Krugman vs. Smith

Noah Smith recently did a post discussing the long period of deflation in Japan, and noted that NK models generally predict that wages and prices should eventually adjust to restore full employment.  Paul Krugman criticized Smith as follows:

No, the only reason deflation “works” in the standard model is that it increases the real money supply, which leads to lower interest rates; in effect, it acts like an expansionary monetary policy.

But Japan has been in a liquidity trap during the whole period Smith looks at. Monetary expansion is ineffective unless it can raise expectations of future inflation. Deflation is definitely not going to help. In fact, by raising the real burden of debt, it makes things worse.

Hmmm, which hippie to punch?

Long time readers know I strongly disagree with Krugman’s view, as I think the standard model uses inflation where NGDP growth is needed.  Thus if nominal wages fall and NGDP doesn’t fall then employment will increase.  Keynesians would argue that falling wages will reduce prices, and this will increase the real burden of debts, or real interest rates.  But the ratio of debt to the price level doesn’t matter, what matters is the ratio of debts to NGDP.  And real interest rates don’t matter, it’s the difference between nominal rates and expected NGDP growth that matters. Hold NGDP stable and falling wages and prices most certainly will restore full employment.

Now I suppose you could argue that falling wages would cause the central bank to reduce NGDP.  But I’ve argued that Krugman and Eggertsson’s model doesn’t fit the Great Depression.  In a follow up post Krugman makes the following comment:

One thing Noah Smith did get right, by the way, is his suggestion that Japanese wages are less sticky than in other advanced countries. There’s a fair bit of evidence to that effect, above all the fact that Japan is pretty much unique in having gone into actual deflation. The point, however, is that this is not a good thing in a country that is in a liquidity trap and suffering from a debt overhang: when it comes to wage and price flexibility, the situation in the economy has developed not necessarily to Japan’s advantage.

That last lines echoes Hirohito’s famous comment, and I suppose its cleverness is supposed to end all debate.  But does it?  Yes, over the past 20 years AD in Japan has fallen by more than in any other developed country in the world, indeed so far as I know by more than in any other developed economy in all of world history over such a long period of time.  That fits Krugman’s claim.  Of course this mind-boggling decline occurred during a period of persistent and large budget deficits, which is awkward for Keynesians.

But what about Krugman’s employment claim?  How’s Japan doing compared to economies where workers riot if you try to cut their wages?  Here are some recent unemployment rates in countries with weak NGDP:

Japan:  4.1% and falling

Greece:  26.9% and rising

Spain:  27.2% and rising

One might argue that wage stickiness has not necessarily worked out to the advantage of Greece and Spain.  Yes, you can throw a million objections at my list (I agree that Japan’s actual rate is probably higher), but none of them will address the point I’m making—Krugman can’t simple throw out a clever line and make everyone assume he’s got the facts on his side.  Let him find his own highly misleading comparison to counter my highly misleading comparison and then we can start a meaningful debate.

PS.  Krugman also makes this remark:

Bruce Bartlett’s latest has some interesting history from the 1930s that just so happens to bear on my mild chiding of Noah Smith (Smith has an answer that, frankly, I don’t understand “” but he’s been such a good guy over time that I’m just going to let this one drop).

Well regardless of whether Smith is a good guy, a bad guy, or just a guy, I’m not going to let this Smith comment slide:

So how can we be looking at a sticky-price story for Japan’s stagnation? Well, we could be looking at a very long series of negative demand shocks. Japan could have just kept getting hit with shock after shock, giving the appearance of a long steady decline. But what were those shocks? If they were global in nature (such as the Asian financial crisis, the tech bubble, etc.), there’s the question of why other countries around the world haven’t mirrored Japan’s deflationary experience. And a long string of negative domestic demand shocks is not in evidence.

