Brace yourself for the taper
The research staff at TheMoneyIllusion.com anticipates that unemployment will fall to about 6% by the end of 2014. If so, then market monetarists can be expected to begin tapering their calls for monetary stimulus about 12 months from today. Of course this decision will depend on the outcome of a Federal Market Monetarist Committee vote. Some of the more hawkish members, such as Lars Christensen, are prepared to begin tapering today. In contrast, Ben Cole prefers a data-driven approach, and is looking for the data point “hell freezes over.”
Recall that this taper forecast is not unconditional, but will depend on the future path of the economy. If tapering does occur you can expect about 10% fewer demands for monetary stimulus each month. When tapering is complete most market monetarists will not rest on their laurels, but instead focus on the need for more forward guidance, especially NGDPLT. Once this recession is solved, the goal is to prevent the next recession. That requires a new policy regime with much more robust forward guidance.
We decided to give readers a heads up on a possible taper decision, so that they’d have time to plan accordingly. Of course if this post triggers outrage among my readers, and ad revenue falls sharply, I may delay the taper decision a bit longer.
When Bernanke and I say “data driven,” we actually mean “market driven.”
PS. Blogging will be sporadic over the holidays.
Tags:
25. December 2013 at 09:07
Hilarious, Merry Christmas Prof. Sumner!
P.S.: I think I agree with Ben Cole on this one. Why not maximize employment and stock prices?
25. December 2013 at 10:58
Thanks Travis, And Merry Christmas to you.
25. December 2013 at 11:05
I blame the Brady-Bundchen for bidding up housing prices;
http://www.lonny.com/Tom+Brady+and+Gisele+Bundchen%27s+NYC+Apartment/?utm_source=outb&utm_medium=cpc&utm_campaign=L-Specials-1
How’s a back-up linebacker supposed to have a Merry Christmas when the rich take all their money off the table.
25. December 2013 at 12:36
I found this under the tree!
http://www.amazon.com/Market-Monetarism-Roadmap-Economic-Prosperity/dp/148207382X/ref=sr_1_2?ie=UTF8&qid=1388003725&sr=8-2&keywords=market+monetarism
25. December 2013 at 15:59
Shouldn’t the market monetarist taper be based on NGDP rather than the unemployment rate? Start tapering when NGDP starts rising more quickly than the hypothetical target path (which obviously differs from one adherent to another).
25. December 2013 at 17:50
Happy holidays!
And a correction: I did not say I want QE “until hell freezes over.”
I said I want “QE to ramp up monthly until well after hell freezes over solid.”
25. December 2013 at 19:47
Silver lining: the markets seem to be saying they don’t particularly care about tapering qua tapering, they are much more interested in what policy changes say about long-term Fed behavior.
26. December 2013 at 08:17
Prof. Sumner,
Andy Harless makes a great point above!
Do you, Beckworth, Christensen, Rowe, etc. currently project that U.S. NGDP growth will average ~4.0% over the next 5 – 10 years? Faster? Slower?
26. December 2013 at 08:26
Great post, great year for you.
Merry Christmas!
26. December 2013 at 10:35
Scott,
Here’s Krugman on “Why Corporations Might Not Mind Moderate Depression”:
http://krugman.blogs.nytimes.com/2013/12/25/why-corporations-might-not-mind-moderate-depression/
I think his argument is plausible, though I believe you would not agree.
26. December 2013 at 11:44
Not much time today. Regarding Andy’s question, NGDP is all that matters when you are targeting NGDP. When you are not doing so (yet) you may want to look at the unemployment rate when deciding whether to simply go for 4.5% NGDP growth, or go for one or two years of “catch-up” and then go for 4.5% NGDP growth thereafter.
Travelling now, will try to address other comments later.
26. December 2013 at 12:42
Stumbled upon this gem today and thought of you. I was entering data from a 2008 Caterpillar 10K, and glanced over the “Outlook” section, page A-100 on Edgar:
* Preliminary data indicates the world economy fell into recession in fourth quarter 2008. The developed economies of the United States, euro-zone, United Kingdom and Japan declined sharply, many developing economies slowed, and commodity prices dropped in response to weaker demand.
* Economic policymakers were distracted by inflationary concerns during last summer’s surge in commodity prices and were slow to respond to economic weaknesses and the credit crisis. Effective actions did not really begin until after the collapse of Lehman Brothers in September. The timing of the response means the world economy will likely remain severely depressed through at least the middle of 2009.
…
* While we are encouraged by actions that have been taken to drive economic improvements, we are concerned that the European Central Bank and the Bank of Japan are responding too slowly to today’s economic crisis. In addition, we are concerned that central banks may begin tightening policies at the first sign of economic recovery and could create another downturn.
26. December 2013 at 17:03
http://i.imgur.com/63ywWGW.jpg
http://i.imgur.com/iGZp1bF.png
Someone please rationalize this. Shallow reasoning is preferred.
26. December 2013 at 17:11
^supply and demand
Happy christmas everone’s favorite money illusion troll!
26. December 2013 at 17:59
“Someone please rationalize this. Shallow reasoning is preferred.”
Anything to oblige. Let’s see, I take one look at the name of the commenter and conclude without even looking at his links that it’s BS on stilts. How’s that for shallowness?
26. December 2013 at 18:46
ChargerCarl:
Supply and demand! Excellent. Let’s go deeper. Why could people buy houses and cars and tuition for a lot less relative to their annual incomes then, as compared to today when there are even more houses and cars and schools that should have reduced their prices, ceteris paribus?
Mark:
Outstanding! It’s great how significant the strong emotional response you have towards nothing but empirical data.
Thanks everyone!
26. December 2013 at 23:30
“Supply and demand! Excellent. Let’s go deeper. Why could people buy houses and cars and tuition for a lot less relative to their annual incomes then, as compared to today when there are even more houses and cars and schools that should have reduced their prices, ceteris paribus?”
Demand rose
27. December 2013 at 04:57
Geoff, apart from antique value, how much would you pay for a new 1938 model car?
