Why the Keynesian model cannot explain Britain

Lots of Keynesians think recent events in Britain support the Keynesian model—particularly the Keynesian critique of “austerity.”  Put aside the fact that Britain clearly isn’t “stuck” in a liquidity trap, rather the BoE simply does not want to push inflation even higher.  Let’s say my monetary offset theory is wrong.  Does this rescue the anti-austerity thesis?  Unfortunately no.

Step 1.  The Economist magazine reports (in the back) that Britain has the third largest budget deficit in the world, significantly bigger than the US as a share of GDP.  So fiscal policy is obviously expansionary using a simplistic metric that doesn’t adjust for the business cycle.

Step 2.  Then Keynesians point to the cyclically-adjusted deficit, which is presumably much smaller in Britain, and has been shrinking.  Unfortunately this won’t work either, but the reasons are more subtle.  Just how far below potential is the UK economy?  The honest truth is that no one has a clue.  But let’s use the sorts of measures that Keynesians would rely on.  The unemployment rate is roughly the same as in the US.  So by that measure the output gap is similar, although a bit smaller in the UK because they have a slightly higher natural rate of unemployment.  But almost all economists think that no single labor market indicator is perfect.  And all the other measures show the UK doing far better than the US, especially total employment, which hits record levels in the UK month after month, while lagging 3 million below early 2008 levels in the US (a country with a faster growing population.)  Here’s the bottom line: The UK has a smaller output gap than the US using any plausible set of labor market metrics.  This means that the cyclically-adjusted budget deficit in Britain isn’t just modestly larger than the in the US, but a great deal larger.  And yet the US has not experienced the near zero growth of the UK.  Why not?

Step 3.  Then the Keynesians point to the low RGDP growth in Britain, and claim this somehow proves Britain has a massive output gap, and hence fiscal policy is actually quite austere.  I hope everyone can see the problem with this argument.  It makes the Keynesian theory almost impossible to refute.  Indeed demand-side explanations would appear correct even if Britain’s problems were 100% supply-side.  Here’s why.  If growth slowed sharply for supply-side reasons, the government officials would likely sense that they had a structural deficit problem and cut back on spending.  The alternative would be an exploding debt ratio.  If Keynesians (wrongly) assumed the slowdown was demand-side driven, and that the output gap was huge, they would severely overestimate the amount of austerity, assuming the cyclically-adjusted deficit to be much smaller than it actually was.  All economic slowdowns would contain stylized facts that seemed to confirm the Keynesian, demand side, anti-austerity view, even if (by assumption) the slowdown was structural.

Step 4.  So is this simply a “he said, she said?”  No, we have powerful evidence of supply-side problems in Britain.  Recall that the Keynesian model doesn’t just predict that fiscal austerity reduces output, they have a specific mechanism—lower employment.  The Keynesian model has no explanation for a slowdown that occurs when employment is hitting record levels but productivity is awful.  Thus the stylized facts fit the supply-side model at least as well as the Keynesian model, if not better.  And then there’s that British inflation problem . . .

But I don’t want to overstate things.  The UK unemployment rate is somewhat elevated, and hence they probably have both supply and demand-side problems.  It’s OK for Keynesians to blame the elevated UK unemployment rate on fiscal austerity, but they cheat when they blame the horrible RGDP numbers on austerity, which look dramatically worse than the unemployment figures, much less the employment figures.  Indeed they shouldn’t use RGDP at all; NGDP is a better measure of demand, the P/RGDP split reflects supply-side factors.

Step 5.  Keynesians that are not yet convinced need to think really hard about the implications of the famous Krugman/Mankiw debate over trend reversion, which occurred at the beginning of the recovery.  Mankiw suggested that RGDP would not return to the old trend line, and Krugman got outraged, suggesting that if the labor market improved then RGDP would grow faster than trend during the recovery.  (And insulted Mankiw in the process.)  Well guess what, both the US and the UK have seen some improvement in the labor market, and yet both countries have seen no reversion to trend, indeed in Britain RGDP growth has been dramatically below trend rates of 2.5%.  Mankiw wasn’t just a bit more correct than Krugman, he was overwhelmingly more accurate.

PS.  For those who think NGDP is a better measure than employment, consider that the second biggest budget deficit in the world is in Japan, a country whose NGDP is lower than 20 years ago.

PPS.  And I haven’t even mentioned the major embarrassment of the most influential Keynesian policymaker in Britain, Ed Balls, insisting that the BoE should maintain its 2% inflation target.  Why not 3% Mr. Balls?  Would that lead to too much demand?  Do you want more demand or not?