This is flat out wrong.  Japan’s NGDP is lower than 20 years ago, that’s the biggest fall in AD I’ve ever seen. The only question is why has Japan suffered such a big adverse demand shock, spread out over 20 years.  And the answer is simple; the BOJ has had an unusually tight monetary policy.  The BOJ has produced 20 years worth of adverse AD shocks.  In both 2000 and 2006 they raised interest rates despite the fact that Japan was experiencing deflation.  In 2006 they cut the monetary base by 20%. I’ve often disagreed with Bernanke, but he’d never do anything THAT crazy.  Indeed Bernanke wrote some powerful pieces criticizing the insanity of BOJ policies as far back as the late 1990s.

Oddly, Smith’s slip on this point doesn’t detract for the rest of the post, which is very good (Tyler Cowen also liked it.)  I’ve also argued that demand and supply shocks might become “entangled,” but whereas I focused on the persistent effects of AD on employment, Smith focuses on the possible impact on long term productivity.  I have to admit that his focus makes more sense for Japan.

PPS.  On second thought, Smith is a friend of Miles Kimball, so he can’t really be a bad guy. But he needs to be more polite to conservatives.  Noah, there’s a reason Krugman likes you–think about it.


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35 Responses to “Krugman vs. Smith”

  1. Gravatar of Noah Smith Noah Smith
    18. July 2013 at 06:17

    On second thought, Smith is a friend of Miles Kimball, so he can’t really be a bad guy.

    Hehehe. True!!

  2. Gravatar of Rob Rawlings Rob Rawlings
    18. July 2013 at 06:59

    If Japans unemployment is “Japan: 4.1% and falling ” then why is it thought that Japanese AD is currently too low and needs to be boosted by monetary policy? Seems like the issue is why RGDP (and productivity) have grown so slowly over the last 20 years and this may have nothing to do with monetary policy.

  3. Gravatar of marcus nunes marcus nunes
    18. July 2013 at 07:04

    “Japan’s NGDP is lower than 20 years ago, that’s the biggest fall in AD I’ve ever seen. The only question is why has Japan suffered such a big adverse demand shock, spread out over 20 years. And the answer is simple; the BOJ has had an unusually tight monetary policy.”
    It certainly has:
    http://thefaintofheart.wordpress.com/2012/07/08/japan-poster-child-for-ngdp-targeting/

  4. Gravatar of W. Peden W. Peden
    18. July 2013 at 07:38

    Rob Rawlings,

    Unemployment can be low and still above the natural rate.

  5. Gravatar of Saturos Saturos
    18. July 2013 at 07:53

    So in conclusion, we seem to have decided that, since a steady secular downtrend of NGDP cannot cause “musical chairs” effects on unemployment for 20 years, and Japanese unemployment doesn’t appear to be that high anyway, it is probably the case that there is some kind of supply-side stagnation that has taken root since the bubble burst in the 90’s. This may have something to do with the tight money policy being run by the BoJ since then (it likes deflation), somehow getting “entangled” with the supply side. It may even be the standard point of deflationary expectations getting the interest rate stuck out of equilibrium, choking off investment, although this seems unlikely given that yields in Japan, though low have been persistently above 1%. It might be points relating to the aging workforce, the poorer participation options for women, or the lack of creative destruction as Noah recently tweeted: https://twitter.com/Noahpinion/status/357790438058496000. But we don’t actually seem to know clearly what’s wrong with Japan.

    This sort of thing makes me wish, not for the first time, that our bloggers and textbook authors would clearly mark the degree of certainty with which various claims are advanced. If economics claims to be a science, it is true that within the mind of any scientist or even the consensus of the field there can be considerable different degrees of evidence and belief for various tenets – yet unfortunately you never see bloggers, let alone textbooks clearly list how relatively probable they think their claims are.

  6. Gravatar of Saturos Saturos
    18. July 2013 at 07:55

    Yes, to argue that monetary easing is required in Japan now means either that you think it would reverse some of those negative entanglement effects, or that there has been some recent extra demand shock, pushing NGDP further beneath expectations, that the economy hasn’t had decades to adjust to. I myself really don’t expect very much from Abenomics in boosting the country’s growth.

  7. Gravatar of ssumner ssumner
    18. July 2013 at 08:14

    Noah, I’ve got another one coming.

    Rob, I agree with W. Peden.

