Clive Crook is part of the 99%
Read my previous post first, or this post’s headline won’t make sense. Here’s Clive Crook:
What we know, or think we know, about fiscal policy five years after the global recessionstarted isn’t all that different from what we knew, or thought we knew, back in 2008. It boils down to two points. One, fiscal stimulus is essential when conventional monetary policy is powerless. Two, fiscal stimulus may be impossible even when it’s essential.
Most economists agree that changes in interest rates are usually a better way to regulate demand than discretionary changes in taxes and public spending. But interest rates can’t fall to less than zero. When that limit is reached — as it was in this recession — fiscal policy must carry a bigger load.
. . .
To repeat, fiscal stimulus is essential when conventional monetary policy is powerless. But fiscal stimulus isn’t always an option. Governments can’t do it if investors are unwilling to buy their debt. Greece and other European Union economies discovered this in 2010. Theirs was hardly a new experience.
Europe as a whole had, and still has, unexploited fiscal capacity.
Never reason for a false stylized fact. The ECB is not and never has been at the zero bound.
The ECB has been steering the eurozone economy by raising and lowering interest rates over the past few years. That’s conventional monetary policy folks. They drove the eurozone into its current recession by repeatedly raising interest rates in 2011. Why don’t people know this?
We MMs should call ourselves “the 1%” and “occupy the ECB.”
Tags:
6. June 2013 at 07:27
“The ECB has been steering the eurozone economy by raising and lowering interest rates over the past few years. That’s conventional monetary policy folks. They drove the eurozone into its current recession by repeatedly raising interest rates in 2011. Why don’t people know this?”
How much commentary has there been about ECB interest rate changes vs. commentary about fiscal austerity? Hardly any. From what a lot of economists write about eurozone macroeconomics, you could be forgiven for not knowing that the ECB exists.
6. June 2013 at 07:28
* economists and economic journalists. However, it’s part of the responsibility of economists to help out economic journalists when they neglect important basic economic facts.
6. June 2013 at 07:48
Now if only German would adopt fiscal austerity, everything would start to go relatively right in the rest of euro zone.
6. June 2013 at 08:03
“They drove the eurozone into its current recession by repeatedly raising interest rates in 2011. Why don’t people know this?”
Just because the periphery went into a recession around this time is not sufficient to say that this caused the recession, although it certainly didn’t help.
6. June 2013 at 08:08
The essential question is: are national democracies “worth it” vis-a-vis the European Parliament alternative? The longer austerity drags on, the more delegitimized national democracy will become — and it is working in the EU’s favor thus far.
Historically, I find it amazing how every one of these countries — Ireland, Greece, Italy, France, UK and so on and on — have fought so long and so hard against armies and kings for their national independence and local governments, only to see a few bank guys with suits mow them down so easily. The bankers I know aren’t nearly so intimidating.
6. June 2013 at 08:26
Germany should learn to embrace inflation. What I mean, is that they ECB must learn to differentiate inflation at the local level, vs. inflation across the region.
Inflation at the local level suggests that your standard of living is growing faster than your neighbors. It is a good thing. Well it is good for you, it may not be so good for your neighbor.
New York city is expensive. Prices are high, rents are high, and wages are high. New York is expensive because New York is wealthy. At sometime in our recent history, NYC experienced a greater level of inflation than the rest of the country. Somepeople protested the “gentrification” of New York, but most New Yorkers loved it.
6. June 2013 at 08:32
If I were a German, and the EU political “roll-up and lock-in” was underway (via austerity and tight money), there is no way I’d weaken my political- and financial- clout vis-a-vis other countries.
On the contrary, I’d be inclined to squeeze them as hard as I could and emerge the effective hegemon in the new European order. Maybe that’s me, but remember that we’re talking about Germany. Please do not presume good faith economic interests are steering the ship.
6. June 2013 at 08:34
Nice find, Scott. Clarity on Crook’s part would be very helpful.
1) When Crook says that monetary policy is powerless, what he probably MEANS is that monetary policy is politically constrained – i.e., that the ECB is keeping rates at some number higher than zero and not engaging in alternate monetary stimulus because of political requirements to control inflation or keep bullets in the chamber or something like that.
2) If he said that clearly, then it would be apparent that fiscal stimulus won’t work, because the ECB is still going to target whatever low inflation rate it is politically constrained to target.
