. If the eurozone goes down, France won’t be immune.

    123, Of course I agree about structural reforms, it’s like favoring motherhood and apple pie. Who’s against it? But that’s easy for the ECB to say. The question is whether there will be enough reform to help in the short run. I hope so but doubt it.

    123, Are you going to tell us how Draghi answered the question?

    Adam, See my answer to Charlie.

    Jason, That’s right.

    Oli, The thing that amazes me about Rajan’s posts is that he writes as if he only heard about this novel theory (that AD shocks cause business cycles) a few days ago for the very first time, and is trying to figure out why these strange creatures called Keynesians believe AD shocks cause business cycles.

    People like him need to take a clear stand. Do you believe AD shocks have real effects? If so, what is the optimal monetary policy? Are AD shocks something policy makers should care about? He seems to think the question is whether the Fed should “do something” about aggregate demand. The real question is what is the optimal path of AD that the Fed should target? When I read him I never have a clue as to where he is coming from. He seems to talk a completely different language from other macroeconomists.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. May 2012 at 17:43

    Scott wrote:
    “123, Are you going to tell us how Draghi answered the question?”

    I personally thought his response was very peculiar. His English up until this point (53 minutes in) had been impeccable. Suddenly his English completely degenerated, and after struggling to say something coherent in response, he uttered “I know nothing about this agreement” (shades of Sergeant Schultz).

    This of course totally failed to answer the journalist’s question. (Did he speak to either Merkel or Sarkozy two weeks before LRTO was decided by the Governing Council?) His body language also indicated extreme discomfort and an urgency to move on to something else.

    Shades of Nixon-Burns?

  38. Gravatar of 123 123
    8. May 2012 at 20:26

    Scott, he has answerwed it with a smile. However, every time I watch it, I have a diferent interpretation of that smile. We need some body language experts 🙂

  39. Gravatar of Steve Steve
    8. May 2012 at 20:36

    123, Mark,

    That was a great catch.

    I’m certain that he was lying, but I’m uncertain which of two lies. Either Merkozy met and determined monetary policy, and Draghi is lying about it, or Sarkozy lied about the meeting in the first place and Draghi doesn’t want to call him out on the lie.

  40. Gravatar of John Becker John Becker
    9. May 2012 at 03:32

    Here’s a great quote from Peter Klein over at the Mises site today that brings up a great point about NGDP targeting

    “Critics of discretionary monetary policy have argued for fixed rules, such as Milton Friedman’s famous recommendation of a fixed rate of money-supply growth, or Professor Taylor’s more accommodating set of countercyclical rules.[5] Others debate whether inflation targeting or nominal-income targeting is a more straightforward and realistic policy for the Fed.[6] However, none of these proposals is as effective as eliminating the monetary authority altogether, and relying on the voluntary decisions of market participants to determine the money supply and interest rates. A commodity standard, for example, removes even the possibility of central-government intervention in the monetary system. If rules are better than discretion, the best policy is to eliminate all discretion, and to achieve a monetary standard that is wholly independent of political or technocratic interference.”

    I could easily see people arguing during the next crisis that a nominal GDP target is too inflexible to deal with the circumstances. It probably wouldn’t do much to help the Eurozone now if the ECB adopted that policy. For this reason, an NGDP target ironically suffers the same defect as the gold standard in not allowing enough “discretion.”

    I think Scott should answer the question Klein poses, if rules are better than discretion, why not take authority (or at least seriously circumscribe it) out of the hands of a central bank entirely via a commodity standard. Also, why is central planning in the realm of money necessary while we have clearly seen that it is a disaster in any other area of the economy?

  41. Gravatar of anon anon
    9. May 2012 at 04:44

    John Becker, free-banking based on a commodity money standard might work well, as proposed by George Selgin and others. But I don’t find that critique convincing: inflation targeting has been implemented in a very rigorous way, and most macroeconomists still stand by it as the best policy rule. NGDP and price-level targeting are minority proposals.

  42. Gravatar of Negation of Ideology Negation of Ideology
    9. May 2012 at 06:43

    John Becker –

    “A commodity standard, for example, removes even the possibility of central-government intervention in the monetary system.”

    No, a commodity standard is a central-government intervention in the monetary system. Who defines the standard? The government. Who picks what commodities are in it? The government. Who picks the exchange rate? The government. Who can change it at any time? The government.

