Archive for the Category Eurozone


It was not “inability”

Over at Econlog, I have a post discussing Bernanke’s views on price level targeting.  Here I’d like to nitpick a couple passages from Bernanke’s post:

As price-level targeting and “make-up” policies are closely related, they could be combined in various ways. For example, by promising to return the price level to trend after a period at the zero lower bound, the Fed could use the language of price-level targeting to make precise its commitment to make up for its inability to respond adequately during the period when rates are at zero.

It was not inability to cut rates that prevented the Fed from acting after Lehman failed in September 2008.

It was not inability that caused the Fed to raise the interest rate on reserves in October 2008.

It was not inability that caused the Fed to refuse to cut rates to zero in November 2008.

It was not inability that caused the Fed to refuse to do negative IOR, when Sweden adopted the policy in 2009.

It was not inability that caused the Fed to prematurely end QE1 in late 2009.

It was not inability that caused the Fed to prematurely end QE2 in mid-2011

It was not inability that caused the Fed to prematurely talk about tapering in 2013.

It was not inability that caused the Fed to prematurely raise rates in 2015.

Now Fed policy is roughly appropriate.  But it was obviously too contractionary for many, many consecutive months and years, just as had been the case in Japan.  Just to refresh your memories, Bernanke’s paper that criticized the BOJ on almost precisely the same grounds as I criticized the Fed was entitled:

Japanese Monetary Policy:  A Case of Self-Induced Paralysis?

And the answer he gave was a resounding yes.  That’s not to say the Fed’s job is easy.  I might have done no better than Bernanke, if I were in his shoes.  There are all sorts of political pressures within the Fed and also from the outside.  It’s a very hard job.  But it’s never about inability; it’s about the Fed’s willingness to do whatever it takes.  It’s willingness to show what Bernanke once called “Rooseveltian resolve”.

One other quibble:

Support for a higher inflation target seems to be increasing along with worries about the ZLB. In a recent post entitled “The case for a higher inflation target gets stronger,” Stephen Cecchetti and Kermit Schoenholtz cite four arguments in favor:

  1. the persistent decline in normal interest rates;

  2. findings (like those of KR) that the frequency and severity of future ZLB episodes may be worse than previously thought, even given the low level of normal interest rates;

  3. some evidence, drawn from a study of the 1970s, that the costs of higher inflation might be less than previously believed; and

  4. calculations that suggest that standard inflation measures may overstate actual increases in the cost of living by more than had been understood.

I don’t have a big problem with this, but I don’t really like point four.  If higher inflation is a good idea, it has nothing to do with the fact that “standard inflation measures may overstate actual increases in the cost of living”.  There are several theories about the welfare cost of inflation, but none of them hinge in any way on the question of whether the BLS properly accounts for quality changes, or the substitution effect, or the new product effect.  The welfare costs of inflation have to do with things like menu costs for adjusting prices, or excess taxation of capital income when inflation is high.  Point four creates the misleading impression that economists want to control inflation so that consumers will benefit from a dollar that loses 2% of its purchasing power each year in terms of . . . what?  Utility?

I also disagree with this:

Second, although quantifying the economic costs of inflation has proved difficult and controversial, we know that inflation is very unpopular with the public. This may be due to reasons that economists find unpersuasive—e.g., people may believe that the wage increases they receive are fully earned (that is, not due in part to prevailing inflation), while simultaneously blaming inflation for eroding the purchasing power of those wages.

The thing that is unpopular with the public is called “inflation” by the man on the street, but it has nothing to do with inflation as defined by economists.  I talk a lot about how the American public in 1990 thought inflation was higher than in 1980.  But an even better example occurred in Europe, where polls showed that Europeans believed that inflation jumped dramatically after the euro was introduced.  I had European students tell me this with a straight face, back when I taught at Bentley.  I’m not sure what Europeans were annoyed about in 2002, but it was not “inflation” as the concept is understood by economists.  We need to stop trying to please a deeply confused public that doesn’t understand our terminology, and instead produce a macroeconomic environment with stable NGDP growth, stable growth in incomes, and stable employment growth.  They liked it in the 1990s, and they would like it now.

I vaguely recall reading that there were more complaints about inflation than deflation during the Great Depression.  (Can someone confirm?)