27. December 2013 at 04:59
Dan Carroll, Great excerpt. Do we know who Cat’s economist was, or if they even had one?
27. December 2013 at 07:00
Geoff,
Do you honestly believe that quality of life was better in 1938 than in 2013 ?
If not, then what is the point of such a meaningless comparison ? (other than proving, once again, that you are a total retard)
27. December 2013 at 08:40
Morgan Warstler,
We would all appreciate it if you would address Geoff’s strange claim. But for now, I think these posts from Yglesias are a half-decent response:
http://slate.me/19oy4LS
http://slate.me/1eIX7hd
A couple other quick points: the U.S. experienced rapid inflation from 1938 to 1980. And the standard of living of the average worker was way way way higher in 1980 than in 1938. Since 1980, inflation has slowed and inequality of wealth has accelerated.
Another point: over the past 50 years, South Korea, China and the U.S. have all had plenty of inflation. There’s no doubt that the average person in South Korea and China is better off. And I’m personally certain the average person in the U.S. is better off.
27. December 2013 at 13:48
Scott, I hope you’re joking, as i know you don’t favor targeting unemployment , but NGDPLT.
On a side note, do you REALLY think that the natural rate is 6%? unemployment? Seems like its letting the Fed off easy. In the 50’s and 60’s the natural rate was considered to be 2-4%.
27. December 2013 at 15:11
Natural rate — In the 80’s it was thought to be around 6%
in the 90’s we broke through 5% and everyone was astounded that inflation had not already accelerated.
At this point it seems that NIARU has been largely discarded. Then I thought the Keynesianism was dead and then George Bush seemed to revive it.
27. December 2013 at 16:49
Geoff is a tireless troll, but that second graph is pretty striking.
Goes along way in explaining why the American middle class is no longer reproducing itself, no? Family formation is just too expensive. The religiously motivated and immigrants are picking up the slack. Also corroborated by the increased number of young adults living in their parents’ homes.
This could be totally wrong, but I would love to hear a better response than just snark.
27. December 2013 at 19:52
ChargerCarl:
“Demand rose”
Why didn’t average incomes rise as much as demand?
Brian Donohue:
“Geoff, apart from antique value, how much would you pay for a new 1938 model car?”
You mean what would I pay if you stipulate that it is worthless to me?
Daniel:
“Do you honestly believe that quality of life was better in 1938 than in 2013?”
I don’t make any judgments of this sort, because the truth of it derives from other individuals for themselves, not me. Quality of life is an answer that the individual makes for themselves. I lack the requisite knowledge to know if a random individual is happier in environment X than environment Y. While I would guess that the overwhelming percentage of the population would prefer to live in 2013 than 1938, the fact that I see movies of time travelling, informal conversations where people said life was better way back when, that some people would, if they could so choose, live in 1938 than in 2013, all of this makes me suspect that quality of life varies according to individual preferences, and that it would not be useful information if most people would prefer to live in 2013 than 1938.
I am pretty sure that if you ask a Jew in 1941 Germany if he would prefer to live in 1910 Germany instead, then I don’t think it’s unreasonable to guess that he would.
The point I am making is that you can’t just insist that life is better today than in 1938 for every individual. For most you’d probably be right, but I don’t want to ignore the minority just because they’re outnumbered. Democratic thinkers like you are intellectual followers. You just follow the crowd, and there is something wrong with the fringe and the minority. Your posts reek of such irrationalism.
“If not, then what is the point of such a meaningless comparison ? (other than proving, once again, that you are a total retard)”
Again, considering the fact that your responses to my posts are so childish and laden with schoolyard level insults, only tells me that you lack the requisite knowledge to make substantive comments.
It’s not a meaningless comparison, by the way. Only someone with an anti-intellectual agenda would claim that there is zero useful information in those two charts.
mnop:
“Geoff is a tireless troll, but that second graph is pretty striking.”
Pretty sure you’re unsure of what a troll is, but yes, the second chart is fairly revealing.
“This could be totally wrong, but I would love to hear a better response than just snark.”
Daniel needs snark in order to cover up his ignorance.
27. December 2013 at 22:07
“Why didn’t average incomes rise as much as demand?”
population growth
27. December 2013 at 22:38
ChargerCarl:
Why did demand rise faster than population?
Why didn’t population growth reduce average incomes and reduce prices through increased productivity?
28. December 2013 at 04:03
Geoff,
Once again, you’re a goalpost moving moron.
I didn’t ask about psychological well-being – if we are to be honest, industrial society has totally failed to deliver on that aspect. Hunter-gatherers are the happiest people on earth (and they live a hand-to-mouth existence). They also live in fiercely egalitarian societies, which makes me think that people who espouse extreme libertarian views are somewhat autistic (and that includes you).
I was talking about material comfort, and how you cherry-picked some prices. Yes, those prices do tell us a lot – housing is way more expensive, university education has become ludicrous.
But today’s cars are like spaceships when compared to 1938-era cars, and demand for oil back then was a fraction of today’s. Notably absent is any discussion of disposable income (among others).
So let me ask you again, idiot – do you honestly believe material comfort was higher in 1938 ?
If not, how exactly are you not the stupid troll everyone says you are ?
28. December 2013 at 07:09
Major your choice of years is rather unfortunate. You yourself admit that no Jew would want to live in the time of Nazi Germany-so sometimes you can generalize. I mean so we agree this far: while subjective dispostions do vary greatly, nevertheless no one would prefer to go to the gas chamber. So this generalization is not contested.
1938 America is another year pretty easy to generalize about and be right: 1938 was in the middle of the Great Depression so I don’t think very many at all would want to live in 1938 just when we fell into a second recession during the larger GD.
Materially at least that was a grim year indeed to be alive. I doubt that a cheap dozen of eggs or carton of milk helps much as the economy was in recession and many people didn’t have jobs.
By the logic applied here-that low prices make an age some kind of paradise-late 2008 to early 2009 should have been a paradise-the price of oil and most commodities completely collapsed. I remember that time well and believe me cheap gas for your car doesn’t help when you are out of work and can’t buy gas for it in the first place.
