When you put the phrase “blind spot” in the title of your essay . . .

. . . and when the essay is devoted to the Great Eurozone Depression of 2008 – ??

and when the ECB raised rates twice in 2011, despite a very weak economy,

and when the already feeble eurozone NGDP growth subsequently crashed,

and when eurozone unemployment subsequently soared,

and when eurozone inflation fell to 0.7%,

it might not be wise to omit all discussion of monetary policy in your essay.

Nor does this argument sound persuasive:

The key European problem, which Krugman persistently ignores, has long been constrained supply . . .

On the positive side:

1. Anders Aslund is right that the eurozone does have a huge problem of constrained supply, but it has nothing to do with business cycles caused by NGDP growth crashes.

2.  Anders Aslund is right that Krugman exaggerated the risk of a eurozone breakup, and exaggerated the cost of fiscal austerity.  But don’t throw the baby out with the bathwater.  The eurozone has a huge aggregate demand problem, and it’s the ECB’s fault.

PS.  There is a school of thought that provides a coherent explanation of the eurozone crisis.  It’s not Keynesianism and it’s not austerianism.  And there’s another school of thought that explains the eurozone’s long run supply-side problems, and it’s not American progressivism (anti-neoliberalism in Europe.)  Call me a supply-side market monetarist.

HT:  Tyler Cowen


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75 Responses to “When you put the phrase “blind spot” in the title of your essay . . .”

  1. Gravatar of Geoff Geoff
    12. November 2013 at 13:40

    Zero analysis of pre-recession Europe, you know, when the problems inherent in the economy might have been generated.

    I’m reminded of a doctor who never asks the patient what he did before he got into the hospital. Treat the symptoms with the same “medicine” that the doctor denies had anything to do with the patient’s illness.

    After all, it’s always true that a patient who is becoming more ill must be given increasing dosages ad infinitum, until the patient gets better. But don’t ask about the side-effects of the “medicine”. You don’t want to be a demagogic ideologue.

  2. Gravatar of Mark Mark
    12. November 2013 at 13:58

    I chucked when he singles out 8 governments that “have been reelected…apparently, large budget deficits are not very popular with voters.”

    Two of them, Sweden and Poland, aren’t even on the euro! And Luxembourg?!

    Got another chuckle his conclusion that voter satisfaction and low deficits are the result of austerity and not generally healthier economies and lower unemployment rates.

  3. Gravatar of Daniel Daniel
    12. November 2013 at 14:05

    Austrian economics kinda resembles a trial by ordeal.

    Did a fall in aggregate demand cause a fall in output and employment ? MALINVESTMENT ! (malinvestments made by the same entrepreneurs whom the Austrian claim to worship …)

    Are wages sticky ? Even more deflation, that’ll teach them a lesson.

    Somehow, the answer to pain is always more pain.

  4. Gravatar of Tom M. Tom M.
    12. November 2013 at 16:10

    Does this man have no shame? He holds Latvia up as a positive example! Latvia lost 5 percent of its population. That would be the US equivalent of having nearly 20 million people leave the country.

    Supply side economics = Plutocracy = crappy economy for the bottom 80 percent.

  5. Gravatar of Tom M. Tom M.
    12. November 2013 at 17:01

    Wow…according to this depressing video they have actually lost over 10% of their population. I guess they just have to liquidate those malinvestments…

    http://www.france24.com/en/20130328-2013-03-28-0818-latvians-flee-countrys-financial-crisis

  6. Gravatar of TravisV TravisV
    12. November 2013 at 17:44

    Testing, testing, 1-2-3…..

  7. Gravatar of TravisV TravisV
    12. November 2013 at 19:39

    Dear Commenters,

    Does anyone know how teacher pay works in countries with school choice like Sweden and the Netherlands?

    Is there any kind of pay-for-performance at all there?

    Are there any major examples of pay-for-performance for teachers anywhere else in the world?

  8. Gravatar of TravisV TravisV
    12. November 2013 at 20:05

    One example:

    While the Netherlands has school choice, it appears that it does not have pay-for-performance:

    “Teacher salaries and work conditions are regulated through national collective agreements.”

    http://seekerblog.com/2008/04/09/school-choice-reports-on-denmark-netherlands-and-sweden

  9. Gravatar of Benjamin Cole Benjamin Cole
    13. November 2013 at 00:08

    OT: More evidence that central banking cannot be left in the hands of central banking.

    “Fed’s Lockhart Wants to See Higher Inflation Before Taper
    Bloomberg – “Ž11 hours ago”Ž
    Federal Reserve Bank of Atlanta President Dennis Lockhart, who has backed record stimulus, said he wants to see inflation accelerate toward the Fed’s 2 percent goal before the central bank reduces $85 billion in monthly bond purchases.”

    Okay, this will presented as a “dovish” remark by a central banker—but think about it. Lockhart is not saying, “Hey, what would be wrong with 3 percent inflation for a couple of years to balance the sub-2 percent years.”

    In fact, he is saying that just getting closer to 2 percent would be enough to justify tapering.

    The Fed 2 percent target is now a ceiling to never be approached, and the real ceiling somewhere around 1.5-1.6 percent.

    Do not be surprised if getting out of ZLB-slow growth-land is tough at 1.5 percent inflation.

  10. Gravatar of Andy Andy
    13. November 2013 at 02:20

    ECB decisions to increase rates in 2011 will probably go down in history as one of the most destructive acts of economic policy ever.

  11. Gravatar of Gary O’Callaghan Gary O'Callaghan
    13. November 2013 at 03:05

    Mr. Aslund has written 1,882 words on the euro crisis without using the word “bank” (except in the phrase European Central Bank). Another blind spot, perhaps. Or did he miss the banking crisis?

  12. Gravatar of J.V. Dubois J.V. Dubois
    13. November 2013 at 04:59

    That essay, seriously? Ok, Europe has supply side problems. Good, who doesn’t? There is great deal of ruin in every nation. Everybody knows that so information value of that statement is close to 0.

    As you say it is the herd of elephants in the room that Aslund does not see that is important. Like the fact that doing “structural reforms” AKA slashing budgets with no monetary offset is structurally dangerous. Of course unless you envision “structure” where communists and fascist kill each other on streets like in Athens.

    And Krugman “exagerated” possibility that Eurozone will break up. Really? It was just two years ago and I still remember the mess quite vividly. Back in 2011 ECB washed their hands – even increased rates and basically said that saving EURO is politicians problem. Then you had this whole mess around European Stability Mechanism that threatened to topple governments around the Europe (it actually happened in Slovakia)

    But OK, Scott likes markets. So I just randomly googled Intrade forecasts and in September 2011 there seemed to be 50% chance that at least one country will leave EURO and there was a time where in 2012 where probability that Greece will leave Eurozone shot up by as much as 20 percentage points (from 20 to 40).