PPPS.  Evan Soltas has a post that is generally sympathetic to the anti-austerian view, but also makes this observation:

The data don’t support the thesis that Europe is suffering because it’s doing more austerity than the U.S. It seems, at least from these data, comparable. The story I look to instead is the differing degrees of monetary-policy offset for fiscal austerity.

Also check out his excellent recent posts (here and here) on the euro-disaster.  I’ll have more to say on the ECB when Q1 data is out.

PPPPS.  Here’s the wrong (and offensive) Krugman comment:

I always thought the unit root thing involved a bit of deliberate obtuseness “” it involved pretending that you didn’t know the difference between, say, low GDP growth due to a productivity slowdown like the one that happened from 1973 to 1995, on one side, and low GDP growth due to a severe recession. For one thing is very clear: variables that measure the use of resources, like unemployment or capacity utilization, do NOT have unit roots: when unemployment is high, it tends to fall. And together with Okun’s law, this says that yes, it is right to expect high growth in future if the economy is depressed now.

But to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness. How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.

That’s an implied prediction that a falling unemployment rate in the US would be associated with above 3% RGDP growth.  Since Krugman likes pop music embeds:

something is going on here,

but you don’t know what it is,

do you?

Mr. Jones

HT:  Geoff

I’ll be too busy to do much over the next few days.  Check out Beckworth’s latest, and Nick Rowe’s reply.


Tags:

 
 
 

44 Responses to “Why the Keynesian model cannot explain Britain”

  1. Gravatar of James in London James in London
    25. April 2013 at 05:04

    Small victory today in the UK.

    http://www.ons.gov.uk/ons/guide-method/method-quality/ons-statistical-continuous-improvement/continuous-improvement-of-gdp–24-april-2013/sections-1-5/continuous-improvement-of-gdp—emerging-issues.html

    “4.2 Nominal GDP
    The incoming Governor of the Bank of England has talked about the merits of targeting nominal GDP (i.e. GDP at current market prices) instead of inflation as the anchor for monetary policy, which led some commentators to point out that potential barriers to such a policy are the timeliness and periodicity (quarterly) of nominal GDP figures, and the extent to which they are revised.

    In the March 2013 budget, the Chancellor of the Exchequer announced an updated remit for the Monetary Policy Committee. Although this signalled no shift from the existing 2% CPI inflation target, it opened up the possibility of a more flexible approach, including the use of intermediate thresholds such as nominal GDP, in exceptional circumstances. The Chancellor asked the MPC to produce an assessment of the merits of using intermediate thresholds in its August 2013 Inflation Report.

    In response to this, ONS has recently published an analysis of revisions to nominal GDP (as outlined in section 3.4) and, in the light of this, will be considering possible improvements to the timeliness and quality of nominal GDP estimates to meet the increased user interest. This will enable ONS to respond to the MPC’s assessment in August.”

  2. Gravatar of James in London James in London
    25. April 2013 at 05:05

    actually yesterday, sorry

  3. Gravatar of Britmouse Britmouse
    25. April 2013 at 05:24

    Nice post Scott, James – great find – what excellent news!

  4. Gravatar of Nick Nick
    25. April 2013 at 05:39

    Simon Wren-Lewis still seems convinced that the UK has a demand problem: http://mainlymacro.blogspot.co.uk/2013/04/the-uk-economy-in-three-charts.html

    Is there a reasonable model where more demand increases productivity? Presumably not in the market monetarist model where aggregate demand is simply NGDP?

  5. Gravatar of J J
    25. April 2013 at 05:45

    Professor Sumner:

    Don’t we have to look at the change in the cyclically adjusted deficit from pre-recession levels? If country A always had a large deficit, but then cuts back on the cyclically adjusted deficit after a recession hits (but still maintains a larger deficit than other countries), then country A did not have fiscal stimulus. I thought the idea is that the economy can adjust to a level of government spending and taxation — whatever that amount is — and so when recession hits we want to increase the deficit relative to what it was before (I’m not saying this is right, but just that this is the argument). I don’t know the relevant data for the UK deficit, but if the cyclically adjusted deficit was always larger than in the US, then the fact that it is larger now would not point to them having had fiscal stimulus.

