Everything that needs to be said has already been said.
But since no one was listening, everything must be said again.

Andre Gide

Wednesday, May 9, 2012

This n that and other silly things for this Wednesday morning

Gosh, wouldn't it be great if we could all run trade surpluses? Would solve all of our problems. Like it did for Germany, as Paul Krugman likes to repeat ad nauseam here:
Germany got out of its turn-of-the-millennium doldrums by moving into a huge trade surplus, which is not possible for everyone now.
I had something to say about this point of view in Alien Employers or: How I Learned to Stop Worrying and Let the World Run a Current Account Surplus.

Listen, I'd like to help Europe solve its problems. May I suggest a policy of "export led growth" whereby all exports of goods and services can be delivered to my home address (I will offer, in payment, receipts that can be stored as wealth--but this is completely unnecessary, of course). I am happy to let the whole world (apart from myself) run a trade balance surplus. It is feasible, Paul.

Oh, and here we have Richard Koo who, Explains How in the End, It Really is All Germany's Fault. That is, European bubbles were evidently caused by low interest rates on the part of the ECB designed to save a (then) faltering German economy.

Thanks for this, Richard. Thought experiment: ECB raises interest rates to squelch an emerging Spanish real estate price bubble. Now, go out an interview Spaniards and record their feelings. What do you think you would have found? (And if the price bubble really was a problem detected in real time, what would have prevented Spanish fiscal policy to deal with it directly? Why rely on the ECB to do the dirty work?)

Hmm, oh dear...and here is Paul Krugman again: A Structural Blast from the Past. Paul seems to think that increasing G in the form conscripted labor can increase employment. Duh.

Of course, the issue is not how to increase employment, but how to employ resources efficiently. (There is also a redistributive issue involved, but this is conceptually separate.) WW2 marked a sudden change in society's preferences for resource allocation (toward national security activities). The government acted in a manner that reflected society's preferences in light of the war shock. But that doesn't mean the same sort mass government conscription of labor is what society wants or needs now. See here: Fiscal Multipliers in War and in Peace.

Btw, interesting tidbit here for those of you who have preferences defined over the unemployment rate (from Time magazine, 1965):
Unemployment has not existed in the Soviet Union since 1930—officially.  
Ah, the good ol' days.

Speaking of strange preferences, here are Scott Sumner's preferences U(NGDP), where U(.) is strictly increasing and possibly convex. This tireless advocate of NGDP targeting has another post today on the subject: It's not about Credit, It's about NGDP.

Of course, to Scott, everything seems to be about NGDP. Reminds me of Robert Solow's famous quip regarding Milton Friedman's obsession with the money supply:
Everything reminds Milton Friedman of the money supply. Well, everything reminds me of sex, but I try to keep it out of my papers.
With respect to Scott's remarkable assertion
If the Fed provides the right amount of NGDP, all those finance issues will take care of themselves.
I am reminded of Pedro's brilliant campaign promise in Napolean Dynamite.

OK, enough silly thoughts for one day. Time to get working!

PS. One final thing. Just came across this on Ronald Coase, who is 101 years old! Nobel Laureate: I've Been Wrong So Often, I Don't Find it Extraordinary at All. Good for you, Ronnie. 


  1. ha ha ha, pretty funny!
    100% agree on sumner. That NGDP obsession is pretty creepy.

  2. "Time to get working"

    On my computer it says "Posted by David Andolfatto at 10:50 AM"

    What time do you start work, amigo??? :)

    Good post.

  3. David

    It's difficult, but you seem to have beaten Paul at his own game of giving things the unsympathetic reading. Of course, as long as it's all in fun.

    1. Zen,

      By an "unsympathetic reading" I think you mean a "one-sided view," which, if so, I plead guilty. But I think there is a need to expound the view that is not very much heard. And I am being totally serious (and having fun at the same time). Thanks.

  4. Water fall of false equivalences. Appropo to nothing, don't leave the GS job, unless you go to a TBTF bank.

  5. "And if the price bubble really was a problem detected in real time, what would have prevented Spanish fiscal policy to deal with it directly? Why rely on the ECB to do the dirty work?"

