Mark Sadowski on Koo and Krugman
Long time commenter Mark Sadowski has two excellent posts over at Marcus Nunes’s blog. The first is here, and the second is here. He makes lots of good points; here’s an example from the second post:
So why are Krugman’s results so different from mine? In nominal terms both exports and imports soared during 2003-07. But thanks to a sharp increase in the average price of Japanese imports only exports increased dramatically in real terms.
This is fine from the standpoint of real growth accounting, but the issue at hand was, and is, aggregate demand, which is measured strictly in nominal terms. To claim that net exports drove Japan’s growth during this period is to claim that the source for the increased aggregate demand came from abroad when in fact it came from the Japanese QE, which succeeded by not only stimulating foreign nominal demand for Japan’s exports through a reduced real effective exchange rate, but also by dramatically increasing Japan’s nominal demand for imports.
Mark also shows that Japanese growth correlates more strongly with monetary policy than fiscal policy. Highly recommended.
Tags:
12. June 2013 at 09:32
Not a single mention of sustainable imports, sustainable exports, nor sustainable production, nor their foundation: unhampered economic calculation.
No wonder Sadowski is confused.
Of course with such crude aggregate thinking, I am not surprised how he would be misled into believing that “aggregate demand” is the primary driver. I guess he never learned that economies can shrink in real terms, and thus export fewer goods, if consumption spending rose not only at the expense of capital goods spending, but by a greater relative margin. While aggregate demand might be up, production would be down.
Aggregate demand does not drive growth. If aggregate demand consisted solely of consumer spending, there would be virtually zero real growth. More aggregate spending only *seems* to be the driver because history just happens to be one where money inflation takes the form primarily of credit expansion, which has typically in large part has been used by businesses, who use these funds to raise the demand for factors of production, and so the result has typically been an artificial increase in the ratio of capital goods to consumer goods spending.
The “growth” that results from this is of course unsustainable, but aggregate demand going up, and real growth going up, has tempted shallow and immature economic minds to conclude that it’s aggregate demand that is the driver. Supposedly, if the demand for capital collapses, then growth “should resume” if the demand for consumer goods increases by an equal amount, (or perhaps more “optimally” in the eyes of certain shallow minds, if the demand for consumer goods rose to the extent that aggregate demand went up 5% a year).
As long as money inflation primarily takes the form of credit expansion, which is used by businesses to expand, then the “aggregate demand” crowd will continue to ignorantly believe that their theory has been repeatedly confirmed, here and abroad.
————————-
I cannot help but notice a rather blatant contradiction in MM on this issue. If the MM notion that inflation of the money supply immediately raises prices is true, then domestic inflation should not “stimulate” exports abroad at all. The domestic currency, in this case Yen, should immediately depreciate against Japanese goods. Foreign importers of Japanese goods who can buy more Yen, would have to pay higher Yen prices for Japanese goods. No additional exporting in real terms should result.
12. June 2013 at 09:36
I don’t think there are any market monetarists who would argue that expanding the monetary base “immediately raises prices”.
12. June 2013 at 09:41
The yen obviously would not “immediately depreciate against Japanese goods”. Regardless of Japanese monetary policy, producers of Japanese goods will try to charge the market clearing rate. Japan could increase its base by a factor of 10, and prices would only rise to the level that buyers(whether Japanese or foreign)were willing to pay.
12. June 2013 at 11:00
Michael, The effects are very complex. Some prices rise immediately, most don’t. The long run effect is for prices to rise in proportion to any exogenous change in the base that is permanent.
12. June 2013 at 11:15
The way that Krugman thinks about issues like this is completely flawed. I’m of the belief that low interest rates in today’s environment are actually hurting the economy. The whole IS/LM framework assumes that lower interest rates are always stimulative because they make it more attractive to borrow and less attractive to save. However, we’re in a situation where people won’t borrow at zero interest rates. The ZIRP policy basically takes away income from savers in order to keep (bad) debt serviceable. Due to the inability for savers to earn a safe income on their savings, I actually think that more market participants are actually hoarding cash rather than putting it to use. What we need now is higher interest rates from more activity(higher NGDP).
I’m of the belief that higher interest rates in today’s environment would actually be more stimulative. Right now, US corporations/business are sitting on $2 trillion dollars of cash while individuals are actually hoarding savings. The threat is still deflation, especially if China’s unsustainable Ponzi scheme(they use over 50% of the world’s cement, almost 50% of the world’s iron ore, aluminium, copper, etc. for God’s sake) crashes while the Japanese are desperately trying to export their deflation. I think that if market participants had higher rates, there would actually be more capital(that both households and businesses are sitting on) put to work.