    And to conclude – I do not like many Krugman’s post, especially those ignoring monetary policy – but people should read beyond titles. Like this one named “This is how the Euro ends” – http://krugman.blogs.nytimes.com/2011/11/09/this-is-the-way-the-euro-ends-2/

    Read it again. It basically says that unless ECB does something drastic then Euro is done. Because it cannot handle Spain or Italy going bankrupt. And by the way I think this is still the case even today.

    Who knows, maybe German bankers will organize coup completely overtaking ECB so they may tighten monetary policy and then composing poems watching Athenes, Madrid and Rome burn. Exagerration? Possibly. But utterly unreal? I don’t think so. One has to weight severity of outcome with probability of it happening.

  13. Gravatar of ssumner ssumner
    13. November 2013 at 05:52

    Lots of very good points, needless to say I mostly agree.

    JV, Yes, perhaps the Krugman euro prediction was more nuanced, I was relying on memory.

  14. Gravatar of Andrew M Andrew M
    13. November 2013 at 05:54

    Off topic-

    The fdic released the latest economic scenarios for stress testing required under dodd-frank. The baseline seems particularly optimistic.

    http://www.fdic.gov/news/news/press/2013/pr13100.html

    “The baseline scenario represents expectations of private sector economic forecasters.”

  15. Gravatar of Steven Kopits Steven Kopits
    13. November 2013 at 06:24

    Speaking of blind spots, let’s talk about oil.

    First, let me posit that the oil industry is and has been running flat out. It could not have produced more oil if it wanted, not at any price. So we can take the supply of oil since 2005 as fixed for all intents and purposes.

    Now, let’s see how this fixed supply was allocated. Here’s oil consumption by country, 2012 compared to 2005. (All data are from BP Statistical Review).

    The Losers
    Greece: -26%
    Hungary: -18%
    Ireland: -32%
    Italy: -25%
    Portugal: -30%
    Spain: -20%
    UK: -19%

    OECD Middlers
    US: -10%
    Germany: -9%
    Austria: -10%
    Netherlands: -10%

    OECD Gainers
    Norway: +10%
    Canada: +5%
    Australia: +14%
    US (in the past year): +1.1%

    OECD in total: -9%
    non-OECD in total: +29%

    Gee, anyone see a pattern or two here?

    1. Oil consumption has been re-allocated from the OECD to the non-OECD. The mature OECD has been, more or less across the board, in financial or fiscal crisis. The non-OECD has not been, pretty much across the board, in financial or fiscal crisis.

    2. The biggest losers in oil consumption were big oil importers pro rata, and these faced the largest falls in GDP. Given a fixed supply of oil, if these countries had consumed more, other countries would have had to consume less oil.

    3. Oil producers and major commodity exporters get to consume more oil. Norway, Canada, and Australia all came through the recession pretty well. Why? Because they sell something China wants to buy.

    4. The US is rapidly improving its net oil import position. Our import dependence (net imports to consumption) has fallen from 60% in 2005 to 34% today. And US shale oil production represents 80% of net global oil supply growth in the last two years, and with Canadian oil sands production, 100% of net global oil supply growth in the last two years. To be clear: All of net global oil supply growth is coming from the US and Canada. And the trajectory of US GDP departed from that of Europe just when US shale oil production began to surge in H2 2011.

    5. Note Britain’s position among the losers. This is the result of falling North Sea production. Many, including Scott if I recall correctly, have noted Britain’s “growthless jobs”, with recovering employment levels but struggling productivity.

    This continued recession is, first and foremost, a chronic oil shortage.

    This does not take away anything from Scott’s observations about ECB policy. If there was ever a poster child for sticky prices and wages, surely the southern tier Eurozone countries must be it.

    However, if the oil supply is fixed at a level below inherent demand (the level at which all countries could consumer as much as they would normally like)–and it is–then the existing oil supply must be allocated, and it will be allocated by i) relative GDP growth rates, and ii) towards producers and away from consumers. Thus, the fast growing non-OECD countries are bidding away the oil consumption of slowing growing OECD countries. Since Dec. 2007, non-OECD consumers–not producers–are providing 50% of the incremental oil consumption of the non-OECD countries. In the last year, the number is 28%.

    If the OECD countries are to have their oil consumption bid away, then their GDP growth will be determined by the pace at which they can adjust to lower oil consumption.

    Therefore, if you want to argue against this thesis, you have to argue at least one of two things:

    1. The oil supply could have grown faster, or
    2. The pace of efficiency adjustment in the OECD could be quicker without adverse effect on GDP growth.

    I’m happy to take on all comers.

  16. Gravatar of Ralph Musgrave Ralph Musgrave
    13. November 2013 at 06:24

    Anders is clueless. Krugman’s most recent post at the New York Times sums up the Eurozone problem better in 200 words than anyone else has done in ten or fifty times as many words. See:
    http://krugman.blogs.nytimes.com/2013/11/12/germanys-lack-of-reciprocity/

  17. Gravatar of Steven Kopits Steven Kopits
    13. November 2013 at 06:27

    should read: “Since Dec. 2007, OECD consumers-not producers-are providing 50% of the incremental oil consumption of the non-OECD countries.”

  18. Gravatar of LK Beland LK Beland
    13. November 2013 at 06:55

    Tom M. is absolutely right. Latvia has lost a quarter of its population since 1990. And the emigration rate is steepening. Anybody claiming this country is a success story should significantly adjust their views.

    http://www.tradingeconomics.com/latvia/population

  19. Gravatar of Vivian Darkbloom Vivian Darkbloom
    13. November 2013 at 07:34

    “Latvia has lost a quarter of its population since 1990”.

    I don’t completely follow the argument about the “loss” of Latvia’s population and their record of recent economic performance.

    1. As to that population “loss”, is all of this due to emigration? Or is it also in part due to their very low birth rate (one of the lowest in Europe)?

    http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?
    title=File:Total_fertility_rate,_1960-2011_(live_births_per_woman).png&filetimestamp=20130129121040

    2. Emigration from Latvia mirrors the experience of some other former East block countries, particularly after joining the EU. Is this a reflection of their bad economic policies since liberation (1990), or a product of what went on before that and the new opportunities elsewhere that opened up to them after that?

    3. To the extent Latvia has experienced net emigration and population “loss” since 1990 (and they have, but the nature of that is somewhat distorted above), is the increase in real GDP in recent years more or less impressive given the smaller population?

    If I had strong views that Latvia is a success story (and I don’t), I don’t think I would “adjust” those views on the basis of the evidence given here on “population loss”.