    In the years preceding the crisis, the Spanish did implement countercyclical policies in an attempt to arrest the boom in housing. On a fiscal front, the Spanish gov't ran a surplus which did provide a break to the overheating economy. Spain also implemented prudential regulations requiring their banks to increase their capital reserves (which of course decreases lending). Please note the (partial) effectiveness of these actions in that the collapse of the Spanish housing bubble which was proportionately much larger than the U.S. housing bubble did not lead to the collapse of their banking system (which is only now, after years of recession, being recapitalized by the gov't).

    So yes, Spain was doing "dirty work" to arrest the boom, but their policies (I would say firepower) were insufficient. Perhaps if the ECB had helped out the results would have differed.

    1. Kosta,

      I was not aware that the Spanish fiscal authority (authorities?) took such actions -- thanks for alerting me to this fact. Nevertheless, I can't help but believe that more may have been done, given the political will to do so. But it's hard to put a damper on good times. Hard enough for the local authority. Imagine if instead the ECB did it. This was the point I was trying to make. It was not the Germans' fault; the Spaniards went along with it as well.

  6. The problem with your story is that it's much more than just a real estate bubble in Spain. Of course raising interest rates wouldn't prevent a bubble, but it could have reduced the real interest rates, i.e. inflation in Southern Europe. The short rates were on average 2000-2007:

    Germany (-0.7)
    France (-0.8)
    Euro (-1.1)
    Italy (-1.1)
    Portugal (-1.8)
    Greece (-2.0)
    Spain (-2.1)
    Ireland (-2.4)

    And I don't see any discussion of ZLB in your paper. Perhaps you should check out Eggertsson (2009) and Christiano, Eichenbaum, Rebelo (2009) for fiscal multipliers.

    1. CL,

      Not sure which "problem" you are referring to. Whatever the cause of the Spanish real estate price boom, I am confident that a domestic fiscal policy (tax) could have killed it. They did not want to kill it. So don't go blaming the ECB now for not killing it.

      As for the ZLB and the fiscal multiplier, my point stands (read the article). Our welfare calculations should be independent of the size of the multiplier. Multiplier analysis is the product of lazy work.

    2. David,

      I agree ECB isn't the best way to kill a bubble. Raising interest rates is a very blunt way of doing it. However, what makes you think constrained lending in Spain would have prevented the bubble? Since exchange rate risk was abandoned they could as well have borrowed from Landesbanken.

    3. I might add that the austerity needed for Spain (before the crisis) would (probably) be insufficient to prevent a real estate bubble. Not to mention the difficulty in detecting a bubble in reasonable time as well.

    4. CL,

      Would agree that a 100% on all capital gains in the Spanish real estate sector would have killed the bubble?

    5. Not sure. It might have killed it but it's a little bit like popping a balloon or just letting out the air really quickly.

      Neither am I aware of any real estate bubble in countries like Portugal and Italy who are in a deep trouble as well.

  7. "And I don't see any discussion of ZLB in your paper."

    Maybe because it doesn't matter.

    1. Not maybe -- it does not matter. As mentioned above, and in the paper I link to, the estimated welfare benefit of a fiscal intervention should not be based on the size of a multiplier. Makes no sense in modern macro theory.

  8. I only clicked here because the article had "silly" in the title. So this is what passes for silly among economists, huh? It just makes my brain hurt. And the comments are worse.

    I'm going to play with my puppet, George, now. Bloody economists!

    (Does this qualify as "(constructive) criticism"?

  9. 1. How much fiscal contraction do you think would have been required to offset the inappropriate real rates Spain had as a result of EMU?

    2. You presumably now think Germany should run a severely contractionary fiscal policy. What kind of effect do you think this would have on the rest of the euro-area?

    1. 1. I have no idea.

      2. I make no such presumption (what makes you think I do?)

  10. "what makes you think I do?"

    You said Spain should use fiscal policy to offset monetary policy.
    "presumably" that policy prescription is not limited to Spain, i.e. if Germany thinks monetary policy is too loose, it should use fiscal policy to offset that.

    1. Can you please quote the passage where I said that Spain "should" use FP to counteract MP?

  11. From Anon @ 747 and 1048: If you don't want to answer the question (#1) - which was a good faith attempt on my part to learn - then perhaps you could point me in the direction of what you think is the appropriate way/model to answer the question.

