Draghi: High eurozone unemployment is causing low AD
I found this gem in a post by Christopher Mahoney:
Why is aggregate demand so weak?
[Mario Draghi] “You have a quite broad weakness in domestic demand and consumption, particularly because of the high levels of unemployment.”
So the unemployed are the cause of unemployment. QED.
BTW, Mahoney gives Ambrose-Evans Pritchard and the late Christopher Hitchens a run for the money in doing “moral indignation.” Here’s a sample:
The ECB is not to blame for zero growth and high unemployment: that is the fault of the defective countries and their lazy people:
“You also have to ask yourself why these countries were not competitive. Why did they have to rely for growth in the good times, or “fairyland” times, on the protected sectors that were shielded from international competition?”
It appears that there is more than a bit of Savonarola in Mr. Draghi. Although a Roman Catholic, he has a Puritan heart. He is truly a man of the world, highly educated, highly intelligent, with a resume intimidating in its excellence: MIT, Harvard, World Bank, Brookings, Institute for Advanced Studies, Goldman Sachs, Bank of Italy, ECB. Whatever Draghi’s problem is, it is not intellectual ignorance or a low IQ.
A bit of psycho-biography: Draghi has spent his entire professional life apologizing for Italy. Imagine his life, traveling around the world in order to explain and excuse his country’s medieval politics and ungovernability. Try to imagine for a moment the depths of Draghi’s contempt for Italian politicians (and voters), with their Byzantine disinterest in anything but power, family and money.
Could Draghi be unconsciously (or even consciously) seeking revenge on his country’s unmodern political culture, the succession of Andreottis, Fanfanis and Berlusconis and all of their satraps and corrupt henchmen? Does he perhaps think, like Lincoln, that only by going through a cauldron of fire can his country atone for its sins and enter the modern era? Does he, in other words, think that his utopian ends justify his brutal means? Certainly the tone of his monthly Q&A would suggest impatience if not contempt for the complaints of those who would question his disastrous policies.
This may no longer be true, but when I was at Chicago in the 1970s the general perception was that the MIT guys knew more math, but we were better at thinking on our feet.
PS. Remember, this is the same guy who said lower than target inflation is good news, as people will be able to consume more. One could construct an entire principles of macro text on the basis of teaching students to see through the nonsense coming out of the mouths of our policymakers.
Tags:
10. June 2013 at 12:02
Is that just an idle remark, or…
10. June 2013 at 12:14
OT: This post by Brad Delong seemed very good to me:
http://delong.typepad.com/sdj/2013/06/confusion.html?utm_source=feedly&utm_medium=feed&utm_campaign=Feed%3A+BradDelongsSemi-dailyJournal+%28Brad+DeLong%27s+Semi-Daily+Journal%29
Do you have any thoughts on it?
10. June 2013 at 12:34
Some of Draghi’s utterances may be explained by the fact that the German Supreme Court is about to inquire into ECB bond buying: http://www.spiegel.de/international/europe/german-high-court-considers-challenge-to-ecb-bond-purchases-a-904745.html
By the way, can you explain how Market Monetarism differs from Ordoliberalism? (Defined at http://ecfr.eu/page/-/ECFR49_GERMANY_BRIEF.pdf : “The central tenet
of ordoliberalism is that governments should regulate
markets in such a way that market outcome approximates
the theoretical outcome in a perfectly competitive market” ). Because they appear to have close to the same intent, but the policy prescription is quite different. (I apologise if you already did and I missed it)
10. June 2013 at 12:39
High unemployment leads to weak demand. Weak demand leads to high unemployment. That is exactly how they teach it!
10. June 2013 at 13:01
OT: This Delong post seems related to the other one:
http://delong.typepad.com/sdj/2013/06/brad-delong-normalization.html
10. June 2013 at 13:19
“I was at Chicago in the 1970s the general perception was that the MIT guys knew more math, but we were better at thinking on our feet.”
As a math person myself, I can say it’s a bit of a Faustian bargain. The math gives you a competitive advantage, as you can do research that others can’t even understand. But when the time comes to think on your feet, others say “hey, aren’t you the math guy? You aren’t ALLOWED to think on your feet!”
Note: This comment relates to my experience, not to Chicago or MIT.
10. June 2013 at 13:31
Scott
Compared to Draghi, Hoover was a ‘Krugman groupie’:
http://thefaintofheart.wordpress.com/2013/06/03/poor-hoover/
10. June 2013 at 14:05
Saturos, “Show me the money”
kebko, Well written post, but I think he gets off track when he starts assuming that central banks can’t target NGDP at the zero bound. It’s not that they can’t, it’s that they don’t want to.
Alex, I think they go wrong when they assume that economies recovery quickly from demand shocks.
