The New York Times notices that the real problem is nominal

Back in late 2008 and early 2009 most people focused on “the debt crisis” as being “the problem.”  But debt is a problem only to the extent that it exceeds one’s ability to repay the loans, which depends on one’s income.  A few of us market monetarists argued that you also needed to look at the denominator of the debt/income ratio, not just the numerator.

This NYT piece by Landon Thomas Jr. never uses the term NGDP, but that’s exactly what they see as Europe’s real problem:

The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.

That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe.

Two other closely watched countries on the debt list, Spain and Italy, also have rising debt-to-G.D.P. ratios “” even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.

Government debt is nominal debt, not indexed to inflation.  That means the debt /GDP ratio is the ratio of debt to NGDP, not RGDP.  Maybe that’s obvious, but most of the time when the media refers to “GDP” they mean real GDP.

Glad to see the NYT echoing market monetarist talking points from 3 years ago.

And there seems to be at least one blogger in Portugal who understands the real problem:

“Portugal would save 3 billion euros a year if it restructured its debt,” said Pedro Lains, an economic historian and a blogger at the University of Lisbon.

Mr. Lains spoke not only as a theorist. He feels austerity firsthand. Because his salary at the government-run university has been slashed by 30 percent in the last year, his family has needed to dip into its savings.

He said that wage contraction throughout the country was prompting increasing numbers of Portuguese to leave the country, even as their government labors to prove it is worthy to remain part of the euro zone.

Why, Mr. Lains asks, should he and his fellow citizens suffer while the bondholders get their money back?  “It’s not the fault of the Portuguese people,” he said. “The fault lies with the structure of the euro.” 

That’s not to say Portugal doesn’t have real problems, but the ECB needlessly turned those real problems into a crisis.


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31 Responses to “The New York Times notices that the real problem is nominal”

  1. Gravatar of Greg Ransom Greg Ransom
    16. February 2012 at 14:17

    Hyper-inflation, the ultimate solution.

  2. Gravatar of Cthorm Cthorm
    16. February 2012 at 14:28

    Trololol – the final solution.

  3. Gravatar of PrometheeFeu PrometheeFeu
    16. February 2012 at 17:19

    I think you might be going a bit far Scott. Your model as I understand it goes something like this: We all predict the future path of our private nominal income. Based upon that, we make nominal commitments. If we are right, we pay back the debt. If we are wrong, we don’t pay back the debt. (shothand for a variety of different possibilities including lowering our consumption etc…) The job of the central bank is therefore to ensure that the market forecast for the NGDP growth path is stable because that way people are generally able to repay their debt. But it does not mean that any particular debtor (here the Portugese government) will see their particular forecast vindicated and that they will be able to pay their debt. If the market consensus is a stable 5% growth path, that does not mean that the growth path I should count on for my own income is 5%. That’s true whether I’m an individual, a corporation or even a government.

    Now of course, I agree with you that the ECB is way too tight due to its 2% inflation mandate. But that does not tell us that the Portugese, Greek and Italian governments were actually smart in predicting their nominal income growth path. It may very well be that they would have seen their expectations disappointed to the point of a crisis even with market NGDP expectations satisfied. Of course, the ECB precipitated the problem, but the PIIGs as far as I know were not in the process of putting their house in order. If you keep overestimating your nominal income path (or acting as if you do) the central bank perfectly targeting the NGDP path won’t save you from a crisis.

  4. Gravatar of Benjamin Cole Benjamin Cole
    16. February 2012 at 17:25

    Exactly, exactly, exactly. Scott Sumner is the Best Economist.

    You have to pay down debts, you want your economy to increase relative to debts.

    If austerity shrinks the economy, then it is bad. Run roughly balanced budgets and print a lot of money. That will work.

    I do not advocate inflation for every situation, although there are those who advocate zero inflation for every situation.

    For this few years ahead, I advocate moderate inflation and a lot of robust growth ASAP.

  5. Gravatar of ssumner ssumner
    16. February 2012 at 18:33

    Prometheefeu, Two points:

    1. I’m not advocating NGDP targeting to avoid debt crises.

    2. The ECB should provide stable eurozone NGDP growth–they aren’t even coming close to doing so. That has certainly hurt the “PIGS”

    Thanks Ben.

  6. Gravatar of Major_Freedom Major_Freedom
    16. February 2012 at 18:52

    A few of us market monetarists argued that you also needed to look at the denominator of the debt/income ratio, not just the numerator.

    Oh yeah right, just a tiny handful of quirky clever economists the world over were yammering for the central banks to press CTRL-P repeatedly.

    Jeepers, every economist except the Austrians were calling for inflation.