    Saturos, I’ve always argued that Japan had both problems, even ignoring possible entanglement effects:

    1. I think the bigger problem in Japan is structural.
    2. I think downward wage stickiness makes the average unemployment rate in Japan higher than it would otherwise be, but not much higher. And I think the natural rate in Japan is very low, perhaps 2%
    3. I think there is a big difference between years like 2007, when the demand shortfall was a minor problem and the period since 2008, when is has been more substantial.
    4. I’ve always been somewhat agnostic on Japan, believing that falling NGDP is a bad policy, but not certain how much of the slow RGDP growth is due to tight money, and how much is due to other factors.
    5. The Japanese markets seem to believe they have had demand-side problems.
    6. Japanese films portray an economy with a serious unemployment problem, much worse than 4.1% would suggest.
    7. If there is “disguised unemployment” in Japan, then the cheaper yen will put workers who are currently sitting around doing nothing, back on the production line. That will look like productivity, but will be partly employment.

  8. Gravatar of ssumner ssumner
    18. July 2013 at 08:16

    Saturos, I’ve argued with commenters who expected a lot of RGDP growth from Abenomics. I expect some extra growth, but not a lot.

    Ditto for the US, I don’t think we can get back to the old RGDP trend line.

  9. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. July 2013 at 08:33

    “Japan’s NGDP is lower than 20 years ago, that’s the biggest fall in AD I’ve ever seen. The only question is why has Japan suffered such a big adverse demand shock, spread out over 20 years. And the answer is simple; the BOJ has had an unusually tight monetary policy.”

    This is misleading on a couple of counts.

    First, while there may be some correlation between NGDP and AD, the two are not synonyms and I think it is particularly dangerous to equate them in the case of Japan.

    The reason it is particularly misleading for Japan, and this is the second misleading notion in the above-referenced quote, is that when talking about GDP or AD demographics are important. Japan’s population has been nearly stagnant over the past two decades and the working-age population has actually suffered a decline. One would expect this to result in lower GDP growth (nominal or real) than in countries with a growing population. Not everything that happens in an economy to GDP or AD is the result of monetary policy!

    Paul Krugman actually put together a nice graph on this a while back that indicates Japan’s GDP per working-age person has actually been gaining ground on the US since about 1998.

    http://krugman.blogs.nytimes.com/2013/02/09/japanese-relative-performance/

    I’m no expert, but I wouldn’t rule out the possibility that Japan’s monetary policy might have had something to do with that.

  10. Gravatar of 123 123
    18. July 2013 at 08:54

    “In 2006 they cut the monetary base by 20%. I’ve often disagreed with Bernanke, but he’d never do anything THAT crazy”

    In 2006 BoJ has delivered price stability according to mandate. Experimenting with tapering is much more dangerous, while 2006 might have been no AD shock at all.

  11. Gravatar of 123 123
    18. July 2013 at 08:55

    Addendum. Never reason from change in M0.

  12. Gravatar of Jason Jason
    18. July 2013 at 09:02

    Partially inspired by Scott’s request for a model almost a year ago
    https://www.themoneyillusion.com/?p=14826
    (Including a request for a definition of the price level …) And certainly inspired by the short course on money
    https://www.themoneyillusion.com/?p=20599

    I’ve been putting together a model based on information theory and the quantity theory; here is an intro:
    http://informationtransfereconomics.blogspot.com/2013/07/short-course-on-information-tranfer-and.html

    The interesting thing is that it does a reasonable job of explaining Japan’s persistently deflationary environment
    http://informationtransfereconomics.blogspot.com/2013/07/a-more-global-perspective.html
    even though the monetary base has ostensibly increased …
    http://research.stlouisfed.org/fred2/graph/?g=kI7
    The problem appears to be that the base is too large in magnitude relative to GDP, which changes the behavior of the model and takes it farther from the behavior of the traditional QTM including deflationary increases in the monetary base. AD and AS become entangled as Scott (and Noah) mention.