28. December 2013 at 11:36
TravisV,
Yes, my personal “main scenario” would be that the Fed will be able to and likely will deliver 4-6% in the coming 5 years and as I am also fairly optimistic on supply side developments I believe that inflation will remain subdued around 1-2% in the same period. I discuss these issues in my latest blog post: http://marketmonetarist.com/2013/12/26/christmas-muslings-on-life-money-and-blogging/
And Scott, you are right – I am probably the “hawk” on the “FMMC” as I believe it is time to let bygones-be-bygones. As I argued back in September: http://marketmonetarist.com/2013/09/10/it-is-time-to-let-bygones-be-bygones/
That said, Market Monetarism is exactly not about being hawkish or dovish. It is about arguing for monetary policy rules – preferably a completely market determined monetary regime.
28. December 2013 at 11:47
Mike:
Major, by what you said, it appears you agree.
“I doubt that a cheap dozen of eggs or carton of milk helps much as the economy was in recession and many people didn’t have jobs.”
But for those who did…
Not sure why we should ignore the 75% of the workforce with jobs.
28. December 2013 at 11:47
Mike:
Major, by what you said, it appears you agree.
“I doubt that a cheap dozen of eggs or carton of milk helps much as the economy was in recession and many people didn’t have jobs.”
But for those who did…
Not sure why we should ignore the 75% of the workforce.
28. December 2013 at 12:24
http://krugman.blogs.nytimes.com/2013/12/27/melancholy-danes/
December 27, 2013
Melancholy Danes
By Paul Krugman
“I’m going to be visiting Scandinavia next month, so I’m doing preliminary homework “” and for someone who hasn’t been following the region closely, there are surprising developments. Here’s real GDP, with the US to give some sense of comparison:
[Graph]…”
If we’re going to discuss the effects of demand side policies then we need to be looking at the demand side of the economy. The most relevant measure is nominal GDP (NGDP), not real GDP (RGDP). Here’s a graph of NGDP for Sweden, Denmark, the US and the Euro Area since 2007. This is quarterly instead of annual since I think the higher frequency is beneficial in explaining what happened. It is indexed to 100 in 2007Q3 since NGDP was close to the 2007 average for all of the currency areas that quarter. I’ve thrown in the Euro Area because Denmark’s peg of the kroner to the euro makes it highly relevant:
http://research.stlouisfed.org/fred2/graph/?graph_id=153008&category_id=0
Paul Krugman:
“…A couple of years ago Sweden was widely considered a role model, with the best recovery in the advanced world. Now, not so much, thanks to slowing growth “” perhaps because of the central bank’s bubblephobia…”
The only EU member that escaped recession in 2008-09 was Poland. Sweden had a recession but it was the mildest of any EU member that did. What both of these countries had in common was flexible exchange rates. Denmark by contrast is pegged to the euro. Since Denmark and Sweden are neighbors, and are very similar in terms of language, culture, religion, insitutions, politics etc. This makes for the ideal economic experiment on the effects of fixed versus flexible exchange rates.
28. December 2013 at 12:27
Here’s a graph of the Danish kroner relative to the German mark through 2001 and the euro since 1999:
http://research.stlouisfed.org/fred2/graph/?graph_id=153007&category_id=0
Note that the kroner has been effectively pegged to the euro since January 1997 or for nearly 17 years.
Here’s the exchange rate of the Swedish kronor relative to the euro since 2002:
http://research.stlouisfed.org/fred2/graph/?graph_id=153017&category_id=0
Note that between August 2008 and March 2009 the kronor depreciated by about 16% relative to the euro. The fact that Sweden’s NGDP only fell 4.4% peak to trough instead of 7.8% like Denmark is directly attributable to this fact. The Swedish Riksbank was unconstrained by the requirement of maintaining an exchange rate peg when the crisis hit and so was free to pursue a more expansionary monetary policy than the Danish National Bank.
Note also that Sweden opened up a very wide lead in NGDP with respect to the other currency areas between 2009Q4 and 2010Q4. NGDP grew by 13.4%, 6.9%, 6.9% and 11.2% in 2010Q1 through 2010Q4 respectively. Thus NGDP soared by 9.6% year on year between 2009Q4 and 2010Q4.
Was there anything that the Riksbank did during that period that might account for this?
The Riksbank increased its monetary base by more than the Fed early on in the crisis. By October 2008 it was already 121% larger than in August compared to 25% for the Fed. By December 2008 it was 225% larger compared to 101% for the Fed. However, unlike the Fed which moved to a zero interest rate policy by December 2008, the Riksbank did not lower its repo rate to 0.25% until August 2009.
Although the Riksbank was slower to move to ZIRP, during this time (this lasted through June 2010) it maintained a (-0.25%) deposit rate, the first central bank to institute a negative interest rate, and the monetary base was maintained in the range of 270% to 350% larger than it had been in August 2008. In contrast the Fed was paying (+0.25%) on reserves and the monetary base was only 100% to 140% larger than it had been in August 2008 during this period.
28. December 2013 at 12:29
What about fiscal policy?
In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature. The best place to find CAPB data is the IMF Fiscal Monitor. You can find the CAPB on the bottom half of Table 2 on page 70:
http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf
Between calendar years 2007 and 2010 the Sweden’s CAPB decreased by 1.6% of potential GDP, which was expansionary. But for comparison, the CAPB of Denmark, the US and the Euro Area decreased by 4.6%, 5.3% and 3.1% of potential GDP between 2007 and 2010 respectively. And in 2010, the year that Sweden soared into the lead, Sweden increased its CAPB by 0.7% of GDP whereas Denmark, the US and the Euro Area decreased theirs by 0.3%, 0.2% and 0.2% of potential GDP respectively. Thus the year Swedish NGDP took off, her fiscal policy stance was actually contractionary in contrast to the expansionary policy stance of the other three currency areas.