  7. Gravatar of marcus nunes marcus nunes
    16. February 2012 at 20:14

    There are those who think a “Supply-side revolution” is the only “cure”!
    http://thefaintofheart.wordpress.com/2012/02/17/is-a-supply-side-revolution-possible-amidst-disappearing-demand/

  8. Gravatar of Hafiz Noor Shams Hafiz Noor Shams
    16. February 2012 at 20:31

    You know what’s a better nominal-based ratio? Deficit/government revenue. I’d think this is a more direct measure of ability to pay than deficit/GDP.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. February 2012 at 20:43

    Scott:
    You said “nominal” huhhh huhh huh.

    http://www.youtube.com/watch?feature=player_embedded&v=oYqB0m4XYRQ

  10. Gravatar of marcus nunes marcus nunes
    16. February 2012 at 21:26

    @Mark Sadowski
    You´ve got your answer:
    http://thefaintofheart.wordpress.com/2012/02/17/another-nail-in-the-more-fiscal-stimulus-is-needed-view/

  11. Gravatar of PrometheeFeu PrometheeFeu
    16. February 2012 at 22:04

    @ssumner:

    I don’t mean to claim that debt crisis are all you think about when recommending NGDP. But we are talking about a sovereign debt crisis here and you have written several times about sudden NGDP drops being triggers for debt crisis and the use of NGDP targeting to avoid that problem:
    https://www.themoneyillusion.com/?p=12448
    https://www.themoneyillusion.com/?p=12910#comment-131928.

    So yes, low NGDP means debt/NGDP is unsustainably high. But given the way Portugal, Greece and Italy were managing their finances, it doesn’t seem too far fetched to say that sooner or later, they would have gotten themselves into that same position without any help from the ECB. That fact alleviates significantly the responsibility of the ECB in this mess.

    Think of a car driving on an unfinished bridge. Eventually the car will catch up to the construction crew and fall off. If the construction crew goes on strike causing the car to fall off a bit earlier, the fault still lies mostly with the driver, even if the crew does bear some fault.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. February 2012 at 22:28

    Marcus,
    I’m not as impressed as I would have expected. Certainly the results are strongly negative with respect to Sweden and the US but I am surprised by how huge the swing to deficits are in Poland and Australia.

    Nevertheless it was an interesting exercise and I’m grateful for you taking the time to explore it.

    I should also note that I have often posted your blog posts in place of my own refusal to start my own blog. You’ve saved me a lot of effort.

  13. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2012 at 01:01

    “Mr. Lains spoke not only as a theorist. He feels austerity firsthand. Because his salary at the government-run university has been slashed by 30 percent in the last year, his family has needed to dip into its savings.”

    Smells like a productivity gain!

    Governments run slashed salaries = must happen.

    The CORRECT NGDP point is that he would have NEVER gotten the wage increases to begin with.

    In life, the animal must show you its teeth to modify your behavior, at some point, this man no matter what – would be lamenting his reality.

    There is nothing noble in trying to keep him from learning his lesson.

  14. Gravatar of PrometheeFeu PrometheeFeu
    17. February 2012 at 05:15

    @Morgan Warstler:

    Smells like you’re making a whole bunch of untested assumptions. There are plenty of cases where empirical evidence shows us clearly that specific government employees are compensated above the market price, but do you have evidence of that in this case?

  15. Gravatar of ssumner ssumner
    17. February 2012 at 06:02

    Major Freedom, Nope, we were just about the only ones calling for monetary stimulus back then.

    Marcus, They’ll never give up.

    Hafiz, Yes, but NGDP tells you the ability to raise government revenue.

    Mark, I guess I say that a lot.

    Prometheefeu, Yes, I’ve argued all three were irresponsible. But I think a crisis was inevitable only in Greece.

    Morgan, I’m not sure average government salaries in those countries are falling relative to average private sector income.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. February 2012 at 10:05

    Prometheefeu,
    “But given the way Portugal, Greece and Italy were managing their finances, it doesn’t seem too far fetched to say that sooner or later, they would have gotten themselves into that same position without any help from the ECB.”

    I agree about Greece and Portugal. But Italy’s gross debt as a percent of GDP was on a relatively rapid downward trend prior to the crisis. It had fallen from over 121.6% of GDP in 1995 to 103.6% in 2007.

    Furthermore, with respect to EU countries that were behaving profligately prior to the crisis I would add the UK. And yet the UK does not have a debt crisis (no euro).

    On the other hand Italy, Spain and Ireland do and they were behaving quite responsibly before their GDPs imploded. And their combined GDP is over $3.4 trillion versus less than $600 billion for Greece and Portugal.

  17. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2012 at 11:32

    PrometheeFeu,

    The point is not to pay public employees the market price, the point is to pay them slightly below the market price…. a little less each year, because they are becoming less productive than the private secotr.

    GVT employees are like GREEK employees.

    Back in the day the phrase “good enough for govt. work” meant something…

    Note:Back in the day gvt. did a far better job than it does now.

    Gvt. isn’t meant to compete with the free market for talent. the whole point of automating gvt. – what I call GOV2.0 is to continually be able to use stupider and stupider people to do the same job YOY.

    See WalMart.

    LOOK, if you want to have public employees keep up with salary gains made by the private sector, the public sector has to deliver productivity gains YOY that the private sector delivers.

    Gvt. since 1980 has been running at 1% or less.

    It should be 2.5-5% per year. To do that the job cuts and job security must be thrown out the window.

    GVT. needn’t get BIGGER.

    So if Bob and Jim want a raise, we have to be able to fire Tom.

