Last year, lots of people said the Australian miracle would finally come to an end.  I had commenters mocking me for arguing that Australia wasn’t a bubble.  They insisted that the bubble was already bursting.  (I wish you guys would come back to my comment section—I miss you.)

Now we are well into 2016, and the Australian economy is surging:

Australian business confidence jumped and an employment gauge in the survey surged to the highest in almost five years, signaling a healthy job market and reducing the likelihood of an interest-rate cut. The local currency gained.

The sentiment index doubled to six points last month, according to a National Australia Bank Ltd. survey of more than 400 firms conducted March 23-31. The business conditions gauge — a measure of hiring, sales and profits — climbed to 12, matching the highest level since before the 2008 global financial crisis. The employment index jumped four points to five, its best result since 2011.

“This is an especially good result in the context of a downbeat global economic outlook,” said Alan Oster, chief economist at NAB. “Low interest rates and a more competitive currency, even given recent strength, are expected to remain key drivers domestically. Consequently, our outlook for the economy remains unchanged — and with the non-mining recovery expected to progress further, monetary policy is likely to remain on hold for an extended period.”

Australia’s economy is proving resilient in the shadow of recent financial turbulence in China, negative interest rates in Japan and Europe and weaker commodity prices that have combined to increase global risk. The Reserve Bank of Australia cut rates to a record-low 2 percent in May last year in an easing cycle designed to cushion the economy from unwinding mining investment and encourage services industries to pick up the slack.

While gross domestic product grew a robust 3 percent last year and the unemployment rate has fallen to 5.8 percent, the Australian dollar has rebounded more than 10 percent since mid-January.

Last Australian recession—1991.

Funny how countries that maintain adequate long-term NGDP growth don’t seem to have problems with the zero bound.  I wonder if the problems in Japan and the eurozone are self-inflicted?  (NGDP growth has recently been weak in Australia, due to lower commodity prices, but the long-term expected trend is high enough to keep interest rates above zero.  That trend rate remains well above European and Japanese levels.)

When the Chinese stock market crashed last summer, lots of commenters mocked my claim that China was doing fine, and insisted that it was entering a recession. This month the consensus forecast for 2016 GDP growth in China (private forecasters) rose from 6.4% to 6.5%.  Even accounting for data problems, most experts think growth is at least 5%.  In an economy with a flat labor force, 5% is not too bad.  Retail sales growth is still running at double digits, and exports are picking up, although by less than this FT story suggests:

China reported stronger than expected trade data on Wednesday, the latest sign of a tentative revival in fortunes that paves the way for Friday’s release of first-quarter economic growth.

Exports surged 18.7 per cent in renminbi terms in March over the same month last year, after declines in both January and February. Imports also stabilised, dropping just 1.7 per cent compared with an 8 per cent fall in February.

In dollar terms, exports rose 11.5 per cent while imports fell 7.6 per cent for the period, reflecting the renminbi’s recent rise. The currency has gained 1.9 per cent against the dollar over the past two months.

China’s export sector has been buffeted by the slowdown in global trade, the dollar value of which has been shrinking since 2012 largely because of the slump in international commodities prices.

The International Monetary Fund this week warned that the world risked a “synchronised slowdown” but highlighted China as a rare bright spot among major economies.  Chinese officials have been working to counter international investors’ increasingly negative outlook for the country’s economy.

Their cause has been boosted by a slew of better than expected data releases, including March inflation figures that showed producer price deflation had moderated.

This contributed to the IMF’s decision to revise upwards its forecast for Chinese economic growth this year, to 6.5 per cent from 6.3 per cent. At last month’s meeting of China’s parliament, Premier Li Keqiang projected economic growth of 6.5-7 per cent for 2016.

“China’s commodity imports should see further improvement soon,” said Zhou Hao at Commerzbank.

“Rare bright spot” doesn’t sound like a Chinese recession.