Between 2010Q4 and 2013Q3 Sweden’s NGDP has only grown at an average rate of 1.7% annually. This is barely faster than the 1.6% and 1.3% rate it has averaged in Denmark and the Euro Area respectively, and it is dramatically slower than the 3.9% rate it has averaged in the US.
Has the Riksbank done anything differently? Most definitely yes.
By January 2011 its monetary base was reduced to only 2% more than it had been in August 2011. Starting in July 2010 the repo rate was raised in quarter point increments until it reached 2.00% in July 2011 where it remained until December 2011. Since then the Riksbank was eased somewhat with the monetary base now back up to 23% larger than it was in August 2008 and the repo rate having been reduced to 1.00% by December 2012 and to 0.75% only on December 18, 2013.
In contrast the Fed has maintained its zero interest rate policy throughout and has initiated not one but two separate QE programs since the Riksbank left the zero lower bound.
And what about fiscal policy?
Sweden’s CAPB has decreased by another 1.9% of potential GDP between calendar years 2010 and 2013. In contrast Denmark, the US and the Euro Area have increased their CAPBs by 1.8%, 3.7% and 4.4% of potential GDP between 2010 and 2013 respectively. Thus on average Sweden has had an expansionary fiscal policy during 2011-13 while the other three currency areas have had contractionary fiscal policy, and the currency area which has easily led in NGDP growth since 2010Q4, namely the US, has had the most expansionary monetary policy and the tightest fiscal policy of these four currency areas during this period.
And so it would seem that good monetary policy in 2008-2010 and bad monetary policy in 2011-13 completely account for Sweden’s relative boom, and then bust.
28. December 2013 at 12:47
Mark:
Uhhh
28. December 2013 at 12:58
Mark in this paragraph are you talking about GDP or NGDP?
“Between calendar years 2007 and 2010 the Sweden’s CAPB decreased by 1.6% of potential GDP, which was expansionary. But for comparison, the CAPB of Denmark, the US and the Euro Area decreased by 4.6%, 5.3% and 3.1% of potential GDP between 2007 and 2010 respectively. And in 2010, the year that Sweden soared into the lead, Sweden increased its CAPB by 0.7% of GDP whereas Denmark, the US and the Euro Area decreased theirs by 0.3%, 0.2% and 0.2% of potential GDP respectively. Thus the year Swedish NGDP took off, her fiscal policy stance was actually contractionary in contrast to the expansionary policy stance of the other three currency areas.”
Also I don’t see what data your claim that the U.S. had the most contractionary fiscal policy is based on. By the CAPB numbers you gave in the second to last paragraph the EU was tighter than the U.S.
28. December 2013 at 13:07
Assuming for argument sake we accept that Sweden had the most exapnsionary monetary policy until 2010 and then suddenly switched to the tightest while fiscal policy did the opposite going from the tightest to the easiest it still doesn’t really make the case for fiscal tightending only that monetary policy was allegedly able to fully offset fiscal austerity.
At the end of the day we’d still have been better off with both fiscal and monetary expansion.
In the U.S we have seen a better performance in the U.S. since 2010-though we’ve been something of a one-eyed king; compared historically it’s still been a pretty feeble recovery but it was still positively robust in comparison with the EU. Still where’s the case made in any of these numbers that NGDP would have been lower if we had a less contractionary fiscal policy?
As for those who would say that ‘well then there’d be galloping inflation’ we are currently barely over 1%, effectively less than half of what the Fed implicitly said it wants via the Evans Rule-2.5%. So with inflation at 1.1% and a 2.5% goal-in reality it’s something like a goal-there would have been plenty of room to roam for fiscal policy.
We;re not even talking about stimulus here just less contraction. Can you claim that if there had been less contraction there would be a lower NGDP rate since 2010?
28. December 2013 at 13:07
“By January 2011 its monetary base was reduced to only 2% more than it had been in August 2011.”
should read
“By January 2011 its monetary base was reduced to only 2% more than it had been in August 2008.”
I can see several editing mistakes but nothing else substantive.
28. December 2013 at 13:09
Incidentally, the claim that the U.S. has had more fiscal austeirty than Britain is far from universally accepted.
http://www.econbrowser.com/archives/2013/12/british_economi_1.html
28. December 2013 at 13:10
Spoke too soon.
“In contrast Denmark, the US and the Euro Area have increased their CAPBs by 1.8%, 3.7% and 4.4% of potential GDP between 2010 and 2013 respectively.”
should read
“In contrast Denmark, the US and the Euro Area have increased their CAPBs by 1.8%, 4.4% and 3.7% of potential GDP between 2010 and 2013 respectively.”
28. December 2013 at 13:14
Well what I had in mind Mark was you seemed to be switching between GDP and NGDP when talking about the U.S., Sweden, and the EU. You talk about GDP in Sweden until 2010 and then after for the alleged period of monetary contraction you talk about Swedish NGDP. You talk about the relative CAPB’s of the countries in GDP terms until 2010. Then you begin talking in NGDP. I was just wondering if you meant to use NGDP in that paragraph where you talk a lot about GDP
28. December 2013 at 13:16
Mike Sax,
“Mark in this paragraph are you talking about GDP or NGDP?”
Unless it clearly stated that GDP is adjusted in some way (i.e. for inflation) GDP *is* NGDP. I’m talking about potential GDP there.
“Also I don’t see what data your claim that the U.S. had the most contractionary fiscal policy is based on. By the CAPB numbers you gave in the second to last paragraph the EU was tighter than the U.S.”
I had the numbers listed backards, as I just noted above. Thanks for pointing that out.
28. December 2013 at 13:26
The NGDP numbers between Sweden, Denmark and the EU are a wash. Based on them there’s no real obvious reason why we should choose Sweden’s policy over these other countries.
Only the U.S. clearly stands a head an shoulders above the rest.
I have a few questions-I see that my original question about GDP-NGDP was confused by the absence of the NGDP numbers for Sweden vs. the U.S. prior to 2011.
You said that in 2010 Sweden’s NGDP took off-what was the rate? What was the comparative rate in the U.S.?