    I tried posting it on Noah’s page on this very topic, but got no response (probably because “hey check out my model” in comments might get blocked by a wetware spam filter …)

    Another cool trick includes coming up with a reason that high inflation countries must follow the QTM better than low inflation countries (the latter can, but for some unknown reason don’t) … basically, this counts as a derivation of the quantity theory of money from information theory.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2013 at 09:09

    @Vivien Darkbloom,
    “First, while there may be some correlation between NGDP and AD, the two are not synonyms and I think it is particularly dangerous to equate them in the case of Japan.”

    To be precise, AD is nominal GDP (NGDP) when inventory levels are static (i.e. nominal Final Sales of Domestic Product). Thus for all intents and purposes AD is in fact virtually identical to NGDP.

    And if you look at the dynamic AD-AS diagram that I link to below, and which can be found in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok, you’ll note that the rate of change in the AD curve is equal to the sum of the inflation rate and the rate of change in RGDP, and so is precisely equal to the rate of change in NGDP.

    http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG

    “The reason it is particularly misleading for Japan, and this is the second misleading notion in the above-referenced quote, is that when talking about GDP or AD demographics are important. Japan’s population has been nearly stagnant over the past two decades and the working-age population has actually suffered a decline. One would expect this to result in lower GDP growth (nominal or real) than in countries with a growing population. Not everything that happens in an economy to GDP or AD is the result of monetary policy!”

    The populations of Belarus, Hungary and Russia have been in decline since the 1980s. And except from 1999 to about 2010 in Russia, all three have seen more or less steady decreases in their labor forces. And yet inflation was over 5% in Hungary and Russia last year, and was nearly 60% in Belarus. And of course Belarus and Russia both experienced hyperinflation in 1992. I don’t have time right now to look up their NGDPs but I’m pretty sure they haven’t been stagnant for 20 years like it has been in Japan.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2013 at 09:13

    Scott,
    In Japan the five year average growth rates of NGDP were 6.4% in 1985-90, 2.2% in 1990-95, 0.3% in 1995-2000, (-0.2%) in 2000-05 and (-0.9%) in 2005-10. The OECD’s estimates of Japan’s potential GDP show that the five year average growth rates of potential RGDP were 3.0% in 1985-90, 2.4% in 1990-95, 1.3% in 1995-2000, 0.7% in 2000-2005 and 0.6% in 2005-10.

    The 5 year average NGDP growth rates suggest that Japan has been hit by a series of negative shocks to AD since 1990. The 5 year average potential RGDP growth rates suggest that Japan was also been hit by a series of negative shocks to AS between 1990 and 2005.

  15. Gravatar of ssumner ssumner
    18. July 2013 at 09:29

    Vivian, Check out Mark’s post. I’m fine with using NGDP/working age adult, but the results would be similar.

    Krugman often uses RGDP as an indicator of AD, which is a really bad idea. Look at Zimbabwe.

    123, It’s very debatable as to whether the BOJ has adhered to their mandate. They sometimes suggest they wish Japan had avoided deflation, but were unable to stop it. That suggests they don’t like the path of prices. The rest of the government has done fiscal stimulus, which suggests they’d also prefer more inflation.

    BTW, I didn’t reason from a MB change, I said it’s silly to reduce the base when you are suffering from deflation. That’s a P/Q combination.

    Jason, Thanks. I’ll take a look. Note than in high inflation economies the base is not an important store of value–hence the QTM works better in some respects (although of course V increases as inflation rises sharply.)

    Mark, Thanks for that data, I agree.

  16. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. July 2013 at 09:51

    @Mark Sadowski

    OK,so, GDP and AD are not synonyms. Thanks for that.

    As for the three countries you list, you’ve apparently ruled out Russia, so that leaves Hungary and Belarus. How relevant are those examples? Even including Russia, we’ve got three countries emerging from communism, increased trade with the EU and elsewhere and massive privatization. Their lower populations are due primarily to recently lower birthrates and not so much a decline in working population. As I wrote, there are a lot more variables than monetary in this equation. And, despite those other variables, Hungary’s growth has been pretty meager—I don’t think it has been over 2 percent in the time frame mentioned.