When I hear constant predictions that the Chinese bubble will burst any day now, I’m reminded of Redd Foxx.  People need to stop predicting recessions, because recessions are unforecastable.  The IMF has predicted zero of the past 220 negative growth periods between 1999 and 2014.  This shows that the IMF is smart.  They know that the most likely outcome is growth, and hence they predict growth.  So do I!  Recession predictions also have a corrosive effect on economics as a science.  These predictions lead non-economists to believe that economists should predict recessions, and give undeserved reputational points to lucky permabears.

Peter Schiff said back in January that the US would have a big recession this year. If we don’t have a recession this year, people will forget Schiff’s false prediction, as well as false predictions of major crises in the US in 2015 and 2013, and recall his correct prediction of the 2008 recession.  (Insert broken clock analogy here.) Whenever I hear that someone has accurately predicted a recession, my evaluation of that person declines.  Economists should not be trying to predict recessions; the point is to prevent them.  That’s why we need NGDPLT.

PS.  If you have trouble with me praising the IMF being zero for 220, consider this analogy.  If I’m standing next to a statistician at the roulette wheel, and he predicts the ball will not land on the green numbers (36 out of 38 odds) for each of 220 spins, then I will assume he’s a good statistician.  If he occasionally predicts the ball landing on the green (2 out of 38 odds), I will think less of his statistical skills, even if it does land on the green.

HT:  James Alexander

In the early years of the Great Recession, I pointed to Australia as an example of enlightened monetary policy.  It hadn’t had a recession in 20 years. NGDP grew at a 6.5% annual rate between 1996 and 2006, and then continued growing at a 6.5% annual rate from 2006 to 2012.  Since then Australian NGDP growth has slowed substantially, for a variety of reasons:

1.  Population growth has slowed to 1.2%, from a peak of 2.2% in 2008. (It’s actually per capita NGDP that matters)

2.  Commodity prices have plunged, leading to a fall in the GDP deflator.  (Total labor compensation per capita is probably superior to NGDP in commodity-intensive economies.)

Back in 2009-10, my critics said that Australia was just a lucky country, benefiting from booming commodity exports to China.  OK, let’s test that theory.  How has Australia done in 2015?  Recall that in late 2014 and throughout 2015, global commodity markets plunged due to falling Chinese demand for Australia’s key exports (coal and iron ore), pushing Canada into a sharp slowdown and places like Venezuela into deep depression. Here’s a news report from December 2015:

Australia’s unemployment rate has fallen to 5.8%, the lowest level in 20 months, following the strongest two-month period of jobs growth in 28 years.

Now admittedly the two month data is very noisy, but over the past 12 months the Australian unemployment rate has fallen from 6.4% to 6.0%.  So much for the theory that Australia was bailed out by China in 2008-09.  What’s the new excuse going to be?  If it wasn’t commodities, why did Australia avoid recession in 2008-09?

If you don’t like unemployment data, JP Koning sent me a nice graph comparing Australia with its most similar rival—Canada:

Aussie RGDP is up 3% over the past 12 months, whereas Canada is up just 0.5%. And keep in mind that Canada is one of the best run developed economies, with one of the best run central banks—and the Aussies still blew them away.  Also recall that Canada’s economy has a larger manufacturing sector than Australia, and is thus less dependent on commodities.

Recall this anecdote:

Historical rumor has it that a subordinate once asked Napoleon, “What kind of generals do you want?” “I want lucky ones,” he replied.

I say, “Give me a ‘lucky country’s’ central bankers.”

PS.  Austrian readers may be interested in knowing that Australia’s monetary policy was much more expansionary than Fed policy during the years leading up to the Great Recession.  When will Australia pay the price for all that misallocation?  And Australia’s housing bubble was even bigger, but still hasn’t burst. When will the inevitable collapse occur?

And for all you protectionists out there, Australia’s run massive current account deficits for many decades. When I taught there in 1991, the Very Serious People told me that Australia’s day of reckoning was approaching. That was 25 years ago. So just how long can Australia keep selling condos to Chinese investors in exchange for manufactured goods?  And why do we call that sort of trade a “deficit”?  And just how many empty beaches do they have, where more condos can be built?