28. December 2013 at 13:33
Mike Sax,
Also, the EU is not the same as the Euro Area. The Euro Area is a currency area in ahich all of the 17 members are part of the 28 member EU. If I see one more person conflate the two I think I’ll scream.
“At the end of the day we’d still have been better off with both fiscal and monetary expansion.”
That all depends on the reaction of the central bank to a different fiscal policy. If for example the US had a less contractionary fiscal policy I strongly suspect that there would not have been a QE3.
Since it’s evident to me that there is no such thing as a liquidity trap, it’s also obvious to me that a more expansionary fiscal policy would not necessarily result in a faster recovery. So if a faster recovery is desired it is all the more imperative that we have better monetary policy.
Moreover I sincerely believe fiscal consolidation policies have been the direct result of contractionary monetary policies. There would be no fears of fiscal sustainability if NGDP were higher thus resulting in lower leverage and higher revenues.
28. December 2013 at 13:36
Mike Sax,
“Incidentally, the claim that the U.S. has had more fiscal austeirty than Britain is far from universally accepted.”
UK fiscal policy was more contractionary than US fiscal policy in 2010 and 2011. US fiscal policy was more contractionary than UK fiscal policy in 2012 and 2013. For more detail see the extremely lengthy comment I left at Econbrowser, which Menzie Chinn replied to and did not disagree with in any respect.
28. December 2013 at 13:41
Mike Sax,
“Well what I had in mind Mark was you seemed to be switching between GDP and NGDP when talking about the U.S., Sweden, and the EU. You talk about GDP in Sweden until 2010 and then after for the alleged period of monetary contraction you talk about Swedish NGDP. You talk about the relative CAPB’s of the countries in GDP terms until 2010. Then you begin talking in NGDP. I was just wondering if you meant to use NGDP in that paragraph where you talk a lot about GDP.”
Mike, when you compute CAPB as a percent of potential GDP you’re taking the CAPB from the same year as the potential GDP and computing the ratio of CAPB to potential GDP. Whether or not it is “nominal” is totally irrelevant since they’re both from the same year. If you still have problems with this take it up with the IMF, not me.
28. December 2013 at 13:52
Well I don’t see why you’re getting testy. You put the mumbers up so that’s kind of a dodge saying take it up with the IMF. You have to know that not everyone’s going to have the time to read a 50 page report.
Anyway, I’m still wondering what U.S. and Swedish NGDP where in 2010. After all how else can anyone judge your claim?
28. December 2013 at 13:57
Mike Sax
“The NGDP numbers between Sweden, Denmark and the EU are a wash. Based on them there’s no real obvious reason why we should choose Sweden’s policy over these other countries.
Only the U.S. clearly stands a head an shoulders above the rest.”
That depends on the period. Sweden greatly outperformed the other three currency areas through 2010Q4, as Krugman implies. Between 2010Q4 and 2013Q3 Sweden has barely outperformed Denmark and the Euro Area and has performed far worse than the US.
“I have a few questions-I see that my original question about GDP-NGDP was confused by the absence of the NGDP numbers for Sweden vs. the U.S. prior to 2011.”
There’s no need to use the word “nominal” when computing a ratio of two numbers from the same year. It’s irrelevant.
“You said that in 2010 Sweden’s NGDP took off-what was the rate? What was the comparative rate in the U.S.?”
As I said:
“NGDP grew by 13.4%, 6.9%, 6.9% and 11.2% in 2010Q1 through 2010Q4 respectively. Thus NGDP soared by 9.6% year on year between 2009Q4 and 2010Q4.”
US NGDP grew by 4.6% between 2009Q4 and 2010Q4. In fact the most that it has grown year on year this recovery is 5.2% and the most that it has grown in any single quarter is the 6.2% at an annual rate it did in the most recent one.
28. December 2013 at 14:01
Mike Sax,
“You have to know that not everyone’s going to have the time to read a 50 page report.”
As I said you can find the numbers on the bottom half of Table 2 on Page 70. The IMF doesn’t use the word “nominal” and nor do I in that context because it doesn’t make any sense. (Think about it.)
“Anyway, I’m still wondering what U.S. and Swedish NGDP where in 2010. After all how else can anyone judge your claim?”
See above.
28. December 2013 at 14:11
What are the odds Mike Sax is gonna write a post on his blog about how he (once again) “demolished” one of Sumner’s blood-sucking acolytes ?
28. December 2013 at 15:22
Paul Krugman:
“Meanwhile, who knew that Denmark was doing so badly? I don’t think that you want to place too much blame on the peg to the euro; this would be a drag if Denmark had entered the crisis overvalued, but it doesn’t look as if this was the case. Instead, the likely culprit is a very high level of household debt.”
If the Danish kroner had entered the crisis overvalued relative to the euro then we might expect Denmark to have performed worse than the Euro Area in terms of NGDP growth. But in fact it has performed somewhat better than the Euro Area as depicted in the first graph I posted. But the Euro Area has performed far worse than Sweden, so with Denmark’s monetary policy effectively tied to the Euro Area’s through its exchange rate peg, I think it’s perfectly obvious that the peg to the euro is to blame.
What about household debt levels?
Well, Houshold and Non-Profit sector loan amounts can be found at the ECB Statistical Warehouse. The most comparable measure to the BEA’s Disposable Personal Income (DPI) measure is Household and Non-Profit sector Gross Adjusted Disposable Income which can be found at Eurostat.
Here are the debt leverage ratios (in percent) for the four currency areas in question. The figure for 2013Q2 is the average for 2012Q3 through 2013Q2 in order to address the fact that the Eurostat income measures are not seasonally adjusted:
Year-Sweden-Denmark-US-EuroArea
2007—98.5-193.2—128.8-79.5
2008–103.5-201.0—126.7-80.5
2009–107.3-203.8—124.9-81.7
2010–112.5-201.2—118.6-82.7
2011–114.1-198.8—110.8-82.6
2012–114.5-198.7—106.0-82.5
13Q2–114.8-196.6—104.9-82.2
Yes, household debt leverage is very high in Denmark. In fact it is the highest level in the OECD and is only approached by Ireland and the Netherlands.
