April 17, 2013
"The Great Divergence of Policies"
The current global recovery has followed an unusual path compared with the three previous global recoveries. Specifically, the recovery following the Great Recession exhibits two types of divergences. The first is the sharp divergence of activity across advanced and emerging market economies, which we first noted in the April 2012 World Economic Outlook and that has continued since then. The second is the great divergence of monetary and fiscal policies, which has become increasingly pronounced during the past two years.
Of particular note is this statement:
...Even though monetary policy has been effective, policymakers had to resort to unconventional measures. Even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy. This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies. Four years into a weak recovery, policymakers may therefore need to worry about the risk of overburdening monetary policy because it is being relied on to deliver more than it traditionally has.
The differential behavior of government spending is illustrated in Figure 1.1.2. It is interesting to note the fact that government spending is most depressed relative to previous episodes in those cases where the recovery has been most lackluster.
Posted by Menzie Chinn at April 17, 2013 10:00 PMdigg this | reddit
What I see is the main difference is the rate at which countries move away from failed or ineffective economic policies. The list is already quite interesting, in that those policies viable during good economic times are being abandoned.
Posted by: CoRev at April 18, 2013 05:46 AM
My view is that these policies of higher government expenditures have to come early in a recovery. It is not productive to do them now because we are already up against the effective demand limit of the recovery.
I talk about this more in-depth in response to Adair Turner's call for Overt Money Finance. The result now would be higher aggregate prices with little boost to real output. This effect is what is being seen in Great Britain.
Posted by: Edward Lambert at April 18, 2013 08:02 AM
The link you provide is an example of the "I know stuff those other people don't know" form of argumentation. In particular, you claim that "Economists do not know about effective demand yet." Let us in on the secret - If economists don't know, who does? And if economists don't know "yet", when will they?
Malthus thought he knew about effective demand. Keynes thought Malthus knew about effective demand. Are you claiming that Malthus didn't know about effective demand, even though he thought he did? If Malthus and Keynes knew, then other economists probably know, too.
Now, sometimes, when somebody cooks up their own notion of how things work, they appropriate a term that is already in use. Often, it's because they are unaware of its alternate use. So, are you claiming that today's economists are unaware of a concept current in the time of Malthus and Ricardo, are you unaware that the term had been used by others, or are you appropriating a term that has long had a meaning and insisting that it has another meaning now? 'Cause it's gonna get confusing if you use a term that will make well-read people think "Oh, yeah, that whole 'Say's law' brouhaha" when you mean something else.
Posted by: kharris at April 18, 2013 09:21 AM
Reply to kharris...
The equation I use behaves as a limit upon utilization of labor and capital. Data since 1967 shows that. The equation behaves as Keynes envisioned effective demand imposing limits on output. The equation is based on effective labor income.
Now whether one labels the equation as effective demand or just the dynamic of limiting utilization of labor and capital, the effect is the same.
Now last night I wrote how the definition of effective demand in the Oxford dictionary is wrong. In this sense, economists don't fully understand effective demand yet. The behavior of "macroeconomic" effective demand as Keynes defined it is different from the definition in the Oxford dictionary.. here is the post...
Posted by: Edward Lambert at April 18, 2013 10:08 AM
Figure 1.1.2 is extremely misleading. Resources expended by the USA during the "Great Recession" are far greater than the 5 to 15% increase indicated by the graph. How about the $2 Trillion goose from QE 1&2? What about the $85 Billion/month from QE3? From my back of the envelope calculations, the FED's support of the banking, insurance, and pension markets is 27% of the Federal Budget!!! Add on to that about $91 Billion a month in federal deficit spending, we get a Total Federal Support equal to about 57% of total Federal Expenditures!!!!
Menzie, I consider this kind of sophistry very much beneath you..
Posted by: MarkS at April 18, 2013 12:25 PM
So, the charts tell us that the recession hit the OECD economies--all of them--and only the OECD economies. And all the OECD economies--all of them--are growing sub-par post recession.