  20. Gravatar of Steven Kopits Steven Kopits
    13. November 2013 at 08:02

    As regards population:

    In terms of population change, 2007-2013 (IMF WEO), annualized pace of change, in order, by country, is:

    Lithuania: -2.0%
    Latvia: -1.4%
    Hungary: -0.3%
    Germany: -0.1%
    Estonia: 0.0%
    Portugal: 0.0%
    Greece: 0.1%
    Spain: 0.4%
    Ireland: 0.9%

    So, if the question is: “Did countries with rapid adjustment plans see the largest population falls?”, then the answer is: “In general, yes.”

    However, a number of these countries were in decline well before 2007, so we might want to look at the change in population growth rate, 2013-2007 compared to 2007-2000. In order, change in population growth rate (annual rate), by country:

    Lithuania: -1.5%
    Ireland: -1.2%
    Spain: -1.1%
    Portugal: -0.5%
    Latvia: -0.3%
    Greece: -0.2%
    France: -0.2%
    Germany: -0.1%
    Netherlands: 0.0%
    Estonia: +0.3%
    and Norway (first place): +0.6% (for 22 European countries I checked)

    Therefore, if the question is: “Did austerity in the Baltics exacerbate pre-recession population changes compared to the PIIGS?”, then the answer is: “In general, no.”

    Oh, and if the question is: “Did Norway, Europe’s leading oil exporter see the largest population gain in absolute terms and also compared to trend?”, then the answer is: “Yes.”

  21. Gravatar of Steven Kopits Steven Kopits
    13. November 2013 at 08:15

    I would also point out that, from 2011 to 2013, the rate of population change in Latvia, Lithuania and Estonia is improving, whereas it continues to deteriorate in Ireland, Portugal, Spain and Greece.

  22. Gravatar of Vivian Darkbloom Vivian Darkbloom
    13. November 2013 at 09:32

    Steven Kopits,

    Thanks for the data. It is more directly to the point if one is looking at policies since 2007 and the possible effects of the Latvian “austerity” since then.

    As to the oil data, I think it is always worth reminding oneself that there are many levers and moving parts that affect the economy and that the monetary and fiscal are only two, albeit important, levers. The tendency seems to be for those pulling the levers to subsequently attribute all the positive effects to their own actions and the less positive results to the lever someone else has his hand on.

    That observation surely goes for Latvia and its population, too.

  23. Gravatar of Bob Bob
    13. November 2013 at 10:09

    In other news, the US could get a far better fiscal picture by going Logan’s Run Lite, and getting rid of everyone over 68. Spain’s numbers will also get better when all the unemployed leave the country.

    The problem is that the important thing is not a healthy economy, but overall growth. Countries should not strive to be economically healthy, yet irrelevant. 20% of my graduating high school class has left the country: All college educated, getting better jobs abroad than can be found at home. I don’t know about you, but it doesn’t seem like good economic policy to subsidize the young’s education, and then to see many successful ones leave.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. November 2013 at 10:32

    Steven Kopits,
    According to the IMF WEO all of your population growth figures for 2000-2007 are all wrong.

    Latvia: -1.1%
    Lithuania: -0.5%
    Estonia: -0.3%
    France: 0.7%
    Germany: 0.0%
    Greece: 0.4%
    Netherlands: 0.4%
    Portugal: 0.5%
    Spain: 1.6%
    Ireland: 2.1%

    The biggest clue that all your figures were wrong was that Spain and Ireland had a massive in-migration during the peripheral boom years. Note that population growth has fallen everywhere, but according to IMF WEO figures at least, the Baltic States have not had their population growth implode significantly more than the countries you compared them to.

    The correct figure for Norway is 0.7%, so no, the highest population growth was not in an oil exporting country.

  25. Gravatar of Vivian Darkbloom Vivian Darkbloom
    13. November 2013 at 11:08

    I was under the impression that Kopits’ figures were comparing the *change in growth rates* from the period 2000-2007 compared with the growth rates 2007-2013 and not the actual growth rates in the former period.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. November 2013 at 11:25

    Vivian Darkbloom,
    That makes much more sense. Thanks for correction.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. November 2013 at 11:29

    Steven Kopits,
    OK, lets talk about oil.

    Here’s average RGDP growth in the OECD between 2005 and 2012:

    Chile 4.32
    Poland 4.29
    Israel 4.24
    Slovak Republic 4.18
    Turkey 3.94
    Korea 3.56
    Australia 2.86
    Mexico 2.40
    Czech Republic 2.07
    Estonia 2.03
    Switzerland 1.97
    Sweden 1.92
    Luxembourg 1.65
    Germany 1.57
    Canada 1.51
    Austria 1.51
    New Zealand 1.47
    Norway 1.18
    Slovenia 1.12
    Belgium 1.10
    United States 1.08
    Finland 1.06
    Netherlands 1.02
    Iceland 0.82
    France 0.71
    Ireland 0.69
    United Kingdom 0.62
    Japan 0.48
    Spain 0.48
    Denmark 0.11
    Hungary (-0.11)
    Portugal (-0.27)
    Italy (-0.44)
    Greece(-1.82)

    Which of these countries are significant producres of oil?
    Australia, Mexico, Canada, Norway, the US, the UK, Denmark and Italy.

    The unweighted average rate of growth in these 34 countries is 1.57%. The weighted average is 1.25%. The average rate of growth among the non-oil producers is 1.69%. The average rate of growth among the oil producers is 1.17%.

    Among the oil producers only Australia, Canada and Mexico beat the weighted average. And all of these countries were beat by Chile, Poland, Israel, Slovakia, Turkey and Korea.

    I don’t see any particular advantage for oil producers, but I’m wondering if there isn’t a more systematic way of checking for a relationship. (I would not be surprised if consumption correlates with growth but that is not really the issue, is it?)

  28. Gravatar of Steven Kopits Steven Kopits
    13. November 2013 at 11:49

    Mark –

    As Vivian points out, I didn’t provide population growth rates for 2007-2007. I provided the change in population growth rates for 2007-2007.

    I subtracted the annualized change for 2000-2007 from the annualized change for 2007-2013.

    Thus, for Lithuania, the growth rate from 2000-2007 was -0.5%. For 2007-2013 it was -2.0%, for a difference of -1.5%.

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. November 2013 at 12:24

    Steven Kopits,
    Yes, I understand. I should have read more carefully.

  30. Gravatar of Steven Kopits Steven Kopits
    13. November 2013 at 12:28

    Argh. 2000-2007, not 2007-2007.

  31. Gravatar of TravisV TravisV
    13. November 2013 at 13:42

    Tomorrow’s news today: Janet Yellen’s opening statement posted here:

    http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm

  32. Gravatar of youko shi youko shi
    13. November 2013 at 18:31

    Larry Summers, at a recent talk at the IMF, says that monetary policy is effective at the ZLB (he’s appropriately agnostic for a Keynesian about how hard you’d have to work for the effect to be enough to have prevented the Great Recession, but he still says it.)