But despite its far higher household leverage levels, Denmark is outperforming the Euro Area which has far lower household leverage, and to which its monetary policy is intrinsically linked by virtue of its exchange rate peg.
Moreover, as ex-Deputy Director of the Riksbank Lars Svensson has argued repeatedly (see article for links to two previous articles on this),
http://www.voxeu.org/article/debt-deflation-and-riksbank-s-policy
Rather than NGDP being a function of household leverage, household leverage is a function of NGDP, and to be specific, it is an inverse function of NGDP. In other words, Denmark’s high household debt leverage is not the cause of Denmark’s poor NGDP performance, but rather, Denmark’s poor NGDP performance is making Denmark’s already high household debt leverage even higher than it would be otherwise.
In my opinion, Lars Svensson is exactly right, and in this particular instance, Krugman is reversing cause and effect.
28. December 2013 at 15:52
Scott,
I was wondering what your thoughts on this recent post by Krugman.
http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/
28. December 2013 at 16:37
Daniel if you must know I’ve written about you-not that I’ve demolished your arguments but that you gave me a great definition of monetary offset-‘code for letting poor people starve.’ I can’t top that, as much as I’ve searched for the right imagery that’s it. You’ve got it.
So far from talking about demolishing your argument I’m very grateful.
http://diaryofarepublicanhater.blogspot.com/2013/12/dont-tell-sumner-does-outrage-over.html
28. December 2013 at 16:42
There was someone at Noahpinion-he was anonymous-who referred to Stephen Williamson as having ‘Krugman envy’-that’s a close second I admit. But you win! Can’t be topped.
http://diaryofarepublicanhater.blogspot.com/2013/12/krugman-envy-stephen-williamson.html
28. December 2013 at 16:48
Mike Sax:
Your view of poor people is depraved and insulting. If there is anything that would help the poor the most, it would be for the “do-gooder” paternalistic holier than thou violence initiating ignoramuses to get out of their way, to let them compete with the established and wealthy using their own minds and their own wealth accumulating powers.
That’s what the poor always do when they are allowed to seek a modicum of free enterprise. But the problem is that the established and wealthy have an incentive to go along with anything that prevents competition from the poor. And guess what? YOU are calling for such coercion and control from the state, in the name of helping the poor, and that power is exactly what the established and wealthy can take advantage of to limit competition from the poor. Keeping the poor dependent on the state, and non-entreprenurial, is exactly what keeps them from competing with the wealthy.
Compassion, empathy, these are at their height when you RESPECT the individual to make their own choices in economic freedom. Contrary to starving themselves to death, poor people in economic freedom will become the next generation of billionaires.
Yes yes, I know you believe poor people are helpless sewer dwelling animals who would die on the streets if they aren’t taken care of by mommy and daddy government. But that view is wrong. Poor people are just as capable of holding their own as wealthy people. After all, at the beginning of human civilization, there were no wealthy individuals. Wealth had to be produced. Produced by whom? Those who started poor.
You’re not compassionate. You’re not empathetic. You’re a misguided fool whose ideology, when put into action, makes the poor worse off.
28. December 2013 at 17:40
Mike Sax,
I try and skim your trog posts when I can, if only for the gossip value. With respect to your recent infatuation with Stephen Williamson I generally think it is a mistake to try and second guess other people’ motives. In this particular instance however, my personal opinion is that you’re mistakenly reading your own motives onto Williamson.
Personally I have never ever viewed Williamson as a liberal, or even as being overly political for that matter. The key to understanding his economics is to realize that there is no such thing as disequilibrium in his models, or by extension, what you and I would call “unemployment”. (It’s a myth, don’t you know.) The implication of all of his models is that monetary policy can do little to ameliorate things, since no matter how the economy is performing, it is at full employment, which suits employees of the St. Louis Fed like himself to a tee.
In my opinion the only reason why he has shifted to his recent safe assets shortfall point of view is that it: 1) lets monetary policy totally off the hook (whoopee!), 2) the “safe asset shortfall” meme is the self-interested consensus of opinion among the power brokers in the shadow banking sector, who believe all the economy’s problems are due to their own inability to find enough cheap high-quality repo collateral (isn’t *that* convenient?), and 3) there’s absolutely zero chance that the Republican-run House will do anything about it (yawn).
But go ahead and you believe what you want, as that apparently is your calling as the troll-blogger (i.e. “trog”) in residence.
28. December 2013 at 19:29
Well I appreciate Mark if you at least find it entertaining now and again. My reason for saying he’s a liberal is that he once told me that he’s actually an avid Obama supporter and that ‘all the people in my neighborhood think of me as just another leftie.’
What I really find enigmatic about him-as in I Just can’t figure it out-is that he’s supposedly a ‘New Monetarist’ yet he thinks as you said that monetary policy is ineffective-rather like Krugman-and he claims the real problem is that there is too little public debt. That’s right he actually thinks what we need is more public debt.
I can’t square a desire for more public debt with any ‘Monetarist’ position whether old, new or market but so is his position.
“In New Keynesian theory, the basic idea is that the key inefficiency that monetary policy should be correcting arises from the sticky price friction. It is costly or impossible for firms to change prices frequently, and if there is general inflation or deflation there will be relative price distortions that cause welfare losses. In the New Keynesian framework, price stability will generally fix the problem, subject to some slippage due to what the central bank can and cannot observe at any given time. However, a particular problem, which I think is the key to how New Keynesians think about the current state of the world, is that the nominal interest rate cannot fall below zero (the “zero lower bound”). In a severe downturn, from standard intertemporal economics, efficient allocation of resources dictates that the real interest rate should be low, but this is not going to be consistent with price stability and a non-negative nominal interest rate. The best the central bank can do is to set its policy target nominal interest rate to zero, and the real interest rate is then too high relative to what it would be in an efficient flexible price world. This is essentially the story that Bob Hall told on Wednesday, and it’s consistent with all or most of the New Keynesian work I have seen at the SED meetings here in Montreal.”