And the charts tell us that the emerging economies are growing above pro forma expectations.
Is this coincidence or causality? If I understand your view, Menzie, this is all coincidence. It's just luck that China, Argentina and Indonesia are above par, and Japan, the US, Euro and Great Britain below par. There is no common thread, just luck of the draw. Or perhaps the coincidence is that the OECD countries all, all at once, managed to elect governments incapable of good governance and the non-OECD countries all managed to find governments providing good governance.
Is that the narrative?
Posted by: Steven Kopits at April 18, 2013 12:50 PM
In a related case, Thomas Herndon, Michael Ash, and Robert Pollin recently published a paper criticizing Rogoff & Rheinhart's paper "Growth in a Time of Debt" for statistical errors. Essentially, they conclude that the conjecture that GDP is inhibited at more than a 90% debt/GDP ratio is unsupported by the full data set... Get all the leads at http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/
Posted by: MarkS at April 18, 2013 02:10 PM
Economists may end up arguing over the definitions to avoid the real debate, but Edward has the flow right.
The developed world has literally topped out on demand relative to ability to sustain payments (i.e. real wages + ability & willingness to borrow in the face of globalized labor pressure). Consumers extended themselves to their maximal
credit limit (I would argue they went way beyond, like free climbing El Capitan...you either make it big, or die trying). They succeeded in creating the largest demand their income + credit would ever permit. Collectively, this period produced the largest demand the developed world could muster from the existing real wage foundation, even as globalization was eroding that real wage foundation in real time, and then it only took the smallest of metaphorical margin calls (a feather could've knocked over this heavily leveraged poorly underwritten credit structure, precariously balanced on an eroding foundation) which forced many folks to unwillingly unwind their credit (dump assets, reduce their demand) in a search for a more sustainable individual footing, and those who failed ended up in bankruptcy (or worse, non-dischargable zombie student debt which is still piling up while also draining future demand at completely unjustified usury rates when considering that it is government guaranteed debt....who charges 8%+ on government backed debt when the 30 Year TBond is sub 3%, except for corrupt politicians in concert with connected lenders).
Posted by: KnotRP at April 18, 2013 04:15 PM
CoRev said: those policies viable during good economic times are being abandoned.
This is a curious but all too common sentiment among conservatives. As a lot, conservatives seem to crave absolutes that are eternally true at all times and under all conditions. This sentiment informs conservative views of morality; they have a visceral reaction to situational ethics. Calling someone a "relativist" is seen as a devastating criticism. The search for eternal and incorruptible values is probably what's behind the peculiar "goldbuggism" you find in conservatives. And this same sentiment carries over to economics. Conservatives seek some kind of immutable policy that can serve as a kind of economic north star. And so we get conservatives thinking that it's forever 1979, with inflation always knocking on the door and top marginal tax rates at 70%. No matter what the immediate problem or actual economic conditions, the cure is always tax cuts for the rich and less government spending. I don't understand this sentiment, but I'm convinced it's deep in the primitive part of the conservative brain.
Posted by: 2slugbaits at April 18, 2013 05:50 PM
Another person who basically agrees with Edward on how the flow worked....
Too bad the solution is "waiting for godot".
Posted by: KnotRP at April 18, 2013 06:32 PM
2slugs, quite the rant. The political views, and to a large extent the politics of economics, center upon simple differences. Liberals believe that the government is the answer. Conservatives believe government is the problem, and not to be trusted. Almost all differences flow from this simple concept.
Since our country was founded largely on the conservative views, " And so we get conservatives thinking that it's forever..." possible to relive:
1764 - The Sugar Act was passed in 1764.
1765 - The Quartering Act was established on March 24, 1765.
1765 - In 1765, the British government started the Stamp Act.
1770 - The Boston Massacre occurred on March 5, 1770.