    And, the last comment you wrote regarding potential GDP in Japan demonstrates, I think, the very point I made: demographics (and other factors) play a huge role in the Japan story. I also would not rule out the huge and growing public debt has been a drag on their GDP growth, whichever measure you may choose.

    I realize the interest on this blog is primarily with respect to the effects of monetary policy; however, I get the impression that this sometimes creates a certain tunnel vision.

    I’m still amazed by the fact that Japan has been gaining ground on the US as regards per capita and per working-age person GDP since about 1998, per that chart Krugman posted. If the US were to annex Ontario tomorrow, this would immediately increase the measure of “US GDP”. It would not mean that we are collectively better off (particularly those Ontarioans) or that our monetary policy has somehow worked some magic. Conversely, if Texas were to leave the Union, it would not mean our monetary policy has failed. It is probably debatable who would be better off. How do you explain that?

  17. Gravatar of Rob Rawlings Rob Rawlings
    18. July 2013 at 09:55

    “Unemployment can be low and still above the natural rate.”

    While undoubtedly true I still have problems reconciling Japan’s relatively low unemployment rate over the past 23 years (possibly due to flexible wages) with a “deficient demand” story that would have been “fixed” by better monetary policy.

    It it possible that the RGDP numbers are just wrong and Japan has actually done much better than the stats would tell us ?

    (http://mises.org/daily/5170/ seems to think so)

  18. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. July 2013 at 10:04

    “I’m fine with using NGDP/working age adult, but the results would be similar.”

    I would be interested if you were to elaborate on that. If it is true, per Krugman’s post, that Japan has been gaining ground on per capita and per working person GDP since about 1998, how would you explain that? As a failure of monetary policy?

    Of course, your focus is on NGDP; but, I would think that the ultimate reason for that focus is to drive *real* growth. On the measure that should ultimately count for economic well-being, Japan has been doing quite well versus the US for about 15 years. Do you have an explanation?

  19. Gravatar of W. Peden W. Peden
    18. July 2013 at 10:32

    Rob Rawlings,

    If money is superneutral in the long-run (i.e. the rate of change of prices is irrelevant to the rate of change of RGDP) then there’s a problem for a deficient demand explanation.

    If money is not superneutral in the long-run, then a deflationary trend in a country with sticky prices would lower potential RGDP.

    I don’t know enough about Japan to usefully hypothesise.

  20. Gravatar of ssumner ssumner
    18. July 2013 at 10:46

    Vivian, Hasn’t a lot of that gain been since 2008? In that case it partly reflects the bad performance in the US. Also recall that 1998 was a boom year for the US and a recession year for Japan. If you compare the two since 1990, the US has seen faster RGDP growth per capita, and that’s a dramatic turnaround from prior to 1990, when Japan was rapidly gaining on the US, and widely expected to continue gaining ground. As you know, it’s easier for a low GDP country to grow fast than a high GDP country.

    Of course this is off topic; what I objected to was Smith’s remarks about AD, not RGDP. I don’t expect AD to have a big impact on long term growth in RGDP, nor is that a prediction of the mainstream models.

    Rob, See my reply to Saturos.

  21. Gravatar of 123 123
    18. July 2013 at 10:47

    Scott, I am saying that BoJ was closer to its mandate in 2006 than the Fed is now, and BoJ action was much less reckless than tapering.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2013 at 11:02

    @Vivien Darkbloom,
    “As for the three countries you list, you’ve apparently ruled out Russia, so that leaves Hungary and Belarus.”

    I gather you think labor force and not population is the meaningful factor. For what it is worth the World Bank projects that Russia’s labor force will decline substantially by the 2020s and yet the IMF is projecting continued moderate inflation in that country.

    “How relevant are those examples?”

    Very, as you are claiming that AD cannot increase in countries with declining populations and those are specific counterexamples to that effect. That’s the nature of logic.

    “Even including Russia, we’ve got three countries emerging from communism, increased trade with the EU and elsewhere and massive privatization.”

    The factors you list would almost certainly affect aggregate supply (AS) not aggregate demand (AD) .

    “Their lower populations are due primarily to recently lower birthrates and not so much a decline in working population.”