‘From a New Monetarist point of view, a key element of the financial crisis relates to the scarcity of liquid assets. There is one type of liquid asset, which is outside money. Currency and bank reserves play their own unique roles as media of exchange in retail and large-scale financial transactions. A second important set of liquid assets are (in the US) Treasury securities, and various intermediated private assets that are implicitly traded through the exchange of various intermediary liabilities. When the Fed conducts an open market purchase of Treasuries, it swaps the first type of liquidity for the second. My view is that one reason this matters is that it increases the scarcity of the the second type of liquidity. The financial crisis also increased the scarcity of the second type of liquidity. For example, some mortgage backed securities, which had been widely traded in financial markets, and had served as collateral in various credit arrangements, dropped in value and were no longer traded. An increased scarcity of the second class of liquid assets is reflected in a lower real interest rate – these assets carry a larger liquidity premium. The correct central bank response to such a phenomenon, in additional to stepping in temporarily take up some of the intermediation functions that seemed to have shut down in the private sector, is to sell Treasuries, not to purchase them (which would increase the first type of liquidity, not the second).’
http://diaryofarepublicanhater.blogspot.com/2013/12/freshwater-economists-saltwater.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
I’m must saying it’s an original position. Apparently New MOnetarism goes back to Lagos and Wright who wrote it’s kind of foudning paper back in 2005.
http://qed.econ.queensu.ca/pub/students/phds/liuqian/MRG/Fall_2007/Lagos_Wright2005.pdf
28. December 2013 at 19:47
“You’re not compassionate. You’re not empathetic. You’re a misguided fool whose ideology, when put into action, makes the poor worse off.”
I never claimed to be any of these things Major. As you seem to be an expert on these virtues maybe I can learn them from you.
I fail to see how what I’m talking about will make the poor worse off. First of all I am poor myself. You are in this little rant of yours saying nothing about me but just making fevered projections of what you think ‘all liberals’ must think.
“Your view of poor people is depraved and insulting. If there is anything that would help the poor the most, it would be for the “do-gooder” paternalistic holier than thou violence initiating ignoramuses to get out of their way, to let them compete with the established and wealthy using their own minds and their own wealth accumulating powers.”
I never claimed to be a ‘do-gooder’ nor do I see what makes me one. You have no idea what my view of poor people-of which I am one-is so you have no way to make such a judgment.
What you are doing is attacking some ‘bleeding heart’ strawman that bares no resemblance to me or pretty much anyone. It’s just your feverished imagination. What have I said that can possibly stop poor people from making it? I don’t want to stop them I want to make it myself and for that very reason am working 12 hours a day-as well as writing a pretty popular blog that even Mark Sadowski sees the gossip value in.
Rather than paint me with all kinds of generaliations you might actually show an example of where I had this insulting attitude. Is it in criticiizng the failure to extend UI benefits? So you are trying to tell me that if we extend UI and end the sequester-whcih the budget deal with Obama and the GOP House has at least begun to reversee
http://diaryofarepublicanhater.blogspot.com/2013/12/as-obama-signs-budget-bill-above.html
-this somehow it ‘standing in the way of the poor?’
Whatever I may agree or disagree with Mark on he’s right about you-nothing but BS on stilts.
More of your fevered imagery:
“Yes yes, I know you believe poor people are helpless sewer dwelling animals who would die on the streets if they aren’t taken care of by mommy and daddy government. But that view is wrong. Poor people are just as capable of holding their own as wealthy people. After all, at the beginning of human civilization, there were no wealthy individuals. Wealth had to be produced. Produced by whom? Those who started poor.”
No I don’t think they’re helpless some through force of will do make it. This doesn’t mean we shouldn’t help where we can to make it easire for more to do so and that society wouldn’t benefit from this-I know in your methodlogoical indvidulaist stupor you don’t believe in society but that’s not my problem.
Just because it’s possible for some to make it doesn’t mean we have to deliberately make it as hard as possible. And some don’t make it. Recently there was a story here on Long Island of a homeless man who died in the last big snowfall-of the cold.
It sure is good there were no do-gooders out there to insult him and stand in his way.
Meanwhile, I’m not opposed to poor people working and neither are most poor people you meet. I’ve even met some homeless people and nobody needs your Sunday School sermons on the virtues of hard work and personal initiative as this is what they are striving for. Because I say we shouldn’t kick 1.2 million people off of UI over night doesn’t mean I don’t want them to work. Actually it’s much harder to find a job when you have no income at all-again I speak from experience.
29. December 2013 at 06:32
Major I notice on your chart it has a 1938 car costing a little over $14,0000 in 2013 dollars and a car today costing $31,000. I Don’t know where that number comes from but you can certainly get a new car for much cheaper than that.
Assuming you don’t need a very high end car you can find a new one for in the neighborhoold of 14,0000 or certainly at least $17,000.
http://autos.aol.com/car-finder/price-under-20000/
29. December 2013 at 06:34
Never mind the taper. Brace yourself for the wrath of Mike Sax.
29. December 2013 at 07:04
Becky now you’ve given me a great line too. I love it. Embrace yourself for the wrath of Mike Sax. Another keeper.
29. December 2013 at 08:58
‘I fail to see how what I’m talking about will make the poor worse off. ‘
You think that’s news to most of us?
30. December 2013 at 13:01
Geoff, adjust your prices by that year’s income. You’ll see that the share of income of each good barely varied. Granted, I used your first two columns; I don’t know exactly what you were getting at by the good’s “actual” prices in 2013.
30. December 2013 at 14:32
Reader223:
“Geoff, adjust your prices by that year’s income.”
Prices should not be adjusted like that. Those prices are the prices people paid, given the average income they made.
“You’ll see that the share of income of each good barely varied.”
Of course it barely varied. The second column is the imputed price that assume the share remains the same.
The third column is showing what actual prices ended up being, as opposed to imputed prices.