PS.  Here’s today’s headline from the FT:

Sign ‘Trumpflation’ sputtering as consumer prices fall

I’m still skeptical of the Trump reflation story.  Monetary offset is still in place, and supply side gains are likely to be a couple tenths of a percent at best, assuming he can get anything through Congress.

HT: rtd

About that eurozone “liquidity trap”

Just a year ago, Keynesians were telling us that the eurozone was stuck in a “liquidity trap” and that the ECB was “out of ammo”.  Instead, Europe needed fiscal stimulus.  Now markets are predicting that the ECB will raise rates within the next 12 months:

Screen Shot 2017-03-07 at 9.12.20 PMObviously if the eurozone actually were stuck in a “liquidity trap” then it would be absolutely insane to raise interest rates this year.

For years I’ve been arguing that the sluggish NGDP growth we see in many developed countries is due to contractionary monetary policies.  Central banks are perfectly capable of delivering faster NGDP growth, they simply don’t want to.

Prediction:  Even as the ECB raises rates, we’ll still hear from the usual suspects that “fiscal austerity” is the problem, even though the US has done just as much austerity over the past 5 years, if not more.

Suggestion:  Those who don’t think the supply side of the economy is important should take a look at Germany and Greece, both operating under the exact same monetary policy.


Greg Ip on trade imbalances and demand

Ramesh Ponnuru sent me a WSJ article by Greg Ip:

If workers lose their jobs to imports and central banks can’t bolster domestic spending enough to re-employ them, a country may be worse off, and keeping those imports out can make it better off.

This occurs only in certain conditions, says a new paper by Harvard University’s Larry Summers and two co-authors, but those conditions may now be present.

Mr. Summers, a former Treasury secretary, is no protectionist and no fan of Mr. Trump, whose election, he warns, could lead to recession in the U.S. and financial crisis abroad. But he does worry that chronically weak demand could make protectionism both respectable and irresistible.

Others, such as New York Times columnist Paul Krugman and Michael Pettis at Peking University have already noted how in a world with too little demand, one country’s trade surplus inflicts unemployment on the country with a deficit.

Even if Summers, Krugman and Pettis are correct (and I think they are wrong) the argument does not apply to the world we live in today.  Thus Greg Ip is mistaken when he says “but those conditions may now be present.”  They are not.

Let’s start with the US.  The US is not at the zero bound, and the Fed is expected to raise rates in a few days because they think that failing to do so would result in excessive AD.  So if protectionism somehow miraculously boosted AD in the US, the Fed would simply raise rates even faster to prevent any stimulative effect on AD.

Now it’s true that the Eurozone and Japan are both at the zero bound.  But both economies have very large current account surpluses, so obviously trade deficits are not depressing output in those two regions.  Even very depressed areas such as Italy run surpluses.

In fact, unemployment has almost nothing to do with trade “imbalances” (a term I hate).

Update:  Dilip sent me the following, from Jared Bernstein and Dean Baker:

In this context, the trade deficit was subtracting from demand in the domestic economy. Spending that could have employed people who needed jobs in the U.S. was instead employing people in Germany, China, and other countries from which America imports goods and services. In principle, the U.S. government could have looked to spur other channels of demand to offset the trade deficit, but as a practical matter this is often not easy to do: The most straightforward way to generate demand is through additional government spending, but there are major political obstacles to running large budget deficits even at times when it would be beneficial to the economy.

No, the most straightforward way to boost demand is to adopt a more stimulative monetary policy.  But that won’t happen because the Fed currently thinks it’s better to slow the growth in demand by raising its target interest rate.  (And they may well be correct.  The consensus of private sector forecasters was that we were roughly on target for 2% inflation, even before the recent bump up in TIPS spreads):


Is Europe moving away from austerity? Will it matter?

Here’s a NYT headline:

Europe May Finally End Its Painful Embrace of Austerity

And here’s the claim:

As Europe has grappled with the trauma of a devastating financial and economic crisis, policy makers have consistently relied on one approach to managing the damage — budget austerity.

Shrink government spending by trimming pensions and cutting social programs, the logic runs, and the markets will gain confidence in the tough-minded people in charge. Confident markets make for happy markets. Money will pour in, and good times will roll.

Even as prosperity has remained painfully elusive across much of Europe, leaders have time and again renewed their faith in the virtues of this harsh medicine.