    That’s not at all true. All three have rapidly aging populations. Belarus in particular has a steady declining share of population in the labor force.

    “As I wrote, there are a lot more variables than monetary in this equation. And, despite those other variables, Hungary’s growth has been pretty meager””I don’t think it has been over 2 percent in the time frame mentioned.”

    Hungary’s NGDP grew at an average rate of 5.2% from 2002-2012. It went up nearly ten-fold from 1992 to 2012.

    “And, the last comment you wrote regarding potential GDP in Japan demonstrates, I think, the very point I made: demographics (and other factors) play a huge role in the Japan story. I also would not rule out the huge and growing public debt has been a drag on their GDP growth, whichever measure you may choose.”

    Again these factors probably affect AS not AD.

    “I realize the interest on this blog is primarily with respect to the effects of monetary policy; however, I get the impression that this sometimes creates a certain tunnel vision.”

    On the contrary, I have noticed an unrelenting tendency of most commenters to assign real causes to nominal phenomena within the econonblogosphere. That of course would leave policymakers largely free of any responsibility. Thankfully this blog is the antidote to that peculiar form of myopeia.

  23. Gravatar of Coleton Stirman Coleton Stirman
    18. July 2013 at 11:18

    Mr. Sumner,

    Glad to see you coming around a bit on Big Ben.

    “I’ve often disagreed with Bernanke, but he’d never do anything THAT crazy. Indeed Bernanke wrote some powerful pieces criticizing the insanity of BOJ policies as far back as the late 1990s.”

    While he hasn’t live up to his academic street cred while at the fed, being more of a conservative in the traditional sense, maintaining the “status quo”, he has it seems performed better than you often indicate.

    P.S. Although it is damn frustrating to see his paper (posted here a few days ago) where he lists price-targeting #1 on his list of 7 unconventional ways to fight deflation at the zero bound. Might be interesting to see if the fed’s hallowed halls could change Mr. Sumner?

  24. Gravatar of Citizen AllenM Citizen AllenM
    18. July 2013 at 11:59

    How about a more simple explanation of the “low Japanese unemployment rate”: http://www.nira.or.jp/past/publ/review/96winter/kishi.html

    The simple explanation was a lie- they simply made them disappear into the background. High unemployment was politically unacceptable, so it was not allowed to exist.

    The truth of the matter can easily be seen in the demographic disaster of Japan since 1990: http://en.wikipedia.org/wiki/Demographics_of_Japan
    Open up the table showing live births, and see the amazing crash starting even before the beginning of their great depression.

    The truly curious part is that so many are not forcing change- and they are starting to import significant numbers of Chinese to perform migrant labor tasks- also apparent from the chart.

    http://www.stat.go.jp/english/data/getujidb/index.htm#i

    Just peruse some of the statistics in these lists- it is a shockingly different society, and a shrinking society- unlike any in the West outside of the PIGS.

    Someday this war’s gonna end…

  25. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. July 2013 at 12:45

    Mark Sadowski,

    You wrote:

    “…you are claiming that AD cannot increase in countries with declining populations and those are specific counterexamples to that effect. That’s the nature of logic”.

    The nature of logic is that one cites the comments of others correctly and draws appropriate conclusions from those facts. When one deliberately misstates facts, that is not only illogical, it’s dishonest. Please point out where I argued that “AD cannot increase in countries with declining populations.”

    Specifically, what I argued is that one cannot automatically assume that Japan’s “GDP shortfall” (assuming there was one) was the result solely of monetary policy. I argued that it is most likely Japan’s performance was hindered by its demographics, not only in respect to its overall slow population growth or decline, but the decline of its workforce. In fact, I argued that many factors go into determining a country’s GDP, indeed AD, and therefore logic would dictate that it may be possible for countries with declining populations to actually experience GDP growth. Did I not mention that Belarus, Hungary and indeed Russia benefitted in the relevant period from abandoning communism, opening up trade and privatizing industries? There are, I’m sure, many other factors that could increase GDP growth in a declining population other than monetary policy.