PS.  I notice there’s been a lot of recent discussion of Sweden’s 4.5% RGDP growth over the past year.  I do understand that GDP growth is more volatile for smaller countries, but that seems surprisingly high.  Might it be related to the inflow of 163,000 refugees (1.7% of Sweden’s population)?  In other words, a positive supply shock?

Patrick Sullivan sent me a link to a talk by John Taylor.  Around the 15 minute mark Taylor recounts an amusing conversation he was part of with James Tobin and Paul Volcker, back in 1982:

I remember very well Jim [Tobin] asking Paul “Why don’t you lower interest rates, Paul?”  And Paul Volcker said, “I don’t set interest rates; I set the money supply and the market reacts [with] the interest rate.”

John seemed to say “to” not “with”, but in context I think he meant, “reacts with changes in interest rates.”

I love that quote.  Great to know that central bankers occasionally see the light.

Those who want higher interest rates need to tell me precisely what they want the Fed to do to cause rates to be higher.

PS.  I have a new post at Econlog.  The first of many, many posts to comment on Bernanke’s new memoir.

PPS.  Bob Murphy has a new post criticizing my recent post on real shocks.  He starts off as follows:

Sumner’s whole purpose with this post is to argue that shocks in “real” factors can have huge impacts on welfare. However, they do not correspond to the business cycle. So long as the central bank exercises wise monetary policy, real shocks can be offset and full employment can be maintained. In contrast, we don’t need a real shock to get a recession and rising unemployment; all we need is the central bank to stupidly let NGDP growth fall below trend.

Actually, there are real shocks like a $20 minimum wage that could cause recessions and much higher unemployment.  I was trying to show that as a practical matter the fluctuations in unemployment in the US and Australia are mostly about NGDP shocks. I probably should have been clearer; sometimes I assume there are certain things that “go without saying.”

In the rest of his post Bob belatedly discovers something I have said dozens of times here over the past 5 years, that for commodity exporters like Australia I view total nominal labor compensation as better than NGDP.  I’ve also explained why this compromise is a clear implication of the musical chairs model.  Bob seems to think that somehow undercuts my whole message, but I’m not quite sure why nuance is worse than fanatical devotion to fitting one single model into all conceivable circumstances. I’m a pragmatist, so sue me.

But yes, I should have made that point explicit in the post.

Real shocks are far, far more important that nominal shocks, for long run growth in living standards.  But for the business cycle, and especially for fluctuations in the unemployment rate . . . well, it’s all about the musical chairs model.  Here are two more recent examples.

Let’s start with Australia, which has been hammered by a global commodity downturn, especially by falling Chinese imports of iron and coal.  In the past when I praised the RBA of Australia for keeping a rising trend of NGDP during the global crisis (after a small blip), people scoffed that the Aussie’s were just lucky.  Even then that argument made no sense.  Australia has no had a recession since 1991, but in theory a country susceptible to commodity shocks should have more recessions than the US.

And now the evidence is even weaker.  Look at the unemployment rate in Australia since the commodity bust began:

It bounces around, but I see no significant trend.  Ironically, Aussie unemployment had a mild upward trend before the commodity bust:

That was probably due to the slower than trend rate of NGDP growth.

And then there is Texas.  Recall that progressives keep telling us that the Texas miracle is due to oil.  Obviously there’s a grain of truth in that.  Texas does have lots of shale oil.  But so does Europe, and so does California.  The difference is that Texas actually believes in producing it.  I said a “grain” of truth, because most of the Texas growth is due to other factors.  It’s not oil, and it’s not weather (which is actually worse than many other slower growing states.) Nor is it housing, which is just as cheap in neighboring slow growth states. It’s good economic policies.

Now that we have had a big oil bust, the progressives were probably expecting a recession to hit Texas.  And yet the unemployment figures keep getting better and better:

Notice that between February 2008 and June 2008, Texas unemployment actually rose from 4.3% to 4.7%, despite soaring oil prices.  The reason? US NGDP growth was slowing sharply.  Then in the second half of 2008, unemployment soared much higher, as NGDP fell (as did oil prices.)  Over the past year, the unemployment rate has continued to decline, and is now at 4.1%, just above the all-time record low of 4.0% of late 2000.