“Granted, I used your first two columns; I don’t know exactly what you were getting at by the good’s “actual” prices in 2013.”
The third column is the crucial column.
30. December 2013 at 14:42
Ah, sorry. That didn’t come off clearly the way it was worded in your tables. Ignore my comment.
30. December 2013 at 14:58
Brace yourself for the next credit collapse:
http://i.imgur.com/2cRewZ9.jpg
This one is going to make subprime look like a pimple on Daniel’s face.
30. December 2013 at 16:36
Richard Fisher is this week’s Econtalk guest;
http://www.econtalk.org/archives/2013/12/richard_fisher.html
He doesn’t start talking monetary policy until about 37 minutes in. He might as well have skipped the topic completely, for all the sense (lack of) he made. Russ Roberts didn’t exactly ask any useful questions either.
30. December 2013 at 17:02
Mark A. Sadowski,
“In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB).”
Isn’t the Discretionary Fiscal Effort (DEF) a better metric than the CAPB?
http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee-2013-4-03.pdf
30. December 2013 at 18:15
Abenomics in Japan is going along pretty well. The central bank psychopaths have managed to force consumer prices up only 5 times faster than wages have grown.
http://www.bloomberg.com/news/2013-12-29/japan-consumer-prices-seen-rising-five-times-faster-than-wages.html
Market monetarists everywhere let out a sigh of dejection as they wanted that number to be closer to 10 times.
Let us join in the calls for more inflation in Japan. They’re still able to afford food.
31. December 2013 at 09:45
I think I’m going to win our bet:
http://fresh-news.us/fresh-news/pierpaolo-barbieri-and-niall-ferguson-mexicos-economic-reform-breakout
31. December 2013 at 09:47
Oops better link.
http://online.wsj.com/news/articles/SB10001424052702304367204579268742046427468
31. December 2013 at 11:06
Dan, That’s excellent.
Edward, I’m not sure what the natural rate is, but I’d guess it’s around 6%. By next year I’d expect it to be around 5.5%. It changes.
Lars, Good points.
Mark, I was surprised that Krugman placed so little weight on the differences in monetary policy. Sweden hasn’t even been at the zero bound.
Milton, I don’t have strong views on bitcoin, other than that bitcoin isn’t really “money,” and that there is no such thing as bubbles.
Thanks for the link Patrick.
TallDave, I hope you win because Mexico does well, not because China does poorly.
31. December 2013 at 12:50
HO,
“Isn’t the Discretionary Fiscal Effort (DEF) a better metric than the CAPB?”
To be frank I had never heard of it before you mentioned it. But after reading about it I’m not surprised why that was the case. DEF is a brand new measure (2013) developed by the European Commission. I can only find two mentions of it anywhere. Here:
http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee-2013-4.pdf
And here:
http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee2_en.pdf
The biggest problem with DEF is it is only available for the EU-27 and the Euro Area as a whole, and it is only available in multiyear averages for four different periods.
Compare that with the IMF’s CAPB (found in the Fiscal Monitor) which is available for 56 nations plus several multination groups including the Euro Area, and comes in up to 13 annual observations. And if that isn’t broad enough the IMF also produces structural balances (found in the World Economic Outlook) for 93 nations and several multination groups available in up to 39 annual observations.
Furthermore DEF appears to be highly correlated with CAPB. In fact in the context of my discussion of Sweden, Denmark, the US and the Euro Area above, there are virtually zero differences with DEF for the two relevant periods available, and DEF is of course not available for the US.
In short, DEF is a Eurocentric measure available only in multiyear periods that is almost indistinguishable from CAPB. It might be better (it’s hard to evaluate with so few observations) but so far it’s far less useful than CAPB, and given its origins its likely it will remain so.
31. December 2013 at 13:42
Geoff,
You really are a fool.
In the very same article you linked to, they mentioned the SALES TAX as a reason, not the central bank
31. December 2013 at 13:46
Geoff outdoes himself! He attacks the Japanese Central Bank for forcing consumer prices up to 3%, when the article specifically says that is a projection of economists that hasn’t yet occurred! Not only that, the projection is based on the increase of the consumption tax from 5% to 8%. So 100% of the projected increase is to to a tax increase, not central bank policy.
To summarize – a “loose” monetary policy is expected by a survey of economists to cause exactly 0% inflation. It is a relief to get some new stupidity from Geoff – he usually just repeats the same nonsense over and over.
1. January 2014 at 13:42
Negation, What would this blog be without old reliable Geoff?
1. January 2014 at 19:38
Jason:
“You really are a fool.”
I’m touched.
“In the very same article you linked to, they mentioned the SALES TAX as a reason, not the central bank”
Tell Sumner that the Japanese central bank doesn’t control price levels or NGDP. I’m sure he’ll correct you.
Oh wait, you’re attacking me, so he won’t.
Negation:
“He attacks the Japanese Central Bank for forcing consumer prices up to 3%, when the article specifically says that is a projection of economists that hasn’t yet occurred!”
Forecasted inflation is highly correlated with actual inflation. It’s hilarious watching you quibble on a point that in other contexts you have no problem with.
“Not only that, the projection is based on the increase of the consumption tax from 5% to 8%.”
They are raising the consumer tax because there is more to tax.
Are you seriously as anti-Sumner as Jason?
“So 100% of the projected increase is to to a tax increase, not central bank policy.”
That is from a “separate survey” from Bloomberg. Now you’re telling me I should listen to THAT survey? So ignore the 3% price inflation survey, but consider the tax as a cause survey.
Talk about cherry picking.
“To summarize – a “loose” monetary policy is expected by a survey of economists to cause exactly 0% inflation.”
Talk about a false inference.
If you claim that consumer price inflation is 100% caused by a higher tax on consumer prices, then if there is no additional spending on consumer goods, then fewer consumer goods will be sold. But according to that same article, it notes that corporate profits have soared. Corporate profits cannot soar unless there is more spending, or a radical change in accounting standards (which has not occurred).
Sumner:
“Negation, What would this blog be without old reliable Geoff?”
Continually wrong?