6. June 2013 at 08:58
“Why don’t people know this”. Krugman knows it and he’s no MM. (Though he has endorsed as a last resort almost everything you propose).
6. June 2013 at 09:14
Scott, notice how the comments use the word “austerity” yet your post does not?
Selective perception?
http://en.wikipedia.org/wiki/Selective_perception
6. June 2013 at 09:46
W. Peden, Good point.
Jon, Yes, both the Keynesians and the Austerians are clueless on Europe.
Jack, We certainly know that tight money caused the nominal recession. I agree that we don’t know that higher interest rates caused the real recession.
Doug, Europe does not need high inflation, they need 4% NGDP growth (which would be about 2% and 2%)
J Mann, He may mean that (although given he said the exact opposite, I doubt it.) But if so he’s still wrong. The ECB is not constrained by its inflation mandate. It could do much more stimulus and still adhere to its mandate.
Ashok, Then why does Krugman keep saying Europe needs fiscal stimulus because the ECB is at the zero bound?
Edward, There’s a lot of that going around.
6. June 2013 at 10:05
“Europe does not need high inflation, they need 4% NGDP growth (which would be about 2% and 2%)”
I didn’t mean to suggest that Europe needs high inflation.
Inflation is not uniform across the Eurozone. Inflation is near target and increasing in Germany, it is below target and falling in southern Europe.
Responding to purely local factors, why would Germans want to see higher inflation? There is a North-South divide in the Eurozone, with the northerners saying money is just about right and the southerners saying it is too tight.
My point is that higher local inflation is a good thing if it is your location.
6. June 2013 at 10:28
Scott
Journalists are ‘funny’ people. They move house, in CC´s case from the FT to Bloomberg and they either ‘forget’ or change views:
This is Clive Crook almost 2 years ago:
http://thefaintofheart.wordpress.com/2011/08/15/the-ft-joins-the-qm-cabal/
6. June 2013 at 14:48
Doug, If the German’s want the ECB to target the German inflation rate they are nuts. They never should have joined the euro. That’s just an insane idea. The whole concept of the euro is based on cooperation. If have have self-interest at work the system is completely insane. And this policy isn’t even in the interest of the German’s—the deep recession will cost their taxpayers a fortune in bailouts, far more than they’d lose from 3% inflation. They aren’t being selfish, just foolish.
6. June 2013 at 14:49
Marcus, Yes, what happened to that Clive Crook?
6. June 2013 at 15:49
“They drove the eurozone into its current recession by repeatedly raising interest rates in 2011. Why don’t people know this?”
Either that or continually accelerate the growth in the money supply to sustain the increasingly distorted capital structure, thus leading eventually to hyperinflation.
The recession experienced historically can be considered as “caused” by repeatedly tightening money after a prior loosening, but if money was continually loosened, the recession would have been delayed to the future after which there would be an eventual recession regardless.
7. June 2013 at 11:29
While I totally agree that the ECB is a reason for the recession in the Eurozone, the ECB itself has never argued with the zero lower bound. Though interestingly, they DO indeed claim that “monetary policy is not very effective” but not due to the ZLB. They claim it’s because of an interrupted transmission mechanism, especially in the peripheral countries. They then have several arguments on that:
1) Bond markets/sovereign yield are credit-risk driven, hence lowering interest rates a meagerly 0.25% wouldn’t do any good for the peripheral countries anyways but only endanger price stability in the “good” ones.
2) Recent reasoning on why to keep IOR: Removing it might indeed induce lending – but mostly in the “good” countries (-> “Oh no, price stability endangered again!!”). In the “bad” ones, they are afraid, it might not have any influence on lending because banks are afraid to give loans to bad-credit-borrowers, so they’ll keep hoarding their cash. But if they have to pay for hoarding, they might then charge negative interest on deposits, thus punishing the poor consumer.
So basically, they reason with “demaged transmission mechanism”. Which in my oppinion is NOT a very good arguement, since the transmission mechanism wouldn’t be damaged if they would conduct proper monetary policy (i.e. following a reasonable NGDP path) in the first place. Or even signal to start doing that. I bet that transmission mechanism would work just fine.
8. June 2013 at 06:50
Matthias, I agree. Given that their tight money policy of 2011 produced a deep recession, I think it’s fair to say they are wrong, and the transmission mechanism is not broken.