  6. Gravatar of Jesse d. Jesse d.
    25. April 2013 at 05:53

    Unemployment rate has fallen, but the EMP/POP ratio has been stuck at the same place since the end of the recession. That seems like the most relevant measure of employment for assessing RGDP growth.

    http://data.bls.gov/timeseries/LNS12300000

    I would say this proves Krugman right. Or at least fails to prove him wrong.

  7. Gravatar of George Selgin George Selgin
    25. April 2013 at 06:53

    Kimball’s technology argument is precisely the argument for zero (or constant) inflation in the face of changes in the growth rate of TFP that I have sought to refute in _Less Than Zero_. There is, in fact, nothing to it, save the belief–itself nothing more than an article of faith–that changes in the rate of inflation are “bad,” even if they reflect changes in the extent of factor output.

    It cannot be repeated often enough: stability of NGDP growth is NOT properly regarded as a means toward the higher end of stabilizing the rate of inflation. It is itself a policy desideratum, because it serves better than inflation stabilization does to avoid “unnatural” changes in real economic variables.

  8. Gravatar of Asco Asco
    25. April 2013 at 08:21

    Krugman had the same worry back when he admitted his support to targeting NGDP, that too high real growth might give us deflation. Without having read the paper, I assume it’s also a part of why Woodford preffered the ‘potential gdp adjusted price level target’.

    This is a very important disagreement in my opinion, because at least in the models I have encountered so far in my courses, inflation variability being bad is simply assumed in the loss function. Somewhere when economists learned to distinguish between real and nominal, we took it a step too far.

    It is important because it also resolves the problem of dynamic inconsistency, one of the more plausible liquidity trap arguments. The central bank doesn’t have to promise to be irresponsible in the future, and let inflation get out of hand. It has to promise to be responsible, and keep NGDP stable.

  9. Gravatar of Geoff Geoff
    25. April 2013 at 08:25

    George Selgin:

    “It is itself a policy desideratum, because it serves better than inflation stabilization does to avoid “unnatural” changes in real economic variables.

    This is itself a belief; an article of faith, with a dash of naturalistic fallacy. Changes to NGDP are “bad”, even if they reflect changes in actual individual preferences and productivity. This faith is communicated by presenting oneself as “obviously” able to distinguish between “natural” and “unnatural” changes in real economic variables, such that one’s faith that NGDP is “better” than inflation stabilization, becomes something other than faith.

    One could reasonably argue that inflation stabilization is better than NGDP targeting because it allows for more corrections to be made to unsustainable investments that monetary policy itself brings about, to the extent that inflation stabilization requires less monetary inflation than NGDP targeting, during significant correction periods.

    It’s always amusing to see an adherent of one faith critique another’s faith for being a faith. “Your God is not as powerful as my God, because my God…etc etc etc.”

  10. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    25. April 2013 at 08:47

    Except Krugman was completely right and Mankiw was completely wrong if you use something sensible like working age employment to population ratios, not some ridiculous “unemployment” number.

    US labor market did not improve the tiniest bit, and so RGDP is not improving at all. Where’s the surprise?

    Or from another perspective – NGDP is way below trendline, and so is RGDP. How is this surprising?

  11. Gravatar of JJriverrun JJriverrun
    25. April 2013 at 08:56

    What is the justifcation for consistantly referencing ‘total employment’ rather than rate of unemployment when referring to the UK? This has become a pattern in posts about Britain but I fail to understand why that number is significant.

  12. Gravatar of Can Keynesians Explain Britain? | This is Ashok. Can Keynesians Explain Britain? | This is Ashok.
    25. April 2013 at 09:43

    […] Tyler Cowen (approvingly) takes us to Scott Sumner on deficits in Britain: […]

  13. Gravatar of Ray Lopez Ray Lopez
    25. April 2013 at 09:47

    Seems that stylized fact Step #5 about trend reversion by this author is indeed stylized (no evidence of any real debate between Mankiw and Krugman from the link provided). In fact, if this poster from the NYT comments section is correct, then Mankiw himself hedged his bets with his predictions (and is equally wrong):

    NYTimes: “Dr. Krugman,

    I can’t help but wonder if you read all of Dr. Mankiw’s blog entry on this topic. In your opening paragraph you write that Mankiw thinks “there’s no tendency for bad years to be offset by good years.” However, I think if you revisit Mankiw’s post, especially the more technical part for the “econgeeks”, you’ll find that he makes no such unconditional claim. Indeed, he says that when recovery does indeed arrive, “it will probably be a robust one.” This meshes with the general conclusion that you and the likes of Brad DeLong make. However, Mankiw’s point is that even though robust growth will happen once recovery begins, at the present we don’t know when that will happen.