    Indeed, it was you who apparently are arguing in response, sub silentio, that the *only* difference between Russia, Belarus and Hungary on the one hand, and Japan on the other, is that the former had superior monetary policies in place. I disagree.

    The factors I listed would ultimately affect both aggregate supply and aggregate demand. More to the point, they would increase real per capita GDP.

    As far as Hungary is concerned you are citing NGDP growth—they have had relatively poor and very little GDP and very little growth since 2007. I’m only interested in NGDP growth to the extent that it might drive real GDP gains. If that’s not your objective here, cancel my free subscription. So, citing Hungary’s NGDP growth rate and ignoring the real long-term growth or lack thereof does not make a particularly strong case for whatever you are trying to argue. What, exactly, *are* you trying to argue?

  26. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. July 2013 at 12:58

    “Vivian, Hasn’t a lot of that gain been since 2008?”

    The chart Krugman produced shows steady per capita gains from 1998 till now. It is not limited to 2008 till now and it does not appear that the two events you cite explain it. The big decline was from about 1990 to 1998 and I think this was attributable in large part to the housing crash. The period from 1998 till now is about 15 years, so I don’t think the trend is attributable solely to the factors you cite.

    If one takes demographics into account, the picture looks much different and on this point, I think Krugman is right. There is no reason why he couldn’t be because there was nothing inherently political about that post.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2013 at 13:37

    @Vivian Darkbloom,
    “As far as Hungary is concerned you are citing NGDP growth””they have had relatively poor and very little GDP and very little growth since 2007. I’m only interested in NGDP growth to the extent that it might drive real GDP gains. If that’s not your objective here, cancel my free subscription. So, citing Hungary’s NGDP growth rate and ignoring the real long-term growth or lack thereof does not make a particularly strong case for whatever you are trying to argue. What, exactly, *are* you trying to argue?”

    In the context of the AD-AS model, in the short run wages and prices are sticky causing the short run AS curve to be upwardly sloped. In the long run money is neutral and wages and prices are flexible so the Solow growth curve is vertical. Thus shifts in NGDP influence the rate of growth of RGDP in the short run, but not in the long run.

    Both in the short and the long run, NGDP growth is almost completely independent of population and labor force growth, birthrates, political-social organization, trade openness, the degree of privatization, or any other real factor you care to list. NGDP is almost entirely determined by monetary policy. It is after all nominal (that’s what the “N” stands for).

  28. Gravatar of What Does Japan Exemplify? | askblog What Does Japan Exemplify? | askblog
    19. July 2013 at 02:23

    […] surprisingly, Scott Sumner has a […]

  29. Gravatar of J.V. Dubois J.V. Dubois
    19. July 2013 at 02:31

    Actually I am a little bit perplexed by this whole long-term demand shocks vs supply shocks. Why is it so hard to understand?

    Let’s imagine some country that does some stupid policy. Like mandating minimum wage that is at 9th decile of the current wage distribution. As a result you will probably get unemployment. Why? Classical demand shock. Since we have downward “sticky” wages (mandated by law) and monetary policy refuses to inflate to get around this downward stickiness we have bad equilibrium in labor market and depression/unemployment

    Fast forward 20 years. Minimum wage didn’t change, price level didn’t change and nominal income fell. And now we have many economists wonder – how is it possible that we have demand shock lasting so long? Should not wages fall enough to offset this? Did we have some series of demand shocks that caused this trouble? Or is it supply side?

    It is both! Monetary policy is government policy. Everybody knows that bad government policy (like minimum wages and other price controls, innefective justice system etc.) have adverse impact on supply. Why should bad monetary policy be different long-term?

    So the same way that too high minimum wage can have adverse impact on economy for decades bad monetary policy may have the same effect.

    Long-term money neutrality does not mean that having stupid Central Bankers for decades long-term is the same as having thoughtful Central Bankers long-term. Or to say it in other words:

    1) long-term is series of short terms.
    2) “Do nothing” can sometimes mean bad thing in policy. Like do nothing about corruption. Or do nothing about excesivelly high minimum wage.