    He also jives on your comment about how Wicksellian natural rates have been lower than estimated, leading to a secular stagnation of sorts (https://www.themoneyillusion.com/?p=21317). He comments that the ZLB problem will likely occur more often in the future.

    Just thought you’d like to know that you’ve basically won. His talk starts at 40:40 in the final video, titled “Economic Forum”
    http://www.imf.org/external/np/res/seminars/2013/arc/index.htm

    PS Christina Romer talks about NGDPLT earlier in the program. I’m sure you’d love her remarks, which start in session 5, 21:50.

  33. Gravatar of ssumner ssumner
    13. November 2013 at 19:58

    Thanks Youko.

    Everyone, traveling next few days-not much blogging.

  34. Gravatar of J.V. Dubois J.V. Dubois
    14. November 2013 at 02:08

    Steven Koptis: As far as I know data you posted support critique that was said so far. This is the original post by Tom

    “Does this man have no shame? He holds Latvia up as a positive example! Latvia lost 5 percent of its population. That would be the US equivalent of having nearly 20 million people leave the country.”

    So eyeballing your data it seems that since 2007 Latvia lost 6.6% of its popupulation compared to trend. However Latvia labor force is 55% of the population, so if we assume that it is mostly Labor force that is leaving the country we may easily double this number to get the correct impact.

    So yes, if somebody says that Latvia did a remarkable job of lowering unemployment by 4 percentage points from peak of 2010 one also has to add that this was accompanied by possibly 10% people leaving the country to get a job.

    So basically Tom is right. It is as if Somebody said that US tight-money-austerity is a great success to be followed, while 20-40 million Americans were forced to move to Canada to feed their families. Besides the point that it is impossible for USA neighbors to absorb labor force migration of that magnitude (which is why tight money austerity is not an option for Spain or Italy) it does not look that rosy.

  35. Gravatar of Matt McOsker Matt McOsker
    14. November 2013 at 06:01

    While I do believe the ECB and rate policy has an effect, when looking at individual countries fiscal and trade seem to also be factors as explained by folks like Krugman.

    First figure is unemployment rate – I rounded on a few.

    Germany 5.4% Running Trade Surplus Governmnet Spending has been flat since 2010
    Greece 26% Running Trade Deficit Governmnet Spending is down since 2010
    Spain 26% Running Trade Deficit Governmnet Spending is down since 2010
    Italy 11% Running Trade Surplus Governmnet Spending is down since 2010
    Norway 3.5% Running Trade Surplus Governmnet Spending is up since 2010

    I believe if Greece and some others were able to maintain government spending their unemployment rate would be lower. The balance of trade is tougher for them to control, because they cannot set currency policy.

  36. Gravatar of Steven Kopits Steven Kopits
    14. November 2013 at 08:03

    J.V. –

    In terms of population, Lithuania is clearly the worst in either relative or absolute terms.

    This is not true for Latvia or Estonia. In absolute terms, Latvia is second worst. However, Latvia was losing population before 2007 as well. Therefore, it’s arguably more appropriate to look at change compared to the previous trend. Here Latvia is actually better than Ireland, Portugal or Spain and not materially worse than Greece. Therefore, it is not clear that Baltic austerity led to greater drops in population than in the PIIGS.

    Moreover, the very proposition of rapid adjustment calls for short term pain for long term gain. There is every expectation that rapid adjustment will be more painful–no one is denying that. The question is whether it leads to a better overall outcome.

    In truth, the Baltics are looking up, and the southern tier continue to struggle. If we go out another two or three years, I suspect the Baltic model will look even better in comparison.

    I would note that I don’t see deficits or lack thereof as the be-all and end-all. I think the quality of governance overall is what matters, and this implies relatively restrained levels of government spending (say, 33% of GDP in total), effective spending for such fiscal policy as is in place, and a relatively light regulatory burden.

    I do not see that the Troika has really made much effort to achieve these goals. These are not to be achieved by dictating policy, but by aligning the incentives of southern tier politicians with good governance. Ask yourself: Are Italy’s politicians incentivized for good governance? I think the answer is plainly “no”. Then ask, do you think that Italy’s politicians would put in policies to maximize growth and minimize debt if they were paid hefty bonuses for doing so? I think they would. Therefore, if I were the IMF or the Germans, my primary criteria for financial support would be the installation of such performance-based programs. That’s the big prize, not budget cutting or tax increases per se.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 08:09

    Matt McOsker,
    1) Norway is not a member of the Euro Area. In fact Norway is not even a member of the EU.
    2) Spain has had a surplus in trade since 2012Q2:

    http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-055786_QID_9507696_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;S_ADJ,L,Z,0;UNIT,L,Z,1;INDIC_NA,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-055786INDICATORS,OBS_FLAG;DS-055786S_ADJ,SWDA;DS-055786UNIT,PC_GDP;DS-055786INDIC_NA,B11;&rankName1=INDIC-NA_1_2_-1_2&rankName2=S-ADJ_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23

    Your unemployment figures look correct, but it sounds to me like you got your net export figures from Trading Economics.

    Not to be rude, but to make sure that this sticks, Trading Economics data is CRAP. Thus if you got your government spending data from Trading Economics it too is CRAP.

    If you want data on the Euro Area why not go to the source? There’s Eurostat and AMECO. That’s where private data scams claim to get their data anyway. Moreover it’s totally FREE.

    Don’t pay good money for CRAPPY data.

  38. Gravatar of Matt McOsker Matt McOsker
    14. November 2013 at 08:45

    Mark I went to Eurostat as I heard you from other posts. From what I can see Spain has had a trade deficit until march of this year. So if the surplus keeps up it will be a positive to offset government expenditures declining (not as a % of GDP but an absolute decline). I included Norway for a frame of reference, and should have stated that.

    The main point of my post is those things play into NGDP and several underperforming countries have a common trend versus better performing, these are a part of the GDP formula. Norway’s interest rate is 1.5%, and inflation rate is around 2.8%.

  39. Gravatar of Steve Steve
    14. November 2013 at 09:11

    Congress = Stupid

    “I SEE ASSET BUBBLES!!! … I think if you said over the next four years we’re going to bring it [the Fed’s balance sheet] down from $4 trillion to ZERO, we’d see how big the asset bubbles are.” — Sen Mike Johanns, Nebraska

  40. Gravatar of Matt McOsker Matt McOsker
    14. November 2013 at 09:15

    Mark forgot to add, I looked at OECD data, and IMF as well. Further I Google searched for articles to add more color. I wish I had the time to put more details into posts.