Until now.

Some policy makers are flashing tentative signs that they may be prepared to slacken their grip on public coffers to spur growth and improve the lot of ordinary people suffering joblessness and diminished wealth. In the clearest sign of this shift, the heavily indebted Italy is increasingly inclined to challenge Germany — the guardian of austerity — to loosen European purse strings.

Of course everything is relative, and European fiscal policy has not been particularly austere.  But even so, can we assume that a slackening of “austerity” will boost growth? Veronique de Rugy of the National Review reports:

The Congressional Budget Office recently released its Monthly Budget Review for September 2016. It includes a revised estimate of the deficit for 2016. It isn’t much different than the one projected in August. The document makes it hard to ignore that in 2016 the deficit grew by $149 billion, from $439 billion in 2015 to $588 billion at the end of FY2016. This explains why we haven’t heard president Obama brag about how the deficit is shrinking in a while.

Normally the deficit falls during expansions.  How did the economy respond to this loosening of “austerity”?  RGDP growth slowed to less than 1.3% during the past four quarters, as the Fed tightened policy.  As a result of our foolish fiscal policy, fiscal authorities will now have less room for “stimulus” during the next recession, as the deficit will be starting from a higher base.  Of course this will come as no surprise to readers of this blog.  The austerity of 2013 (when the deficit plunged from about $1,050 billion to about $550 billion between calendar year 2012 and 2013), coincided with an increase in GDP growth. But like Chicago Cubs fans, Keynesians never give up hope.

Now let’s look at the UK:

Before the June 23 vote for “Brexit,” the man in charge of the budget, the chancellor of the Exchequer, George Osborne, was publicly pursuing the aim of delivering a budget surplus by 2020. The target required cuts.

But as the political class absorbed the ballot result, interpreting it as a demand for redress from communities reeling from high unemployment and wage stagnation, Mr. Osborne acknowledged that his goal could no longer be achieved.

His successor, Philip Hammond, has raised the ante.

In a speech at an annual gathering of the governing Conservative Party on Monday, the new chancellor declared that the government would borrow more to finance new infrastructure projects — presumably creating construction and manufacturing jobs.

While reading this, I spied a link in the right column, to another NYT story, this one from May 25th:

‘Brexit’ Could Spell More Austerity for Britain, Study Warns

That’s pretty scary, but could the prediction be trusted?  The NYT says yes:

LONDON — Prime Minister David Cameron’s campaign to keep Britain in the European Union was bolstered on Wednesday by a report from one of the country’s most authoritative economic research bodies, which concluded that a withdrawal from the bloc would lead to up to two more years of public spending cuts or tax increases.

A frequent critic of government economic plans, the research body, theInstitute for Fiscal Studies, this time delivered some welcome news for Mr. Cameron.

Of course it could be trusted (the NYT signals), it came from “one of the country’s most authoritative economic research bodies”, which is also “A frequent critic of government economic plans”.  So we aren’t talking about one of those nutty right-wing outfits, like the Adam Smith Institute or the IEA.

NYT readers never need fear leaving their cosy intellectual cocoon, where fiscal stimulus produces growth miracles, and a continent where governments spend 50% of GDP is struggling because of “austerity.”  Yes, the Trumpistas are even worse (and also oppose austerity), but then I don’t expect much from the “stupid party”. I do expect more from the Times.

Our Trumpian Treasury

In Washington DC, all the best and the brightest in both parties are horrified by the prospects of a Trump Presidency.  But perhaps we owe Trump an apology, as in some respects he already controls our trade policy.  Here’s a report from 4 months ago:

The U.S. government is sending a message to countries it believes are manipulating their currencies: We’re watching you.

A Treasury report targets five countries in particular: China, Japan, Korea, Taiwan and Germany. Each meets at least two of the three criteria that “determine whether an economy may be pursuing foreign exchange policies that could give it an unfair competitive advantage against the United States.”

At a time when currency devaluation has become a major tool used by multiple countries to stimulate growth, the U.S. is looking to protect its own interests. The report is an outgrowth of the Trade Facilitation and Trade Enforcement Act of 2015, a bipartisan effort aimed at stemming the global race to the bottom.