1773 - The Boston Tea Party took place on December 16, 1773, when colonists threw tea into the Boston Harbor.
1774 - The Administration of Justice Act became effective May 20, 1774.
1774 - The Boston Port Bill became effective on June 1, 1774.
1774 - The Massachusetts Government Act became effective on May 20, 1774.
1774 - The Quebec Act was established on May 20, 1774.
The conservative belief that we could/will eventually relive this same history drives the distrust of government actions.
The liberal belief that the Nazi, Russian, Roman, English/US, Cambodian, Chinese, Korean, Japanese, etc., etc., etc. history can/will never happen here.
Posted by: CoRev at April 19, 2013 05:12 AM
CoRev Falling back on triumphalist political theory based on whig history is what people do when they don't actually understand the economics. Basically your point comes down to "we don't need no stink'n economics, we got a libertarian vision."
In general liberals do favor a more activist role for government in terms of correcting for externalities, taxing monopoly rents, a greater tolerance for regulation, etc. But that's not the kind of government action we're talking about here. This discussion is about macroeconomic stabilization policies, which is not something that should fall along liberal/conservative lines...unless by "conservative" you mean some Ron Paul style crackpot Austrian goldbug crap. And you're way too old to believe in that nonsense. I can forgive a 19 year old college sophomore for being seduced by that kind of thing, but not a grown adult with many years under his belt. Bottom line is that this appeal to political differences is a dodge to hide the fact that you really don't understand macroeconomic stabilization. Take that community college course.
And while you're at the college registrar's office, you might want to sign up for some better history classes. Something that gets beyond the Mark Levin view. But in the meantime let me help you out. First, try reading the recent books on the Boston Tea Party by Benjamin Carp ("Defiance of the Patriots: The Boston Tea Party and the Making of America" or Harlow Unger's "American Tempest: How the Boston Tea Party Sparked A Revolution." For example, Harlow shows that far from being heroes, colonists viewed the Tea Party "Indians" as cowardly criminals motivated by private commercial interests who wantonly destroyed private property. In fact, the Tea Party criminals were held in such low repute that their identities only began to leak out 50 years after the event. In 1773 it was seen as a shameful act and was only re-imagined to bolster the American Revolution a few years later. Similar story regarding the Boston Massacre. Remember, John Adams defended the British soldiers and the best evidence we have today is that it was probably a colonist that inadvertently fired the first shot.
You also completely misunderstand the Founders. They were not proto-libertarians opposed to government intervention in the economy. State legislatures had their government fingers in just about every aspect of economic life. What some of the Founders opposed was federal government intervention. Try reading a little Bernard Bailyn to appreciate how the New York legislature stuck its nose into every aspect of economic life. That was just as true after the Revolution as it was before the Revolution. The Founders' view of liberty meant self-rule by local republican government; it did not mean libertarianism. And oh by the way, one of the very first acts by the very first Congress was to require private individuals to buy certain commodities. So much for the "Tea Party" wailings against Obamacare.
On to Roman history. The Romans world was probably more politically and economically free than you would be able to find 1500 years on either side of the Roman era. It was the Romans who developed the idea of cosmopolitan citizenship. And this was critical to Rome's rise to power. To understand this better let me recommend "Mediterranean Anarchy, Interstate War, and the Rise of Rome," by Arthur Eckstein. He focuses on the critical "middle Republic" period, but the idea of cosmopolitan citizenship carried deep into the Empire period. And 2nd century C.E. Rome was a period of small armies, relative peace and a surprising amount of economic freedom.
Posted by: 2slugbaits at April 19, 2013 02:54 PM
reply to KnotRP...
Sarah Raskin explains the dynamics, but it helps a great deal to have the model with equations. We now have it.
Posted by: Edward Lambert at April 19, 2013 04:30 PM
CoRev, one of the most "Conservative" areas of the US, the DC suburbs, is among the most dependent upon gov't war and homeland security contracts, sub-contracts, Pentagon consulting, transfers, subsidies, etc. Take away their double-wide feeding space at the DC slop trough, and these overfed piggies starve.