As for the Krugman/Koo idea that only fiscal policy is stimulative in today’s environment, they don’t look at asset prices. In Japan, equities and real estate prices fell by almost 80% from peak to trough while the Japanese yield curve has flattened out and the real debt burden actually went up. This is the classic debt deflation that Irving Fisher talked about. The rise in the real debt burden has basically taken away all of the growth that Japan would have otherwise had(due to the cost of servicing the debt).
12. June 2013 at 12:36
Suvy,
Keep in mind that the Fed targets a short term interest rate, they do not “set” that rate by decree. If banks wanted to accumulate more cash so as to facilitate more financial intermediation, there is a very simple way for them to achieve this – offer higher interest rates! There is absolutely nothing preventing them from doing so other than that they have no interest in doing so.
But why should banks want to accumulate more cash? They have plenty of means to lend right now given their excess reserves. They can create as much money as they want to lend, subject to maintaining required reserves, which is not a constraint right now.
Raising the Fed funds rate will not stimulate anything but another recession/depression.
12. June 2013 at 13:00
Michael,
I was referring to longer term rates, not the rates on the short end. My point is simple: if you have flattening curves across the zero lower bound, you have an extremely tight monetary policy. I’d like to have the Fed stop targeting interest rates and target monetary aggregates.
Think about it this way: if you had deflation/deflationary expectations, what would your yield curve look like? It would be inverted, right? Now, what if I told you that you were at the ZLB, then how would you draw your yield curve? You’d draw a flat yield curve. Flat yield curves mean extremely tight monetary policy. If we had higher growth/growth expectations/inflation/inflation expectations, we’d actually have higher interest rates.
12. June 2013 at 13:11
“If we had higher growth/growth expectations/inflation/inflation expectations, we’d actually have higher interest rates.”
I agree.
12. June 2013 at 14:15
Suvy,
I am with you, but the key rate is the differential between the cost of funds and the lending rate.
12. June 2013 at 14:43
Geoff,
For all intents and purposes AD is NGDP. Spending on physical investment *is* a component of NGDP and thus of AD. Furthermore physical investment is procyclical. Thus AD shortfalls usually lead to low levels of physical investment and reduced long run rates of real growth.
Frankly this mindnumbing focus of crude internet Austrians on supply, supply and only supply as the driver of real growth makes them the autistic poster children of economics.
12. June 2013 at 16:14
Sorry for the OT, but this is the sad state of our society:
“With President Obama in the White House, Democrats stand in support of the NSA’s methods, 49% to 40% in the Gallup survey. Republicans were opposed 63% to 32%. When President George W. Bush was in office, Republicans were supportive of government surveillance efforts and Democrats opposed.”
http://www.chicagotribune.com/news/la-pn-republicans-democrats-nsa-poll-20130612,0,173726.story
12. June 2013 at 18:54
“Mark also shows that Japanese growth correlates more strongly with monetary policy than fiscal policy. ”
That is weird, because one look at Japan’s GDP shows a dip in 1997 when they tried to get “debt under control” and no change 2002-2005 when they doubled the monetary base. During all that QE inflation… fell, as it did in Sweden.
http://www.adamsmith.org/blog/money-banking/chart-of-the-week-japanese-monetary-base-and-inflation
http://www.theresilientinvestor.com/2011/01/does-monetary-expansion-stoke-inflation/
12. June 2013 at 20:30
OhMy,
Here’s the chart of RGDP you will find at my post:
http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_6.png
These figures come straight from Japan’s Cabinet Office. They show RGDP went up by 1.6% in 1997 despite the increase in the consumption tax from 3% to 5% on April 1. They also show that RGDP grew at a 1.8% annual rate from 2002-2005 (and it averaged 1.8% from 2002-07). This was double the 0.9% average annual rate of change from 1991-2002 when Japan was doing all of its fiscal stimulus.
And as I point out in the post disinflation ceased on an annual basis in 2002 and annual consumer price inflation rose until Japan experienced back to back years of consumer price inflation in 2006-7 for the first time in nine years.
13. June 2013 at 00:10
Abenomics will produce nominal wage gains: http://online.wsj.com/article/SB10001424127887323734304578540873822669816.html
13. June 2013 at 01:42
Epic post by Cardiff Garcia summarizing the blogosphere (including Market Monetarists): http://ftalphaville.ft.com/2013/06/13/1533782/a-blogospheric-taxonomy-of-the-fiscalist-vs-monetarist-debate/
13. June 2013 at 05:52
Suvy, You said;
“The whole IS/LM framework assumes that lower interest rates are always stimulative because they make it more attractive to borrow and less attractive to save. ”
No it doesn’t–never reason from a price change.
You said;
“I’m of the belief that higher interest rates in today’s environment would actually be more stimulative.”