    1. Your question of "how much" X is required to offset Y is a quantitative question. It would require a quantified model to answer it. I am not aware of any such model. You might want to try to contact economists specialized in open economy macro. Enrique Mendoza is a name that comes to mind. He could pass you on to other references. Good luck (and please let me know what you discover). Regards. DA

  12. Thanks, David, I appreciate your response.

    I apologize for misquoting you: "could" rather than should.

    But what should Germany do? Or what should a state in the US do if they feel monetary policy is too expansionary? There seem to be political/social constraints on policy action, as (I think) you hinted at in your original post.

    1. can i add: "full employment" is a function of supply side issues (labor mobility, etc).

      Yglesias had a good post: what Germany needs is #more# supply side reforms that lowers the natural unemployment rate to 5%. they have lower-than-u.s. labor force participation and many other issues. now would be a good time, to alleviate inflation over the medium term.

      i would say the same for any state: lots can be done to draw out of state workers, etc. "supply side" does not have to be dirty words.

    2. "What should a state in the U.S. do if they feel monetary policy is too expansionary?"

      You know, that is an excellent question. The way I might think of it is as follows. Expansionary monetary policy is like a subsidy on economic activity. If a local authority believes there is "too much" subsidy, then they should reduce the subsidy. One way to reduce the subsidy would be to increase state sales and income taxes.

      The practical problem with this remedy is the classic one: fiscal policy is often deemed to respond too slowly to current economic conditions. But I think that this is a hurdle that can be overcome if there is enough political will to do so.

  13. "Speaking of strange preferences, here are Scott Sumner's preferences U(NGDP), where U(.) is strictly increasing and possibly convex."


  14. David,

    You don't understand. It was Germany's fault that their sluggish economy constrained the ECB from doing enough to stop Spain's housing bubble, and now it is Germany's fault for preventing a German housing bubble generating a boom to help the Spanish export their way out of this crisis ( http://macromarketmusings.blogspot.co.uk/2012/03/germany-stiffs-ecb.html ). It is just Germany's fault.

    I expect this weekend's G7 summit to agree 6 to 1 that Germany should be "decisive" and "step up to the plate" to help out the eurozone periphery with more spending and loan guarantees.

    1. This comment has been removed by the author.

    2. I'm sure I don't understand a lot of things. One thing I don't understand is how people can make such sweeping claims like "it's just Germany's fault." Come on now. The Spanish government had the fiscal tools to pop any local bubble. Heck, increase the tax rate to 100%. I guarantee you...no bubble.

    3. My sarcasm seems to have gone over your head!

      See my comment on David Beckworth's blog post for my view of the double standards by which Germany is being judged: http://macromarketmusings.blogspot.com/2012/03/germany-stiffs-ecb.html?showComment=1333141499415#c4493444108761276528

    4. RebelEconomist -

      That's funny! But cut me some slack -- it is VERY difficult to detect sarcasm in the comments section, given the wide range of opinions often expressed here!

      Thanks :)

  15. "May I suggest a policy of "export led growth" whereby all exports of goods and services can be delivered to my home address (I will offer, in payment, receipts that can be stored as wealth--but this is completely unnecessary, of course)."

    Very interesting idea. However, if you shift export destination from "you" to each country's government, doesn't this idea result in the fiscal stimulus policy which "Paul" strongly recommends? Moreover, he argues that we shouldn't worry too much about the resultant issuance of governments bonds, which somewhat sounds like your assertion that issuance of receipts that can be stored as wealth is completely unnecessary.

    1. There is no doubt that working hard to benefit your neighbor will keep you employed. Indeed, working hard for nobody's benefit in particular will also keep you employed. These may be "interesting" observations, but I'm not sure what is supposed to follow from them.

  16. "Germany got out of its turn-of-the-millennium doldrums by moving into a huge trade surplus, which is not possible for everyone"

    " I am happy to let the whole world (apart from myself) run a trade balance surplus. It is feasible, Paul."

    Everyone != Everyone but you. You are just proving Krugman's point- not everyone can run a trade surplus- at least one country (or person in your example) must run a deficit. Who will do this? I don't understand why you think this "is feasbile"- your own example shows that it is not.