  41. Gravatar of Steven Kopits Steven Kopits
    14. November 2013 at 09:19

    Mark –

    Regarding oil and the economy. You have a long list up there, and I’ll try to get to it.

    For now, here’s a piece from Zero Hedge on Eurozone versus US growth. At the time of the Arab Spring (Q1 2011), I stated that the associated oil price spike would be sufficient to induce a recession in the advanced economies. And Europe and Japan did, in fact, fall into recession, from which the former is yet to emerge. However, the US did not fall into recession, although the ZH graph shows that Q1 in the US was essentially negative. But after this point, the US sees clear and sustained separation from Europe, even though it had largely tracked Eurozone GDP from 2005 (indeed, the US was under-performing Europe).

    Why the separation? QE2 had come out in 2010; and QE3 would not be announced until Sept. 2012. Therefore, it is hard to attribute the difference to QEx. Further, the period was characterized by the first debt ceiling crisis (Q3 11), the policy uncertainty of which was supposed to kill growth–except the opposite happened.

    No, what clearly does happen at that time is that US oil shale oil production begins to soar. And indeed, US shale oil production since that time represents 80% of all global oil production growth (and with Canadian oil sands, 100%).

    So we have some nice GDP evidence right there, albeit in this case on the oil production, not consumption, side.
    http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/11/Europe%20Q3%20GDP.jpg

    http://www.zerohedge.com/news/2013-11-14/eurozone-narrowly-avoids-return-contraction-third-quarter-led-french-weakness

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 09:23

    Matt McOsker,
    “From what I can see Spain has had a trade deficit until march of this year.”

    Click on the bookmarked link I provided above and you will see that Spain had a trade surplus of 2.9% in 2013Q2 (the months of April, May and June 2013). The net exports figures for 2013Q3 are not out yet.

    A trade surplus of 2.9% of GDP is not only a trade surplus, it is a very large trade surplus, and this was the fifth consecutive increase in Spain’s quarterly trade balance.

  43. Gravatar of Matt McOsker Matt McOsker
    14. November 2013 at 09:50

    Yes Mark it has improved a lot since it was -6.7% of GDP in Q1 of 2008 according to the Eurostat data. If it continues to improve it will help Spain. So yes I was being sloppy in my comment, where I was trying to highlight trends. I still stand by my statement that countries with nominal government spending declines (or flatlines) and trade deficits underperform countries with the opposite trends.

  44. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. November 2013 at 10:38

    Latvia checked in today with 1.2 percent 3rd quarter GDP growth (second highest in the Eurozone). This, with a presumably declining population.

    Tell me again what they are doing wrong.

  45. Gravatar of Dwight Monson Dwight Monson
    14. November 2013 at 11:26

    Make sure Larry Kudlow sees that moniker: “supply side market-monetarist.” It may also help George Will (who, as shown in a recent interview in Reason Magazine, continues moving in a libertarian direction) understand what you’re talking about.

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 12:08

    Steven Kopits,
    Let’s first look at a simple model of the economy so we are on the same page:

    The following link is to a dynamic AD-AS diagram, 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

    Note also the short run AS (SRAS) curve and the Solow growth curve, which is essentially the long run AS curve. In the short run wages and prices are sticky causing the SRAS 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 AD influence the rate of growth of RGDP in the short run, but not in the long run.

    Short run shifts in AD are caused by monetary policy and fiscal policy. Shifts in the SRAS curve are caused by anything that affects the costs of production, such as the price of energy.

    A short run shift in only the AD curve will result in the rate of change in RGDP and the inflation rate both increasing, or both decreasing. A shift in only the SRAS curve will result in the rate of change in RGDP increasing and the inflation rate decreasing, or the rate of change in RGDP decreasing and the inflation rate increasing.

    Shifts in both may make it harder to determine the nature of the shifts in the curves. Fortunately AD = NGDP which simplifies the task greatly.

  47. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 12:18

    Steven Kopits,
    Now, let’s look at the US versus the Euro Area. Here’s a graph of the year on year rate of change in NGDP in both currency areas courtesy of David Beckworth:

    http://1.bp.blogspot.com/-Aan9WBA900s/UX3og6p8tEI/AAAAAAAADuE/Y_-_pA0YLts/s1600/ngdpgrowth.jpg

    Not that the year on year rate of change in NGDP started to decline in the Euro Area in 2011Q2. Since NGDP=AD, and short run shifts in AD are caused by monetary and fiscal policy, we know that one, or the other, or both, are responsible for the decline in the rate of change in Euro Area NGDP.

  48. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 12:33

    Steven Kopits,
    Let’s look at fiscal policy first.

    In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature. The following is a graph of the changes in CAPB by currency area over the calendar years 2009-13. All data comes from the April 2013 IMF Fiscal Monitor.

    http://thefaintofheart.files.wordpress.com/2013/06/sadowski3_10.png

    Note that both US and Euro Area fiscal policy became contractionary in 2011. Fiscal policy was more contractionary in the Euro Area in 2011. But US fiscal policy became slightly more contractionary in 2012 and significantly more contractionary in 2013. If you total the changes in CAPB over the three years, you’ll find that in aggregate US fiscal policy has been more contractionary than Euro Area fiscal policy.

    Incidentally, the October 2013 IMF Fiscal Monitor has come out since I made the above graph, and according to the updated estimates US fiscal policy has been even more contractionary than Euro Area fiscal policy over 2011-13 than depicted above.

  49. Gravatar of Kyle Hale Kyle Hale
    14. November 2013 at 12:39

    Am I missing something here? Latvia isn’t officially in the Eurozone until 2014.

  50. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. November 2013 at 12:47

    What you are missing is that the Latvian currency is already pegged to the Euro.

    As a result, they are included in most current statistics as a Eurozone member.

    For example:

    http://online.wsj.com/news/articles/SB10001424052702304243904579197001087968652?mod=WSJEurope_hpp_LEFTTopStories

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 12:55

    Steven Kopits,
    Now, let’s look at monetary policy.

    The following is a graph of central bank policy rates by currency area:

    http://thefaintofheart.files.wordpress.com/2013/06/sadowski3_5.png

    The Fed lowered the fed funds rate to the 0.0%-0.25% range by December 2008, where it has been ever since. In contrast, the the ECB didn’t lower the MRO rate to 1.0% until May 2009. This was raised to 1.25% in April 2011 and to 1.5% in July 2011. Recall that slide in the year on year rate of change in Euro Area NGDP began in 2011Q2, the very quarter that the ECB first raised the MRO rate.

    April 2011 also happened to be the beginning of the second round of the Euro Area sovereign debt crisis, and what was in fact its more widespread and severe phase.