10. June 2013 at 14:07
Marcus, You are exactly right about Hoover.
10. June 2013 at 14:51
Gee, Draghi sure does seem obsessed with “punishment.”
Interpol might want to check his crawl space.
10. June 2013 at 16:13
Scott,
the ECB works in a way that is very similar to price level targeting.
Under price level targeting, unexpected supply side shock due to oil prices is good news, that’s why Draghi said people will be able to consume more. If inflation falls due to lower oil prices, he will be able to ease monetary policy sooner.
Under price level targeting, higher structural unemployment will reduce the domestic demand. That is what Draghi probably had in mind.
10. June 2013 at 16:33
Vaidas, When inflation falls due to supply shocks, output rises faster than the trend rate. When it falls due to demand shocks then output rises at less than trend. The eurozone was hit by a demand shock–that’s why inflation fell.
I believe that even core inflation is falling–at least in the US.
10. June 2013 at 16:39
Draghi: “You have a quite broad weakness in domestic demand and consumption, particularly because of the high levels of unemployment.”
Sumner: “One could construct an entire principles of macro text on the basis of teaching students to see through the nonsense coming out of the mouths of our policymakers.”
This is two posts in a row where Dr. Sumner cites Draghi saying something that is true in the proper context, but Sumner gets it wrong because he believes printing green pieces of paper makes people wealthier.
2-0 Draghi? Yikes
10. June 2013 at 16:51
Well Scott your blog does complete me…
10. June 2013 at 17:10
Scott, Draghi was not discussing the demand shock at that time. His topic was the oil supply shock.
Here is what Draghi said when the topic was demand:
“I can only repeat what I said last time, in that we will monitor all incoming data very closely and stand ready to act.”
10. June 2013 at 19:06
Stupid and disengenuous hand waving. Surprised that is deserves any mention. Tight money persists, and nothing changes.
Krugman published a bit of a CYA assuring the world that he supports monetary easing. How about holding his feet to the fire, Scott? Where, possibly, if your critique is of use, has he failed? Tight money and a fiscal fetish, perhaps?
10. June 2013 at 21:54
“This is two posts in a row where Dr. Sumner cites Draghi saying something that is true in the proper context, but Sumner gets it wrong because he believes printing green pieces of paper makes people wealthier.”
This is two posts in a row where Geoff cites Dr Sumner saying something that is true in the proper context, but Geoff gets it wrong because he believes axiomatically that central banking causes the business cycle.
2-0 Sumner? Yikes.
11. June 2013 at 00:07
One could construct an entire principles of macro text on the basis of teaching students to see through the nonsense coming out of the mouths of our policymakers.
Should be fun. If you put that on Kickstarter, I’m in.
11. June 2013 at 00:11
Ben J,
Since aggregate demand shortfalls don’t come out of nowhere, I think it would be quite accurate to say that central banking causes the business cycle.
I’m not saying that the moron is right, just that one should pick his/her words very carefully when dealing with such mental cases.
11. June 2013 at 00:31
Daniel,
Good point!
11. June 2013 at 05:20
Vaidas, They “stand ready to act?” How much data do they need to convince themselves that Europe has an AD problem?
11. June 2013 at 08:07
Not much. Either prices should drop a little bit more below the implicit price level target, or they should see more negative economic date, and then they will say there is AD problem, and then they will act.
11. June 2013 at 12:25
Vaidas, Then they should tell us where there “implicit” price level target is. It does no good keeping it secret.
11. June 2013 at 21:11
Scott, this is a good place to start (chapter “Measures of Performance”): http://www.ecb.int/press/key/date/2012/html/sp120326.en.html
12. June 2013 at 07:56
Vaidas, I’d like a graph, not an article. Where’s the trend line they are shooting for, and where are we now?
BTW, I hope you are right, as it would conclusively prove my zero multiplier argument.
If they really believe that, I want the ECB to say “we are right where we want to be regarding prices, and hence we’d be very upset if eurozone AD were to increase further.” I dare them to say that.
12. June 2013 at 08:06
Scott,
the slides are here (slides 4,5,6 are the most interesting ones):
http://www.ecb.int/press/key/date/2012/html/sp120326.pdf?7d4194164c0d7de130851ada31d78018
BTW, I have emailed you all this material already on Monday.
They would not say “we are right where we want to be regarding prices, and hence we’d be very upset if eurozone AD were to increase further.”. I guess Couere would say something like “looking backwards, our record and the current price level confirms we are doing a good job. Looking forward, medium term inflation expectations are firmly anchored, and this is the best contribution we can make to minimize the volatility of inflation and output. We are happy oil prices are lower than we thought they would be as this will allow AD to increase further.”