    “” David Landry March 4, 2009 12:26 pm “

  14. Gravatar of Ashok Rao Ashok Rao
    25. April 2013 at 09:50

    Scott,

    You said you’re busy, but if you have time I have more thoughts here (http://ashokarao.com/2013/04/25/can-keynesians-explain-britain/). My problem with this question to begin with is the murkiness of using labor market statistics to deduce, well, anything. Unemployment rates (rightly perhaps the most important objective) cannot mean much in an economy with concentrated human capital and falling wage share of GDP. If I had ten units of physical capital, nine nails and an airplane, and cyclical-downturns forced me to put the plane out of use, it makes no sense talking about a “10%” unemployment.

    Output gap is ultimately the only thing that matters insofar as recession. And while employment-population might be better than rates, it still fails in a modeling sense because it thinks all people are economically equal.

    A chart from Simon Wren Lewis (http://ashokarao.files.wordpress.com/2013/04/uk-prod-boe1.jpg) suggests a negative productivity shock, so AS clearly fell. The only thing that can explain the lack of serious cost-push inflation, then, is the continued shortfall in nominal expenditures. I see this as an argument for a larger output gap, and hence lower cyclically-adjusted deficits.

    What do you think?

  15. Gravatar of Michael Michael
    25. April 2013 at 10:01

    Geoff wrote:

    “This is itself a belief; an article of faith, with a dash of naturalistic fallacy. Changes to NGDP are “bad”, even if they reflect changes in actual individual preferences and productivity. This faith is communicated by presenting oneself as “obviously” able to distinguish between “natural” and “unnatural” changes in real economic variables, such that one’s faith that NGDP is “better” than inflation stabilization, becomes something other than faith.

    One could reasonably argue that inflation stabilization is better than NGDP targeting because it allows for more corrections to be made to unsustainable investments that monetary policy itself brings about, to the extent that inflation stabilization requires less monetary inflation than NGDP targeting, during significant correction periods.”

    FYI, George Selgin is not a market monetarist. If I understand his position correctly, he favors something like stable NGDP growth at a level that allows a falling price level (“Less than Zero”). Also favors private currency rather than a Fed monopoly with the discretion to adjust the base, reserve requirements, etc.

  16. Gravatar of OhMy OhMy
    25. April 2013 at 10:39

    So Osborne and Cameron are sticking their necks out claiming they are doing austerity, but Scott Sumner knows better: they ain’t. At least his message has changed and is now less insane. In 2010 SS predicted that austerity wouldn’t be harmful. Now he is silent on the topic, but claims that what is screwing Britain is *something else* than austerity. It is definitely an improvement.

  17. Gravatar of Michael Michael
    25. April 2013 at 11:00

    Geoff wrote:

    “One could reasonably argue that inflation stabilization is better than NGDP targeting because it allows for more corrections to be made to unsustainable investments that monetary policy itself brings about, to the extent that inflation stabilization requires less monetary inflation than NGDP targeting, during significant correction periods.”

    By the way, this is not just wrong but dead wrong. Even assuming it could be measured accurately, stabilizing inflation would bring about exactly the kind of forced relative price changes that you claim to be against.

    Under an inflation targeting approach, if computers get cheaper, prices in the rest of the economy need to be forced upward to achieve stable inflation. Likewise, if the price of some good or service increases, prices in the rest of the economy must be forced downward to compensate. That is true even the inflation target is 0%, or even if we were to target DEflation.

    Stabilize nominal income, and relative prices aren’t forced to offset changes in other sectors.

  18. Gravatar of Geoff Geoff
    25. April 2013 at 11:28

    Michael:

    “FYI, George Selgin is not a market monetarist. If I understand his position correctly, he favors something like stable NGDP growth at a level that allows a falling price level (“Less than Zero”). Also favors private currency rather than a Fed monopoly with the discretion to adjust the base, reserve requirements, etc.”

    That’s incorrect. Targeting a stable NGDP growth, allowing falling prices or not, is market monetarism. It’s the very definition of market monetarism.

    “Even assuming it could be measured accurately, stabilizing inflation would bring about exactly the kind of forced relative price changes that you claim to be against.”

    Right, but I never said inflation stabilization would avoid bringing about relative price changes. NGDP targeting would not avoid it either.