    Therefore we can see long-term adverse impacts of series of short-term “do-nothings”.

    PS: If it is not clear after this I give up.

  30. Gravatar of ssumner ssumner
    19. July 2013 at 05:35

    123, You may be right, but of course 2006 was a pretty good year for Japan. Then things got much worse.

    In any case “close to mandate” is not really a good way of judging a central bank that sets its own mandate. Suppose they switched their mandate to 10% deflation each year–would you praise them for hitting it?

    Coleton, I’d be a HORRIBLE Fed chairman.

    I’ve actually praised Bernanke on numerous occasions over the past 4 years.

    Vivian, I’m not saying Krugman is not “right,” I’m saying that’s not necessarily the best comparison. I’ve done comparisons that start at 1990, which I think make more sense. You are right that Japan’s housing crash came in the early 1990s, and ours came more recently. So he is looking at a period where the US did unusually poorly, and excluding the period where Japan did unusually poorly.

    I’d add that I’ve often argued growth rates are misleading. Bangladesh has grown much faster than the US over the past 15 years, which in my view tells us nothing of interest. The striking thing about Japan is the shocking dive in economic performance after 1990 as compared to before 1990. That’s partly explained by Japan’s economy maturing, but in my view not all of it can be explained by that factor.

    I’ve spoken to several western businessmen (unrelated) who lived in Japan for a long time. They both told the same story, things in Japan got far worse after 1990. The Japanese stagnation is very real and many people there are hurting. However their culture is good at covering up the pain. A popular movie shows an unemployed businessman who puts on a suit everyday and pretends to go to work, so that his own family won’t find out he’s unemployed.

    The extreme volatility of the Japanese stock market reminds me of the US market in the 1930s; suggesting something is very wrong and stocks swing wildly on rumors that it will get fixed.

    JV, You better give up because it’s not clear at all. It seems you are describing a supply shock, not a demand shock.

  31. Gravatar of J.V. Dubois J.V. Dubois
    19. July 2013 at 07:37

    Scott: “JV, You better give up because it’s not clear at all. It seems you are describing a supply shock, not a demand shock.”

    Really? So blunder in wage policy that will cause 5 year long unemployment is “supply shock” while monetary policy blunder that also causes the same thing is “demand shock”?

    Imagine this monetary policy: CB president announce “We will target 1,000,000% inflation every year next 20 years” So now fast forward 20 years – what did the country experience: demand shock or supply shock (that includes “bad aggregate demand policy causing disruption in exchange of goods that made it harder for people to trade leading to inefficient markets leading to lower supply)?

  32. Gravatar of 123 123
    19. July 2013 at 14:16

    Scott, it is not as if they changed their mandate every year. In 2006 they were close to their mandate, and the mandate worked reasonably in 2005-07. Their mandate deserves lots of criticism, but that criticism should be focused on other periods.

  33. Gravatar of ssumner ssumner
    20. July 2013 at 06:01

    JV, You said:

    “Really? So blunder in wage policy that will cause 5 year long unemployment is “supply shock” while monetary policy blunder that also causes the same thing is “demand shock”?”

    Yup. File under “never reason from a quantity change.”

    123, I agree.

  34. Gravatar of ssumner ssumner
    20. July 2013 at 06:03

    123, I’d add that I talk about 2000 and 2006 a lot because most people are from the concrete steppes, and can only see the absurdity of Japanese policy if explained with those sorts of instrument changes during periods of deflation.

    Otherwise they’ll ask “well what could they have done?”

  35. Gravatar of J.V. Dubois J.V. Dubois
    22. July 2013 at 00:47

    Scott: File under “never reason from a quantity change.”

    May I evoke this sentence next time you say that monetary policy is easy/tight because some quantity named “this year NGDP growth” changed relative to some trend? Will it make any sense?

    So if some supposedly supply side government policy will affect wages (your preferred metric) or NGDP for that matter do you claim that Central Bank should not care?

    Anyways I did not hear any real argument why *persistently* bad monetary policy does not affect long-term ability of a nation to produce. I thought that it is this ability ti produce that is the gist of what “supply side” means.

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