  52. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 13:18

    Steven Kopits,
    To help illustrate, here is a graph of 10-year bond spreads of the GIIPS nations relative to Germany:

    http://thefaintofheart.files.wordpress.com/2013/06/sadowski3_9.png

    Portuguese acting Prime Minister Socrates requested a bailout in April 2011. The next 15 months was marked by the peaks in the spreads for all of the GIIPS, and only concluded shortly after Spanish Prime Minister Rajoy requested a bailout in July 2012.

    The ECB responded by cutting the MRO rate to 1.25% in November 2011, and to 1.00% in December 2011. December 2011 also happens to be the month the ECB launched its 3-year LTROs.

    The ECB calls its 3-year LTROs an “enhanced credit support programme”. In the words of Claude Trichet “enhanced credit support constitutes the special and primarily bank-based measures that are being taken to enhance the flow of credit above and beyond what could be achieved through policy interest rate reductions alone.”

    In other words, LTRO is the equivalent of what the Fed calls “credit and liquidity programs”. Credit and liquidity programs are “designed to support the liquidity of financial institutions and foster improved conditions in financial markets.” These programs are denoted by acronyms such as CPFF, MMIFF, PDCF, TALF, TSLF TAF etc.

    The point is, the 3-year LTROs are not QE, and the ECB has been adament that it has never done QE.

    Moreover, why would it, since the ECB has never been at the zero lower bound? The MRO rate was reduced to 0.75% in July 2012 and to 0.5% last week. The ECB has been clear that it could reduce the MRO rate even further if it wishes to.

  53. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 13:48

    Steven Kopits,
    One proxy for the amount of QE done is monetary base expansion. This isn’t perfect of course since it also measures other policy responses such as the Fed’s “credit and liquidity programs” (which largely came to an end in July 2010) and the ECB’s “enhanced credit support programmes”.

    As of May 2013 the Federal Reserve’s monetary base up by 260% and the ECB’s up by 48% relative to their respective levels in August 2008 (before any large scale expansion in their monetary bases):

    http://thefaintofheart.files.wordpress.com/2013/06/sadowski3

    That little red pimple, down and to the right, is the ECB’s 3-year LTROs. The most recent data shows that the Fed’s monetary base is up 323% and the ECB’s by 35% compared to August 2008.

  54. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 13:49

    And just in case 35% sounds like a lot consuder the following, it took 63 months to expand it that much. The ECB’s monetary base expanded by more than that between June 2005 and August 2008, a period of 38 months:

    http://sdw.ecb.europa.eu/quickview.do?node=2018802&SERIES_KEY=123.ILM.M.U2.C.LT01.Z5.EUR

  55. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 14:33

    Steven Kopits,
    Now, let’s look for signs of a shift in the SRAS curves. To do that we need to consider the rates of change in RGDP and the implicit price deflator.

    But first recall the David Beckworth graph of year on year NGDP growth rate above. Euro Area year on year NGDP growth fell from 3.7% in 2011Q1 to a low of 0.4% in 2012Q4. In contrast US year on year NGDP barely changed, falling from 3.9% in 2011Q1 to 3.8% in 2012Q4.

    Here’s the year on year change in RGDP for the US and the Euro Area. (The RGDP counterpart to Beckworth’s NGDP graph above):

    http://research.stlouisfed.org/fred2/graph/?graph_id=145891&category_id=0

    Euro Area year on year RGDP growth fell from 2.6% in 2011Q1 to (-1.1%) in 2012Q4. Thus the year on year change in the Euro Area GDP implicit price deflator was 1.1% in 2011Q1 and 1.5% in 2012Q4. Note that both the rate of change in RGDP decreased and the inflation rate increased. This is consistent with a leftward shift in the SRAS curve. So it appears that over the period in question, the Euro Area has had both a leftward shift in AD and SRAS.

    In contrast US year on year RGDP growth was 2.0% in 2011Q1 and was still 2.0% in 2012Q4. Thus the year on year change in the US implicit price deflator was 1.9% in 2011Q1 and 1.8% in 2012Q4. There was not a significant change in either, so it appears that over the period in question the US had no shift in either the AD or SRAS curves.

    This does not exclude the possibility of a positive effect on SRAS from the oil shale boom. But if so, its effect has apparently been canceled out by other supply side factors. Thus its effect is too small to detect in aggregate.

  56. Gravatar of TravisV TravisV
    14. November 2013 at 15:08

    Prof. Sumner,

    Is capacity utilization the right way to think about the positive effect expansionary money has on stocks?

    Imagine that Procter & Gamble’s factories are running at 80% capacity. Higher demand in the economy requires Procter & Gamble to increase production to 90% capacity, which represents a higher return on investment (building the factory).

    Is that the best way to think of it?

  57. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 15:10

    Minor correction:

    “Euro Area year on year RGDP growth fell from 2.6% in 2011Q1 to (-1.1%) in 2012Q4. Thus the year on year change in the Euro Area GDP implicit price deflator was 1.1% in 2011Q1 and 1.5% in 2012Q4.”

    should read

    “Euro Area year on year RGDP growth fell from 2.6% in 2011Q1 to (-1.0%) in 2012Q4. Thus the year on year change in the Euro Area GDP implicit price deflator was 1.1% in 2011Q1 and 1.4% in 2012Q4.”

  58. Gravatar of Jim Glass Jim Glass
    14. November 2013 at 16:51

    Velocity rises in Argentina in response to inflationary policy.

    http://www.bloomberg.com/news/2013-11-13/porsche-911s-at-39-off-spurs-argentina-crackdown-on-peso.html

    So to speak.

  59. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. November 2013 at 20:08

    Correct link for monetary base graph:

    http://thefaintofheart.files.wordpress.com/2013/06/sadowski3_1.png

  60. Gravatar of ssumner ssumner
    14. November 2013 at 21:01

    Everyone, I heard that Yellen said the Fed tries to engage in monetary offset of fiscal policy. Anyone have a link?

  61. Gravatar of Steve Steve
    14. November 2013 at 22:31

    http://www.c-span.org/Events/Senate-Hearing-on-Federal-Reserve-Nomination/10737442622-1/

    1:03-1:05 Monetary offset

    1:45-1:47 Fiscal at cross purposes to Monetary

  62. Gravatar of Matt McOsker Matt McOsker
    15. November 2013 at 05:33

    Scott, the Yellen thing I have seen is called “Optimal Control”. Link here:

    http://www.businessinsider.com/what-is-optimal-control-2013-11

  63. Gravatar of TravisV TravisV
    15. November 2013 at 07:28

    Prof. Sumner,

    Here’s a link to your new commentary on The Economist website:

    “Monetary policy has not been ultra-loose”

    http://www.economist.com/blogs/freeexchange/2013/11/unconventional-monetary-policy-2

  64. Gravatar of Gordon Gordon
    15. November 2013 at 11:23

    Scott, I thought that your commentary in The Economist was a good one. (Thanks Travis for the link.) But I wanted to give you a heads up on something I’ve noticed on occasion in your writing style. People who know what they mean and are addressing an audience they believe understand their views can employ semantically ambiguous statements at times. For example, in the commentary you state, “If we did see interest rates rise back to 2007 levels, it would almost certainly reflect much more rapid nominal GDP growth than is currently expected.” You have an occasional tendency to have effect proceed causes in your sentences. I know that you meant higher NGDP growth would lead to higher rates but your sentence is open to the opposite interpretation.