This is a meaningless statement, without explaining how rates rise. Never reason from a price change. Tight money, or faster NGDP growth expectations?
OhMy, I agree that QE is Japan didn’t help very much, because it was temporary. But it did help a little. The VAT increase is an adverse supply shock, so that would reduce output. But Japan’s stimulus spending did nothing.
And see Mark’s response.
13. June 2013 at 06:13
Dr. Sumner:
“Michael, The effects are very complex. Some prices rise immediately, most don’t.”
This contradicts your claim that the Cantillon Effect is non-existent. You can’t claim that it doesn’t exist, and claim that inflation raises some prices rises before other prices, both at the same time.
——————–
Mark Sadowski:
“For all intents and purposes AD is NGDP. Spending on physical investment *is* a component of NGDP and thus of AD. Furthermore physical investment is procyclical. Thus AD shortfalls usually lead to low levels of physical investment and reduced long run rates of real growth.”
Physical investment in itself is not “pro-cyclical.” It is determined and constrained by time preference, i.e. the propensity to value future goods to a positive degree (while less than the value on present goods). This leads to consumption that is less than 100% out of total incomes.
“Frankly this mindnumbing focus of crude internet Austrians on supply, supply and only supply as the driver of real growth makes them the autistic poster children of economics.”
Frankly this mindnumbing focus of crude internet Monetarists on demand, demand and only demand as the driver of real growth makes them the autistic poster children of economics.
Anyone can play that anti-intellectual game.
The actual Austrian position, contrary to your typical misunderstanding of it, has private property rights, and the concomitant economic calculation, as the primary driver of economic growth. Austrians do not hold supply as the primary driver, nor do they hold demand as the primary driver. Unlike crude internet Monetarists like yourself, they don’t arbitrarily divorce economic activity into nominal and real worlds. They treat money as a commodity just like every other, with the sole difference being that money is a commodity that is traded for, for the purposes of trading for other goods, a medium of exchange, a commodity used for indirect exchanges. They just aren’t foolish enough to believe that making more medium of exchange can make more of that which is exchanges against money, at least in a sustainable way. To you I can see how NOT fetishizing over demand, demand, and nothing but demand all day long in your cult, would APPEAR as though the Austrians are of the “supply, supply, and only supply” mirror cult.
13. June 2013 at 06:16
Dr. Sumner:
“”I’m of the belief that higher interest rates in today’s environment would actually be more stimulative.””
“This is a meaningless statement, without explaining how rates rise. Never reason from a price change. Tight money, or faster NGDP growth expectations?”
This is a meaningless statement, without explaining how more green pieces of paper makes us wealthier in real terms. Never reason from a spending change. Unhampered money production, or inflationism according to arbitrary NGDP growth percentages that no investor cares about in the first place?
13. June 2013 at 06:18
Geoff
http://en.wikipedia.org/wiki/Liberal_paradox
Now kindly buzz off and troll somewhere else. Your shtick is getting old (and it wasn’t that interesting to begin with).
Mark,
See what you did ? You answered the moron – and got a wall of text in return.
13. June 2013 at 11:09
Daniel,
But just think how much more text there would have been (forcing us to scroll even further to get past it) if instead it had been Major Freedom.
13. June 2013 at 12:19
Daniel:
“Now kindly buzz off and troll somewhere else. Your shtick is getting old (and it wasn’t that interesting to begin with).”
Hahaha. Sen’s “paradox” isn’t a paradox at all, for like many who feel some weird sense of compulsion into wanting to violate individual property rights, Sen does not actually disprove what he sets out to disprove, because he doesn’t make clear the issue of individual PROPERTY at all.
His original example is one of vague and fuzzy “endowment” of wealth, with no concrete analysis on property rights.
No libertarian has ever claimed that everyone other than Mr. Smith would be psychologically happy with what Mr. Smith does with his own property, in terms of his own direct enjoyment or consumption. Sen’s example includes such a thing, unfortunately. Apparently, Pareto optimality is violated if Mr. Smith reads his own book, but Mr. Jones disapproves and feels angry or sad because of that.
More importantly, Sen’s example is one that frames the issue as a problem for a social planner to solve. Apparently, if Mr. Smith reads his own book and feels happier, while Mr. Jones would feel unhappier, than the problem is what would a social planner for both do.
It is truly mind boggling how you can possible believe that Sen, in this theory of his, has disproven libertarian economic theory. And it is even more mind boggling how you can believe that merely linking to it is somehow sufficient to disproving what I have written.
Poseur is a word that comes to mind.
“See what you did ? You answered the moron – and got a wall of text in return.”
Walls of text are better than links to wikipedia articles that supposedly stand as proper arguments.
I notice that neither you nor Sadowski even engaged anything I have said, let alone refuted it.
But whatever makes you able to sleep at night.