    My point, which you didn’t address, but only claimed is wrong, is that during a significant correction period, to the extent inflation stabilization calls for less monetary inflation than NGDP targeting, there is a reasonable argument to be made that inflation stabilization is better, because it allows for more corrections to be made *as compared to NGDP targeting*.

    That isn’t the same thing as claiming there are no relative price changes because of the inflation stabilization. The relative price changes brought about by monetary inflation would obviously be reduced if inflation itself is reduced during significant correction periods.

    “Under an inflation targeting approach, if computers get cheaper, prices in the rest of the economy need to be forced upward to achieve stable inflation. Likewise, if the price of some good or service increases, prices in the rest of the economy must be forced downward to compensate. That is true even the inflation target is 0%, or even if we were to target DEflation.”

    “Stabilize nominal income, and relative prices aren’t forced to offset changes in other sectors.”

    That’s not correct. First, the reason for the relative price changes in an inflation stabilization regime, is not because of the fact that if some prices fall, then other prices have to rise by intention. While that is a part of inflation stabilization, these are not the relative price changes I refer to. The relative price changes I refer to are not grounded on some average price level. They are grounded on the prices that would prevail if money production and interest rates were privately controlled. You’re using the wrong framework, your own framework, when understanding the concept of relative price changes in the context with which I advance it. Moreover, inflation stabilization in our economy is consumer price inflation stabilization, not prices for everything. So the only offsetting process of relative price changes of the kind you’re talking about, are constrained to consumer goods. If some consumer goods prices go up, then other consumer goods prices have to go down, and vice versa.

    But the relative price changes I refer to contain capital goods (and financial claims to the incomes from using such capital goods) as well, which consumer price inflation stabilization ignores.

    The relative price changes are brought about by monetary inflation itself, not whether or not some consumer prices have to rise because other consumer prices fall.

    Stabilizing nominal incomes with inflation would also affect relative prices in the context with which I advance that argument. It would affect relative prices away from the standard which are the prices that otherwise would have prevailed in a free market. Here, prices in general can rise, stay the same, or fall. Also, consumer prices can remain stable and yet the distorting relative price changes are still taking place, because while true consumer preferences would have prices of capital remain stable relative to consumer goods prices, monetary policy makes capital goods prices rise or fall relative to consumer goods prices, thus bringing about reallocation of capital into production lines that are not physically sustainable.

    Stabilizing NGDP doesn’t eliminate any of the price signalling distortions that prevail in inflation stabilization regimes. To the extent that it demands more monetary inflation, or less monetary inflation, than what would otherwise prevail in a free market, the same relative price changes, the same distortions, exist. But to what degree they exist, depends on how much more monetary inflation is needed to target NGDP as compared to stabilizing prices.

  19. Gravatar of Geoff Geoff
    25. April 2013 at 11:33

    Dr. Sumner:

    http://www.bloomberg.com/news/2013-04-24/central-banks-load-up-on-equities-as-low-rates-kill-bond-yields.html

    Does this mean you accept the Cantillon Effect is taking place with central banking, because central banks are engaging in “fiscal policy” through buying stocks?

  20. Gravatar of J J
    25. April 2013 at 12:00

    Geoff:

    I’m trying to understand your point about relative price changes. If the Fed were able to target some sort of all-price inflation index, would that mitigate the problem of relative price changes?

  21. Gravatar of Bill Ellis Bill Ellis
    25. April 2013 at 13:54

    Scott says…

    “Keynesians that are not yet convinced need to think really hard about the implications of the famous Krugman/Mankiw debate over trend reversion, which occurred at the beginning of the recovery. Mankiw suggested that RGDP would not return to the old trend line, and Krugman got outraged, suggesting that if the labor market improved then RGDP would grow faster than trend during the recovery. ”

    I don’t understand why this exchange is always seen as a disagreement over the prediction, when it was clearly a disagreement over how the prediction was made. Krugman saying using “Unit Roots” is not applicable.

    From The Roots of Evil post…

    “(…one thing is very clear: variables that measure the use of resources, like unemployment or capacity utilization, do NOT have unit roots: when unemployment is high, it tends to fall. And together with Okun’s law, this says that yes, it is right to expect high growth in future if the economy is depressed now.

    But to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness. How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.”

    I never know… are Mankiw defenders defending his use of Unit roots, or his prediction? A prediction PK made clear that he did not think was necessarily wrong, just unfounded.

    Was Mankiw’s use of “unit roots” a good founding for his argument that RGDP would not return to the old trend line… or not ?