  65. Gravatar of Steven Kopits Steven Kopits
    15. November 2013 at 12:15

    Mark –

    You’ve covered a lot of ground here. Let me try to summarize:

    You state: “Not[e] that the year on year rate of change in NGDP started to decline in the Euro Area in 2011Q2.” Agreed. This was just after the Arab Spring and the oil price spike to $125. Historically, when oil has reached this level as a share of GDP, the OECD countries have normally fallen into recession. Hence my call for an OECD recession.

    But you seem to reject the oil hypothesis. Instead, you examine fiscal and monetary policy in turn.

    You seem to dismiss fiscal policy as a reason that the Eurozone went into recession, and the US did not.

    “Note that both US and Euro Area fiscal policy became contractionary in 2011. Fiscal policy was more contractionary in the Euro Area in 2011. But US fiscal policy became slightly more contractionary in 2012 and significantly more contractionary in 2013. If you total the changes in CAPB over the three years, you’ll find that in aggregate US fiscal policy has been more contractionary than Euro Area fiscal policy.

    “Incidentally, the October 2013 IMF Fiscal Monitor has come out since I made the above graph, and according to the updated estimates US fiscal policy has been even more contractionary than Euro Area fiscal policy over 2011-13 than depicted above.”

    So it’s not fiscal policy, if I understand you correctly.

    Then you turn to monetary policy. You seem to be suggesting, by way of causality, that the Euro recession was caused by a relatively minor interest rate change: “In contrast, the ECB didn’t lower the MRO rate to 1.0% until May 2009. This was raised to 1.25% in April 2011 and to 1.5% in July 2011. Recall that slide in the year on year rate of change in Euro Area NGDP began in 2011Q2, the very quarter that the ECB first raised the MRO rate. ” Thus, the proximate cause of the recession, as I understand your argument, is a hair-trigger interest rate response. OK, well tell us then about hair-trigger interest rate recessions.

    For example, did you predict at the time, or believe at the time, that a 0.5% increase in the Euro area MRO rate would send the continent into a six quarter recession? Is that a reasonable expectation?

    I did predict a recession, and we did indeed get one in Europe and Japan. This suggests my causal explanation might also have been right.

    But I was wrong about the US. Well, why? It could have been iPhones (not a trivial contributor to GDP at the time). But what’s the constrained enabling commodity? It’s absolutely, clearly oil. When manual labor in the Bakken can command 3x their normal wage, that’s clearly price gouging. And price gouging only occurs when buyers are desperate. Global consumers are desperate for more oil.

    How much suppressed demand is there? Consider: As gasoline has dropped to $3 / gallon in these parts, US oil consumption has risen by 1 mbpd to 20 mbpd–a 5% rise in one year (frankly, in a few weeks). I thought we were supposed to have “peak demand” and kids who didn’t want to drive anymore, and instead our oil consumption can grow at twice the pace of China? Wow. That’s a lot of suppressed demand.

    So, if you want to argue that a 0.5% Euro interest rate increased caused a six quarter recession, make your case. But otherwise, you don’t have much other than oil to explain the separate paths of the US and Europe after Q2 2011.

    By the way, if you’d like to see a more detailed approach, send me an email, and I’ll forward my Woodrow Wilson School presentation over to you.

  66. Gravatar of ssumner ssumner
    15. November 2013 at 12:31

    Gordon, Good advice, I’ll try to remember that.

    Everyone, Thanks for the links.

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. November 2013 at 14:02

    Steven Kopits,
    “But you seem to reject the oil hypothesis.”

    There is no sign at all of a rightward shift in the SRAS curve in the US between 2011Q1 and 2012Q4, so there is no evidence in support of positive macroeconomic effects from oil shale during this time period.

    “You seem to dismiss fiscal policy as a reason that the Eurozone went into recession, and the US did not…So it’s not fiscal policy, if I understand you correctly.”

    US fiscal policy was only slightly less contractionary than Euro Area fiscal policy in 2011, and was more contractionary than Euro Area fiscal policy in 2012.

    “Then you turn to monetary policy. You seem to be suggesting, by way of causality, that the Euro recession was caused by a relatively minor interest rate change:…Thus, the proximate cause of the recession, as I understand your argument, is a hair-trigger interest rate response. OK, well tell us then about hair-trigger interest rate recessions.

    For example, did you predict at the time, or believe at the time, that a 0.5% increase in the Euro area MRO rate would send the continent into a six quarter recession? Is that a reasonable expectation?”

    The important fact is not the size of the policy rate increases but the signals they sent that the ECB wanted to tighten monetary policy. They raised the policy rate not once but twice in three months despite the fact that inflation was only 1.1% and unemployment was already at double digit levels. And this was only months after both Greece and Ireland had been bailed out in their respective sovereign debt crises.

    “I did predict a recession, and we did indeed get one in Europe and Japan. This suggests my causal explanation might also have been right.”

    Just to be clear, thousands of people get predictions right for the wrong reasons every single day. A lucky guess is evidence of precisely nothing.

    “So, if you want to argue that a 0.5% Euro interest rate increased caused a six quarter recession, make your case.”

    Steve, I left ten comments with about as many links. I’m done making my case.

    Here’s the biggest problem I have with your response. You never addressed the AD-AS Model. You haven’t once attempted to reconcile your pet theory with elementary Econ 102. And without doing that it’s just a bunch of hand waving and anecdotal evidence.

    The BEA provides a fairly detailed breakdown of National Income by industry. Here is the share of National Income by Mining (i.e. Mining, Quarrying, and Oil and Gas Extraction):

    http://research.stlouisfed.org/fred2/graph/?graph_id=141978&category_id=0

    The most generous estimate I can come up with is that the entire sector has added 0.7% to RGDP between 2009Q3 and 2013Q2 or 0.186% to average annual RGDP growth since 2009Q3. This is consistent with mainstream estimates that the economic impact of the oil-shale boom is essentially zero:

    http://www.econbrowser.com/archives/2013/11/great_expectati.html

    And keep this in mind. At 1.75% of National Income in 2013Q2, the entire Mining sector’s share of National Income is still down sharply from its 2.3% peak share in 2008Q3.