How many of these small-gov't hogs are calling for slashing "gov't spending" for imperial wars? I strongly suspect that the blood-curdling squeals of protest will drown out the few oinkers who might dare propose draining even slightly the slop trough for the hogs.
Posted by: Bruce Carman at April 19, 2013 06:58 PM
2slugs, I see you did the inevitable change the argument to a strawman then argue that.
My point: " Liberals believe that the government is the answer. Conservatives believe government is the problem, and not to be trusted.
The conservative belief that we could/will eventually relive this same history drives the distrust of government actions.
The liberal belief that the Nazi, Russian, Roman, English/US, Cambodian, Chinese, Korean, Japanese, etc., etc., etc. history can/will never happen here."
Your point actually confirmed my description of liberal thinking. " But that's not the kind of government action we're talking about here. This discussion is about (You just forgot to add government) macroeconomic stabilization policies,..."
Posted by: CoRev at April 19, 2013 07:19 PM
CoRev Well, I don't see how I was changing the argument. You made some historically inaccurate implications that needed correcting.
Instead of making some rather cryptic and disjointed references to Korea, China, Nazi Germany and the Roman Empire, why not explain yourself? And I really don't have a clue what you mean by "English/US...history can/will never happen here."
(You just forgot to add government) macroeconomic stabilization policies
So are you claiming that government macroeconomic stabilization policies put us on the slippery slope to Nazi Germany, Stalinist USSR, Maoist China, Pol Pot Cambodia or the Roman Empire under Elagabalus? Are you really that far out in bizarroland?
And what do you have against the Roman Empire? Did you spend too many nights watching "Spartacus" episodes on Starz?
Posted by: 2slugbaits at April 20, 2013 05:59 AM
2slugs, I'm LOL! Just more confirmation how the liberal mind can not relate to conservative beliefs re: the value of many (not all) government actions and historical descriptions of oppressive dictatorships.
Not here! Not ever, huh?
Posted by: CoRev at April 20, 2013 08:35 AM
CoRev Quit the Sphinx act and speak plainly. How exactly are (government) macroeconomic stabilization policies related to "oppressive dictatorships"?
Maybe it would help those of us with a "liberal mind" better understand if you would make an effort to clearly express what you're trying to say. Try that instead of crazy and unexplained references to Nazi Germany, the Boston Tea Party and ancient Rome.
Posted by: 2slugbaits at April 20, 2013 10:08 AM
2slugs, I can not speak any more clearly to make your mind understand the fundamental differences in priorities. Nor will I follow the path of straw to your man.
Posted by: CoRev at April 20, 2013 12:25 PM
"Liberals believe that the government is the answer. Conservatives believe government is the problem, and not to be trusted."
This is of course completely backwards. Liberals by definition believe in limited government.
And if you want to go back to events leading up to the American revolution, this is even more clear. Liberals of course supported the revolution, conservatives supported the crown. And the founding fathers borrowed heavily from such liberal thinkers as Locke and Montesquieu. The conservatives of the time were people like Samuel Johnson, who wrote "Taxation No Tyranny".
Posted by: acerimusdux at April 20, 2013 12:48 PM
acerimusdux, you are absolutely correct for the pre/early post revolutionary period. But we are talking about today's definitions, and I stand by my definition: "Liberals believe that the government is the answer. Conservatives believe government is the problem, and not to be trusted."
Political parties change positions. It is amazing how today's political parties have morphed and changed positions.
Posted by: CoRev at April 20, 2013 04:26 PM
CoRev Conservatives believe government is the problem, and not to be trusted."
But yet I'd be willing to bet dollars to donuts that in 1972 you voted for Richard Nixon. Your political views are almost the definition of cognitive dissonance.
Posted by: 2slugbaits at April 21, 2013 12:50 PM