    Mankiw did not seem to think his method was all that strong…

    From “Team Obama on the Unit Root Hypothesis” ….

    ” Finally, I should note that there is much to forecasting beyond the univariate models in my work with Campbell. And our paper, of course, was only one piece of a large literature…

    If you don’t want to defend the use of unit roots then you don’t have a beef with PK… ‘cept that he was rude.

    Krugman made clear in other posts that he did not have an opinion on the “shape” of the recovery… that it would be situational.

  22. Gravatar of Steven Kopits Steven Kopits
    25. April 2013 at 15:28

    Mankiw, in the above noted post, adds a post script:

    “One odd feature of this {CEA] figure is that it omits the 1980 recession. Perhaps the CEA left it out because that recession was followed quickly by another recession. As a result, in the two years after the 1980 recession ended, growth averaged less than one percent. That episode underscores my main point: when forecasting, you cannot be assured of being in a recovery state rather than in a recession state.”

    So what was going on in this second recession? If you view it through the lens of US oil consumption, it is one continous recession from Jan. 1980 to November 1982. There is no break of trend, no inflection point, just a smooth drop in oil consumption from Jan. 80 to Nov. 82. From an oil markets point of view, it was a single recession brought on the high oil prices resulting from the Saudi decision to defend oil prices with production declines.

    If I use the same metric, the US had a brief recovery from the Great Recession until mid-2010, and has been in recession since, as US oil consumption continues to decline. Mankiw gets the analysis wrong–there was no real recovery from July 1980 to July 1981, just a pause in a longer recession. And this 1980-1982 recession was caused by a supply constraint, specifically, a constraint on the oil supply.

    Now, Scott alludes to a supply constrained, rather than demand constrained, interpretation of the recession. And yet what is the constrained commodity? Not labor, as there’s plenty of unemployment. Not capital, as interest rates are at historical lows. So what’s the constrained factor?

    Are we ready to let oil into the conversation?

  23. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. April 2013 at 16:09

    Anyone still interested in the R&R v. critics thing will enjoy the sparring matches at Econbrowser;

    http://www.econbrowser.com/

    Unlike Krugman, Hamilton invited his adversaries to speak their piece…then destroyed them.

  24. Gravatar of Al Al
    25. April 2013 at 17:21

    It’s difficult to say that Hamilton “destroyed” anyone unless you are already convinced that R-R’s averaging method is as sound as any other. HAP’s averaging method didn’t produce statistically significant differences between Debt/GDP buckets at shorter time frames. Hamilton didn’t discuss the statistical significance produced by other methods. Even if you agree with Hamilton’s equivalence of R-R and HAP averaging methods, he didn’t justify his case so much as assert equal value.

  25. Gravatar of Al Al
    25. April 2013 at 17:27

    Also, note that even Hamilton’s defense of R-R amounts to a criticism of R-R: “The issue instead is whether the expected GDP growth rate should be regarded as if it is the same number across different countries.”

    In critiquing HAP, Hamilton missed the point that HAP critiqued the WEIGHTING method used by R-R to compare returns across Debt/GDP buckets. Hamilton’s argument isn’t particularly relevant to HAP unless you are going back to the source to argue that the criticism of the source is wrong because the source is wrong in the first place; therefore, the criticism should have corrected source’s assumptions before correcting methodology.

  26. Gravatar of George Selgin George Selgin
    25. April 2013 at 17:39

    I must apologize, first of all, for inadvertently commenting here when I had intended to make a comment on the earlier post regarding Miles Kimball’s arguments.

    But as Geoff above has chosen to take me to task, I feel compelled to compound my original error by replying to him. I do so, first, by observing that what he calls my own “article of faith” etc. is in fact what I argue at some length in the pamphlet to which I refer in my comment. Does Geoff expect me to repeat the whole thing here? I can assure Geoff, moreover, that I’ve yet to have any proponent answer the arguments in question at all satisfactorily. The plain fact is that those who, like Kimball, swear by “constant inflation is always best” simply don’t consider how fluctuations in productivity growth bear on their conclusions.

    Finally, as for whether or not I’m a “market monetarist,” since the position I take in my pamphlet is essentially the same one I defended in my 1988 book, itself actually written around 1984, I should think that I am entitled _either_ (a) to not be considered a Market Monetarist or (b) to be considered the true inventor of Market Monetarism. Personally I prefer (a), both because I’m a modest fellow and also because doing so makes it easier for me to disassociate myself from current MM apologies for Fed expansion–apologies which, I very much fear, merely serve the Fed as a sort of Trojan Horse, with which it intends quietly to slip past the barriers erected at such great expense by the original monetarists. Once it gets through out will come the Keynesians, armed with fancy new Philips curves and chanting “full employment at any price.” .