    The only way that those suffering from what I term “fossil fuel derangement syndrome” can come up with their exagerated estimates of the importance of the production of fossil fuels to the national economy is by including value added that does not directly accrue to the actual production of these sources of energy.

  68. Gravatar of Steven Kopits Steven Kopits
    15. November 2013 at 14:34

    Mark –

    So I understand correctly, you’re saying that Europe went into a six quarter recession because “the signals [policy rate increases] sent that the ECB wanted to tighten monetary policy.”

    You can send a continental economy into a six quarter recession with that alone?

    Really? Tell me more.

  69. Gravatar of Steven Kopits Steven Kopits
    15. November 2013 at 15:04

    As for the economic impact of oil:

    Let’s consider as a thought exercise another commodity: air.

    Now, air is neither manufactured, nor bought, nor sold. It is not in the national accounts at all. What’s its measured contribution to GDP? Zero.

    Let’s assume you put a plastic bubble over the US and sucked the air out, making the country airless. What would GDP be now? Zero, right?

    Now let the air back in (and let’s assume everyone was unconscious but not dead). GDP would return to normal. What would be the economic contribution to that from air? On paper, zero.

    In reality, air would be responsible for all of it, in the sense that there would be no economic activity without it. It’s an enabling commodity. But nowhere would it appear in national accounts. If I asked you, “Well, Mark, how important was air in the GDP?”, you’d say that it has no role, it created no jobs, it wasn’t traded, nor was it listed as a consumed commodity. But, of course, that’s not true.

    Let’s turn to oil.

    I suppose I’m lucky a lot. In a 2009 paper entitled “Peak Oil Economics” (Oil & Gas Investor, Oct. 2009), I forecast that the OECD countries would be locked out of oil consumption around $85, never see their earlier levels of oil consumption again, and lose consumption at a pace of 1.5% from the point the oil supply stalled (Q4 2004). That was a very radical proposition at the time (and still is, actually). But all that happened. Menzie Chinn and, to be honest, Jim Hamilton still doesn’t get that.

    Now, if oil consumption is going to fall by 1.5% per annum in the OECD countries, then it all comes down to how fast these countries can adapt. You seem to suggest that your view is that the pace of oil substitution is infinite. There are no such things as oil shocks; Italy can reduce oil consumption by 30% over half a dozen years with no adverse effect. That, like the air in the bubble, we could suck all the oil out of the economy, and there would be no economic impact. Isn’t that what you’re arguing?

    And if you’re not, then how much could we suck out without impact? 50%? 20%? 8%? 2%?

    I think if you reflect on it a bit, you’ll agree that oil is, in fact, a critical enabling commodity and that, to all appearances, there have been oil shocks in the past. Were we to take oil out of the economy overnight, GDP would crash by a very large amount. And if you agree that, then we’re just arguing about the size of the coefficient, as the man said to the woman in the bar.

    But you can’t measure the impact the way your trying to do it, just as you can’t measure the impact of air by using national accounts. You have to measure the dog that didn’t bark, not the one that did.

    If you go back to that Econbrowser article you link, you’ll see I took a stab at just that.

  70. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. November 2013 at 16:36

    Steven Kopits:
    “You can send a continental economy into a six quarter recession with that alone?…Really? Tell me more.”

    Sure. Anytime you have a significant slowdown in NGDP growth you get a recession.

    Every US recession since WW II with the exception of the 1974-75 recession contained a quarter when NGDP growth fell to 1.1% growth at an annual rate or lower.

    The rate of growth of NGDP is determined entirely by monetary and fiscal policy, not oil, housing, or the manufacture of toasters.

    What happened in 1974-75? That was a recession caused by a leftward shift in the SRAS curve. What caused that shift? A combination of an oil price shock and the ending of the Nixon wage and price controls.

    But in my opinion that’s the only example of a SRAS caused US recession since WW II.

    “But you can’t measure the impact the way your trying to do it, just as you can’t measure the impact of air by using national accounts. You have to measure the dog that didn’t bark, not the one that did.”

    If you can’t measure the impact by using national accounts then it’s not macroeconomics. And if it’s not macroeconomics then you’re just wasting your time trying to convince macroeconomists that oil shale has macroeconomic effects.

    “If you go back to that Econbrowser article you link, you’ll see I took a stab at just that.”

    To be frank Steve it’s just the same totally unpersuasive double and triple counting you’re doing here. And if Menzie Chinn didn’t think it was worth wasting any time addressing, why should I?

  71. Gravatar of Steve Steve
    15. November 2013 at 20:44

    There’s ample evidence that BOTH the oil supply shock AND tight monetary policy made large negative contributions to RGDP in 2008 and 2011. I would venture 25-50% oil and 50-75% monetary. Probably closer to 50/50 in 2008 and 25/75 in 2011 (oil/monetary).

    The problem is that people see what they want to see and disregard the rest, so the debate becomes pointless.

  72. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. November 2013 at 21:15

    Steve,
    Euro Area year on year NGDP growth fell from 3.7% in 2011Q1 to a low of 0.4% in 2012Q4. The rate of growth of NGDP is determined entirely by monetary and fiscal policy, not oil, housing, or the manufacture of toasters.

  73. Gravatar of Dustin Dustin
    17. November 2013 at 08:39

    Mark A. Sadowski,

    “The rate of growth of NGDP is determined entirely by monetary and fiscal policy, not oil, housing, or the manufacture of toasters.”

    If we all decide to sit on our bums for the next year, NGDP is $0 and growth rate is infinitely negative – monetary policy, fiscal policy, xyz policy be damned. Perhaps say ‘heavily influenced by’ or the like.

  74. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. November 2013 at 09:19

    Dustin,
    “If we all decide to sit on our bums for the next year, NGDP is $0…”

    I suggest that you try it and see what happens.

  75. Gravatar of Steven Kopits Steven Kopits
    17. November 2013 at 19:46

    I’m truly astounded by what you’re saying, Mark.

    In your world, all recessions are caused by mistakes in fiscal or monetary policy, if I understand correctly. The real economy seems to have no effect at all. The business cycle doesn’t exist!

    I suppose this is where I part ways with market monetarists. I’m happy to acknowledge a role for monetary policy, but it’s not everything to me. By contrast, you think oil shocks don’t exist, so stagflation and all that in the 1970s were purely the result of bad fiscal or monetary policy. What a great world you must inhabit! You’re not dependent on depleting resources at all! We could simply take all the oil out of the economy without effect. In your world, if we reduced oil consumption to zero overnight, then GDP would fall by 4.25%, which is what we spend on oil. Really, you believe that GDP would only fall by 4.25% in that event? I believe that is dead, dead wrong. I believe society would come to a virtual standstill.

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