The criteria to determine whether a country should be on the “Monitoring List” of countries using unfair currency practices are: a trade surplus of larger than $20 billion, or 0.1 percent of U.S. GDP; a trade surplus with the U.S. that is more than 3 percent of that country’s GDP; “persistent one-sided intervention,” defined as purchases of foreign currency amounting to more than 2 percent of the country’s GDP in a one-year period.

No country meets all three criteria, according to the report, though the five on the list meet at least two.

For those not familiar with open economy macroeconomics, those criteria reach almost Trumpian levels of ignorance.  Where to begin:

1.  If you worry about this sort of thing (and a few respectable economists do) then you would look at a completely different set of criteria.  For instance, the trade deficit is a meaningless data point, if anything, you’d look at current account deficits.

2.  Bilateral deficits with the US are stupidity squared, a data point of no conceivable relevance, even to the most mercantilist economist on Earth.  All that “matters” is overall surpluses or deficits, not bilateral.

3.  If you are looking for “villains”, you would certainly not look at overall surpluses; rather you’d focus on surpluses as a share of GDP, or some similar metric.  Otherwise you’d be biased against large countries.  The current account surplus for China is about $170 per capita, for Switzerland it’s over $8000 per capita.  Even as a share of GDP the Swiss surplus is far higher.

4.  “Intervention” should not be defined as purchases of foreign assets, but rather as high government saving rates.  All government saving tends to have the same effect on the CA balance, whether it is used to buy domestic or foreign assets.

5.  The Treasury singles out Asian countries in a Trumpian fashion, for no apparent reason.  Switzerland has a $71 billion CA surplus, and engages in massive purchases of foreign assets to hold down the value of the SF.  There’s two criteria right there.  Why did it not make the list?  I have no idea, its trade surplus is also well above $20 billion.  Lots of other northern European countries also have massive CA surpluses, and spend lots of money holding down the value of their currencies.  In contrast, China’s recently been trying to hold up the value of its currency.

6.  If you were an American mercantilist, I’d think that you’d be much more worried about Germany’s $300 billion CA surplus, than China’s $250 billion CA surplus.  Germany exports lots of capital goods that might otherwise be bought from America, whereas China tends to export less sophisticated goods, which might otherwise be produced in other Asian countries, or Mexico.  Norway, Sweden, the Netherlands and even Italy have CA surpluses far in excess of $20 billion.  Notice that the Treasury follows in the proud tradition Pat Buchanan and Donald Trump in pointing fingers mostly at Asian countries, even though the logic of their mercantilist argument would suggest we should target the northwest Europeans.  Perhaps Germany was put on the list to try to make the racism appear a bit less blatant.

PS.  I forgot to shed a few tears for the “victims” of all this evil currency manipulation.  There’s Australia, with its $62 billion deficit, and no recessions in 25 years.  The UK, with its $162 billion deficit and the US, with its $473 billion deficit.  Both countries have a 4.9% unemployment rate.  In contrast, those sneaky eurozone members with their $394 billion CA surplus keep stealing our jobs, which probably explains their 10.1% unemployment rate.

PPS.  I don’t put all this on the Treasury; it’s Congress that forces them to engage in this sort of nonsense.

PPPS.  Speaking of Trump, last May I had commenters earnestly informing me that I should support Trump because he favored low interest rates.  Now Trump is slamming Yellen for her low interest rate policy.  Trump reminds me of that anecdote about 100 monkeys typing away.  Yes, there’s a tiny chance they might randomly type out Hamlet, but I’d put my money on something far worse.  There are many more ways to screw up than there are ways to succeed.

And no, this is not “normal” in politics.  Normal politicians lie and change their views on occasion.  Hillary’s not much worse than average (although she is certainly worse.)  But Trump’s just completely off the charts in terms of policy ignorance and personal dishonesty.  I’ve never seen anything close to this in my life, and I’ve been following politics since the late 1960s.  Nixon might have been closest on the honesty criterion, but of course was far more knowledgeable.  And even Nixon tried to avoid statements that were obvious lies. He was a devious liar.  Trump just doesn’t care.  He’ll look you in the eye and tell you that he opposed the Iraq War.  And the reporter who asked the question will be too cowardly to call him a liar to his face.  I almost hope Trump wins.  We deserve him.

I said “almost”, I’m not quite there yet.  🙂