  18. Gravatar of PrometheeFeu PrometheeFeu
    17. February 2012 at 13:00

    @Morgan Warstler:

    “because they are becoming less productive than the private secotr”

    Do you have data to back that up? And by that I mean data that government employees are becoming less productive, not that the mean of government employee productivity is dropping.

  19. Gravatar of Floccina Floccina
    17. February 2012 at 13:17

    The euro, how does such a bad idea get enacted?

  20. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2012 at 13:44

    PrometheeFeu,

    yes,

    Federal productivity stopped being measured under Clinton as a “cost savings measure.”

    At that time it was running about 1% since about 1982, when it cam down from like 1.5%.

    http://www.bls.gov/mlr/1997/05/art4full.pdf

    —–

    You can try and play prove it all you want, the animus is on you to first ACCEPT we should get the same productivity gains out of the public sector.

    If you won’t accept it,t hen you have no justification for public employees making as much as the private sector employees.

    Public employees are gong to eat it like Greece baby, don’t take it personally.

  21. Gravatar of D R D R
    17. February 2012 at 15:10

    I’m pretty certain those compensation numbers reported by BLS are nominal, not real, by the way. It’s neither clear that…

    A) real compensation of federal employees had outpaced real productivity of federal employees; nor
    B) that federal employees were fairly compensated in 1967

  22. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2012 at 15:24

    rofl.

    whatever dude. Raises come from firings. It always has been an always will be.

  23. Gravatar of D R D R
    17. February 2012 at 15:36

    “whatever, dude”

    My thoughts exactly.

  24. Gravatar of D R D R
    17. February 2012 at 15:36

    (and sorry for the comma)

  25. Gravatar of ssumner ssumner
    18. February 2012 at 07:18

    Floccina, Hubris, and an overemphasis on the importance to exchange rate stability, as compared to other macro objectives.

  26. Gravatar of PrometheeFeu PrometheeFeu
    18. February 2012 at 08:07

    @Morgan Warstler:

    1) Those are US numbers and we are talking about Portugal.

    2) I don’t see why we need to get the same productivity gains from the private and public sectors. What if the public sector had higher productivity to start with?

    3) I was of course referring to quality-adjusted market prices.

    4) You are making some pretty strong statements and I’m simply asking whether you have the data to back up what you are saying. Here, we were talking specifically about professors in Portugal. But it seems the point you are actually trying t make is that all government employees across the board are overpaid all the time. When you assert something like that, the onus is clearly on you to give evidence.

  27. Gravatar of Hafiz Noor Shams Hafiz Noor Shams
    18. February 2012 at 19:16

    On deficit/GDP, yes it does but I still have problem with it since the GDP includes government component. With deficit/GDP, wouldn’t it be double counting if we were interested in the government’s ability to raise revenue (assuming the multiplier is close to 0)?

  28. Gravatar of Major_Freedom Major_Freedom
    18. February 2012 at 23:49

    ssumner:

    “Major Freedom, Nope, we were just about the only ones calling for monetary stimulus back then.”

    Nope, virtually every economist except the Austrians were calling for inflation back then. Keynesians, monetarists, you name it.

  29. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2012 at 06:30

    “But it seems the point you are actually trying t make is that all government employees across the board are overpaid all the time. When you assert something like that, the onus is clearly on you to give evidence.”

    The proof is easier than you imagine. Don’t bother yourself with words like ALL. Exceptions don’t matter, the rule does.

    GVT. employees are less productive than the private sector, that is all I have to convince my audience of.

    Once I win that argument, and I gave you 40 years of US data, go find your own on Portugal, I can immediate derive that they should be paid less.

    Productivity gains are how you increase value created per employee, er go if the private sector has been delivering greater productivity gains than the public sector, we have our first position.

    Next would be that the public sector wage have wildy increased compared to the private sector, that would be #2.

    With those two alone, you don’t have a leg to stand on.

    If you want brass tacks, go read my analysis on a single gvt. dept. here ya go:

    http://biggovernment.com/mwarstler/2010/05/05/gov2-0-witold-skwierczynski-must-die/

    It is fine to ask for proof, I get it that’s your thing, but I’m way past the proof thing, we’re to hacks that assume the truth, and actually judo the system into compliance.

    It isn’t about whether gvt. employees earn more, it is about an honest appraisal of why (not some bullshit about educational levels), the why as to do with innate problems in Federal democracy, and as of yet unexploited political arguments to reshape the discourse.

  30. Gravatar of ssumner ssumner
    19. February 2012 at 06:41

    Hafiz, That suggests we should look at two data points.

    Deficit/GDP
    Taxes/GDP

    Major Freeman, They were calling for “inflation” via fiscal stimulus, not monetary stimulus. People like Krugman and Delong were saying monetary policy is ineffective at the zero bound.

  31. Gravatar of Major_Freedom Major_Freedom
    26. February 2012 at 16:11

    Major Freeman, They were calling for “inflation” via fiscal stimulus, not monetary stimulus. People like Krugman and Delong were saying monetary policy is ineffective at the zero bound.

    That’s false. Both called for continuation of low interest rates and monetary inflation. Yes, they ALSO called for fiscal spending, but that doesn’t mean they weren’t calling for inflation.

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