Bottom line:  Real shocks, and “reallocations” resulting from real shocks, generally don’t significantly impact the overall unemployment rate.  It’s changes in NGDP (monetary policy) that drive the business cycle.  On the other hand, real shocks can have a modestly larger impact on Texas RGDP, as the drop in oil output affects RGDP more than employment.  It’s a capital-intensive industry.

PS.  Over at Econlog I have a post on a big breakthrough for market monetarism.

Today’s a good day to thank my commenters.   (For overseas readers, today is Thanksgiving in America.)

Comments like this recent one by Integral make it all worthwhile:

I continue to be amazed that you find the time to read and respond to every comment. Not many bloggers do that and I commend you for your dedication to the comment section.

With regards to your point, I think you’re right. Most economists look at Debt/Price level but Debt/NGDP would be a more appropriate variable.

I think it was Lucas who said “once you start thinking about economic growth, it’s difficult to think about anything else.” I’d add an addendum: when you start thinking about monetary policy in terms of NGDP, it’s difficult to think about it any other way. The key breakthrough for me was identifying NGDP with AD. Once I accepted that, literally everything else fell into place.

The same thing happened to me.  Monetary policy is supposed to address AD.  Which best measures AD; NGDP or the price level?  And remember the criticism of old monetarism; the argument that “velocity might change?”  OK, if that’s the problem then shouldn’t we offset velocity shocks, keeping M*V on target? And how about the “dual mandate?”  The advantage of a dual mandate is that we care about both prices and output.  The complaint is that we can only target one aggregate at a time.  So does NGDP or P better fulfill the dual mandate?  Everywhere you look NGDP just makes more sense.

I’m increasingly inclined to believe that most average economists/forecasters/pundits/business reporters/bankers/etc, simple don’t “get” macroeconomics, and never have.  I blame the old Keynesian model, which taught many mediocre economists to think in terms of sectors.  How people could not see that tight money and sharply falling eurozone NGDP growth expectations are absolutely central to the euro crisis is beyond my comprehension.  Yet JPIrving just sent me the following comment, which supports my recent post on the NABE poll:

Baffling. I sat through a two hour meeting on the European outlook today and was the only one who mentioned money might be tight and inflation expectations in the toilet. Everyone else is hung up on the side effects of tight money trying to come up with just so stories to implicitly explain falling V.

Right after Integral, Lorenzo made an excellent observation about Australia:

Down here in Australia, we already ran the experiment of monetary policy operating “surreptitiously”. It worked very badly and we now have 18 years (since 1993) of experience in why explicit targets are good. You would think being the country where the “Great Moderation” never ended would get some attention. (Indeed, not only never ended but operated better than elsewhere when everyone was experiencing it even though our terms of trade were still on their long term downhill slide and mining is about 9% of GDP and extremely volatile.) Apparently not.

I sometimes point to Australia as an example of the virtues of maintaining positive NGDP growth.  One push-back I get is that they benefited from the recent commodities boom.  But that cuts both ways.  Commodity industries are much more volatile than other industries, yet Australia missed both the 2001 and 2008 recessions; their last recession was in 1991.  And note that there have been huge swings in commodity markets over those two decades.  They’ve had to “reallocate” labor into mining industries but somehow avoided high unemployment, perhaps by keeping NGDP growth positive.

Today Rob left an interesting remark that referred to my recent Dr. Strangelove post:

Jim, it’s my favourite movie too. I actually used the “keeping it a secret” line in a recent comment on the Bank of England’s alleged secret NGDP targeting.

He’s referring to the fact that the Soviet doomsday device in Dr. Strangelove was useless unless they US knew about it, which we didn’t.  A very apt comparison.

The “rational” thing for me to do would be to stop answering comments and focus my extra time on twitter.  How do I know that?  Adam Ozimek told me so yesterday . . . in my comment section.

PS.  People!  I’m not seeing many comments today.  Stop spending time with your families and get busy.