  27. Gravatar of Becky Hargrove Becky Hargrove
    25. April 2013 at 18:19

    George Selgin you’ve been hiding too long! Good to have you back. (And you may just be a closet market monetarist, that’s okay you don’t have to tell anyone)

  28. Gravatar of Paul Andrews Paul Andrews
    25. April 2013 at 18:44

    Any neutral money, anti-Cantillon types care to comment on this?: http://www.bloomberg.com/news/2013-04-25/japan-s-investment-banks-once-ugly-sisters-turn-into-cinderellas.html

  29. Gravatar of Benjamin Cole Benjamin Cole
    25. April 2013 at 18:51

    Central bankers: Please print more money, and keep printing more until we see see robust growth and then keep printing even more until guys are bellying up to the bar and buying drinks for the house, and then print even more and release statements that “we are going to have to be tough in the face of some inflation to obtain real solid growth” and print even more money.

    After that, then maybe, think about something else.

  30. Gravatar of ChargerCarl ChargerCarl
    25. April 2013 at 19:17

    Still deflation in Japan:

    http://www.newsobserver.com/2013/04/25/2850675/japan-prices-fall-in-march-as.html

  31. Gravatar of ChargerCarl ChargerCarl
    25. April 2013 at 19:25

    Paul Andrews, assuming abenomics is succeeding in inducing higher expected NGDP growth then thats exactly what I’d expect to see.

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. April 2013 at 21:36

    Seems to me that you’re the one missing the point, Al. Hamilton points out that the only place there is some difference between the two contenders is a legitimate disagreement as to which weighting method produces more useful insight. Which is hardly anything to get excited about.

    Also, the young grad student who appeared on Colbert was used to misrepresent what that difference was (-.1 rather than 1.6) compared to HAP’s 2.2. That wasn’t exactly intellectually honest on his part.

  33. Gravatar of SK SK
    25. April 2013 at 23:20

    The problem with Britain is as follows :
    -Government is doing some kind of austerity but it is the wrong kind.
    -Instead of targeting the areas that need/can afford austerity they have decided to target only the low/middle classes.
    -Inflation is and has been a killer for anyone living in UK the last 5 years. Food/Train/Housing inflation is very high.

    Solution:
    -Right kind of austerity and right kind of stimulus.For example
    1.reduce income taxes
    2.increase wealth taxes (the country is crying for LVT revenue)
    3.cut public sector fatcats but do not cut public sector workers on low-middle incomes.
    4.Reduce Rents and this way make labour flexible.
    5.Reduce house prices
    6.Stop ZIRP

  34. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    26. April 2013 at 00:13

    Keynesians would have a much stronger argument if they had picked Britain as a success story for Keynesianism: high deficit spending leads to low unemployment.

    Yes, the fact of inflation does not really fit the model, but of course, the true reason they don’t is that it’s a Tory government.

  35. Gravatar of Paul Andrews Paul Andrews
    26. April 2013 at 00:13

    ChargerCarl,

    “Paul Andrews, assuming abenomics is succeeding in inducing higher expected NGDP growth then thats exactly what I’d expect to see.”

    OK, so when Bloomberg says “Investment banks are among the first and biggest beneficiaries”, you agree?

  36. Gravatar of Saturos Saturos
    26. April 2013 at 02:52

    Has everyone seen this?
    http://live.wsj.com/video/merkel-breaks-taboo-in-talking-about-rates/54DA4466-FD07-4BC2-96CE-CE0153553DA4.html?mod=us_news_video_newsreel#!54DA4466-FD07-4BC2-96CE-CE0153553DA4

  37. Gravatar of Saturos Saturos
    26. April 2013 at 02:56

    Also David Beckworth tweeted this: http://www.ft.com/intl/cms/s/0/b269796a-ab61-11e2-8c63-00144feabdc0.html#axzz2RZ8IW1Rs

  38. Gravatar of Jan Jan
    26. April 2013 at 07:06

    “Step 1. The Economist magazine reports (in the back) that Britain has the third largest budget deficit in the world, significantly bigger than the US as a share of GDP. So fiscal policy is obviously expansionary using a simplistic metric that doesn’t adjust for the business cycle.”