    I’m not trying to pick on you, but this is my biggest peeve with the commodity folks. If you think the government going on a commodity standard is good for the economy, then make your case. But don’t pretend that having the government control the nominal price of commodities is any less of an intervention than the government controlling the nominal price of a broad index like CPI, PPI, or GDP. It is not.

    In practice, the government has to use something for money. I prefer to tie the currency to the entire economy so no individual or relative price is affected. Then let the free market determine the price of gold, silver and everything else.

  43. Gravatar of 123 123
    9. May 2012 at 08:12

    Steve, if you use Facebook, you might want to join the Facebook NGDP targeting group: http://www.facebook.com/groups/126000900840454/

    It is likely that Sarkozy has persuaded Merkel not to object to LTRO.

  44. Gravatar of Major_Freedom Major_Freedom
    9. May 2012 at 18:36

    “When you said a price inflation policy “means” it is an AD policy, you presumed that S keeps up with D, when it might not do so.”

    I made the assumption that it keeps up enough for 2% inflation-that is all.

    In other words, AD could rise, fall, or stay the same, when price inflation is 2%.

    How is it that a price inflation policy “means” an AD policy again?

    This is like saying an interest rate policy “means” an AD policy as there’s always “a” particular AD associated with a given interest rate.

  45. Gravatar of Jason Odegaard Jason Odegaard
    10. May 2012 at 03:36

    Major_Freedom,

    I think that is why the 2% inflation rule is better to ignore AS declines that raise the price level (I’m thinking wars or droughts). Treat the AS-shock as the baseline +2%.

    Unfortunately, that’s not how the ECB works it out.

  46. Gravatar of ssumner ssumner
    10. May 2012 at 05:58

    Mark, 123, and Steve, That’s very interesting.

    John Becker. I have no idea what he is talking about. A commodity standard certainly doesn’t eliminate the possibility of central government intervention.

    I’m just as opposed to discretion as he is, but a commodity standard is less likely to get us to the promised land than NGDP targeting.

    anon, If economists are still standing by inflation targeting then they really have completely lost their minds. Or perhaps they simply aren’t paying attention to what’s going on in the real world. How many of those economists even know that the BLS says housing prices are up 8% since 2006, and Case-Shiller says they are down 35%?

    MF, Yes, it means the Fed will adjust AD to offset changes in AS. That’s exactly what it means to have an AD policy.

  47. Gravatar of Major_Freedom Major_Freedom
    10. May 2012 at 10:46

    ssumner:

    MF, Yes, it means the Fed will adjust AD to offset changes in AS. That’s exactly what it means to have an AD policy.

    This is like saying ANY Fed policy “means an AD policy.” If the Fed targeted interest rates, the Fed can be viewed as adjusting AD to offset changes in lending costs. If the Fed targeted any other monetary variable, the Fed can be viewed as adjusting AD to offset counter-directional changes to that monetary variable.

    Doesn’t AD policy mean the Fed is aiming at achieving a particular AD? If changing AD is a consequence of aiming at a particular P, then price inflation policy “means” AD policy the same way ANY OTHER targeting would “mean” an AD policy, since there are always implications for AD no matter what variable the Fed intends to change.

  48. Gravatar of Major_Freedom Major_Freedom
    10. May 2012 at 10:58

    Jason Odegaard:

    I think that is why the 2% inflation rule is better to ignore AS declines that raise the price level (I’m thinking wars or droughts). Treat the AS-shock as the baseline +2%.

    Unfortunately, that’s not how the ECB works it out.

    Even if changing AD from where it otherwise would have been absent the monetary intervention, generates distortions in relative spending and prices, and thus makes the economy physically unsustainable in the aggregate compared to prevailing subjective expectations and intentions at local levels?

    What’s worse to you: A little pain now and no pain in the future, or no pain now and a lot of pain in the future?

    2008 was so bad because the Fed didn’t allow sufficient correctional pain after the 2000 bubble burst. The next bursting is going to be really bad because the Fed didn’t allow sufficient correctional pain after 2008.

    All this inflation isn’t making the structural problems go away. It’s just kicking the can down the road by sanctioning them and encouraging new structural problems to be added to the pile.

  49. Gravatar of work work
    29. May 2012 at 00:28

    work…

    […]TheMoneyIllusion » Europe has a growth policy; it’s called “2% inflation”[…]…

  50. Gravatar of TheMoneyIllusion » Trends in European politics TheMoneyIllusion » Trends in European politics
    8. June 2013 at 06:01

    […] I expected,  Hollande is starting his Mitterrand-style U-turn.  BTW, here’s what I said when he was […]

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