    Really, is it so obvious? Greece´s budget deficit in 2012 was 10% of GDP. Would you claim that Greece´s fiscal policy is expansionary? Referring to a mere fiscal deficit is never enough to prove that fiscal policy is expansionary. Certainly in the euro zone right now, the countries with the highest deficits are mostly the ones that cut the most (yes there are exceptions like France).

  39. Gravatar of Aidan Aidan
    26. April 2013 at 07:31

    Let he who doesn’t make his theory almost impossible to refute cast the first stone.

  40. Gravatar of SilentKz SilentKz
    26. April 2013 at 10:57

    So Japan is slipping into worse deflation even with unprecedented monetary stimulus causing the stock market to rally over 25% and the yen to tank. Isn’t it obvious that monetary policy can be offset just like fiscal policy? Asset price inflation doesn’t always transfer over to finished goods and services, as you are seeing now. Monetary policy needs a transmission mechanism, and that is credit expansion. Without that monetary policy is largely ineffective, just like fiscal policy when there is a low inflation target.

    Its interesting how each side dismisses the other as being “ineffective” then ignores evidence that goes against their beliefs.

  41. Gravatar of TallDave TallDave
    26. April 2013 at 23:18

    Anti-austerians are just pro-insolvency.

    If we want to have any sensible conversation about the issue of sovereign debt, we should be talking about “solvency” not “austerity” because that’s what the policies are really intended to achieve. But arguing for insolvency sounds crazy, so instead the fiscal expansionists use a term that sounds like they’re arguing against taking a vow of poverty and moving to a Buddhist monastery, forsaking all material possessions.

    This is how we ended up in an inane discussion of whether austerity creates growth or bolsters employment or prevents tooth decay. None of that matters, the driving imperative of the policy is that the government will be insolvent without it.

  42. Gravatar of ssumner ssumner
    27. April 2013 at 05:39

    Major London–Thanks, I’ll do a post.

    Nick, Maybe, but I think the Keynesians then need to discuss how the welfare programs enacted to deal with the recession have reduced employment (i.e extended unemployment benefits, etc.) I don’t see them doing that.

    J, Most major economies were running deficits around 3% of GDP before the recession.

    Jesse, No, even Krugman has admitted the emply/pop ratio is misleading, due to baby boom retirements, etc. In any case, it would not mean that he was wrong about Mankiw, because he criticized Mankiw’s claim that output would grow slowly—and Mankiw was right.

    George, I agree.

    Asco, That’s right.

    Tomasz, Even if you are right about the labor market (and I don’t agree) that proves Mankiw right, not Krugman.

    JJRiverrun, If you read all the comments no one can agree on which is “right.” Some say employment, some say the employment ratio, some say the unemployment rate. My point is that if you look at a cross section of the indicators, Britain is clearly doing better than the US in labor market terms, it’s not even close.

    Ray, Mankiw said we cannot assume growth will be robust. Krugman disagreed. Mankiw was right.

    Askok, There’s an output gap, but much smaller than the RGDP numbers suggest. How do we get that North Sea oil output back to 2007 levels? More demand? I don’t think so.

    OhMy, You said;

    “So Osborne and Cameron are sticking their necks out claiming they are doing austerity, but Scott Sumner knows better: they ain’t.”

    I’m sorry OhMy, I forgot that the only way to tell what’s going on is to ask incumbent politicians, not look at the data.

    Geoff, You said;

    “Targeting a stable NGDP growth, allowing falling prices or not, is market monetarism. It’s the very definition of market monetarism.”

    You really are an idiot.

    Bill Ellis. UK employment levels are at record highs.

    Steven Why would we judge recessions based on oil output. 1980-82 clearly was not a continuous recession.

    Jan, Might I suggest that you read the entire post, and not just the first half?

    Silentzk, The stock market has rallied over 50%. And the yen is down sharply, which is obviously more inflationary than the yen not being down sharply.

  43. Gravatar of ssumner ssumner
    27. April 2013 at 05:49

    Saturos, Good article, but shouldn’t Chris Giles have directed his criticism at Osborne, not Carney?

  44. Gravatar of W. Peden W. Peden
    27. April 2013 at 06:02

    On the UK’s GDP/employment paradox, Tim Congdon points out (at the end of the article) that GDP is not as easy to measure as it once was, because it’s hard to measure the value of something like Facebook or Twitter-

    http://www.standpointmag.co.uk/node/4982

    – to which he could have added the immeasurably valuable https://www.themoneyillusion.com!

Leave a Reply