Tag: Macroeconomics

The Worst May Not Be Behind Us

Two days ago, I posted James Hamilton’s blog entry on Friday’s GDP numbers and suggested that the 1.6% growth in GDP was not as depressing as it might seem.  Primarily, I noted that inventory growth had slowed and imports had risen.  The latter might be viewed as demonstrating renewed economic strength whether the imports reflect increased household consumption and household income (which they do) or increased business purchases of intermediate inputs (which they also do.)

In today’s Financial Times, economists Carmen and Vincent Reinhart summarize their address given last week at the Kansas City Feds’ annual symposium which features central bankers from all over the world.  The Reinharts warn us that financial crises of the sort we are emerging from do not generate robust rebounds.

Such optimism, however, may be premature. We have analysed data on numerous severe economic dislocations over the past three-quarters of a century; a record of misfortune including 15 severe post-second world war crises, the Great Depression and the 1973-74 oil shock. The result is a bracing warning that the future is likely to bring only hard choices.

But if we continue as others have before, the need to deleverage will dampen employment and growth for some time to come.

Although aggressive use of fiscal and monetary policies may be necessary to avoid the risks of economic depression, they are no substitute for changes in expectations and economic structure required to find a stable long term economic growth path.  Attempts to avoid such “creative destructive” will only deepen the cost of the inevitable adjustment that must take place.

What Should Central Bankers Do To Address PLOGs?

Obviously, to answer this question begs another:  What’s a PLOG? or perhaps:  Should we view central bankers as plumbers?  PLOG, a term coined by IMF economist Andre Meier, refers to Persistently Large Output Gap  or positive deviation between potential GDP and measured GDP.  The big concern raised by the LEX column in today’s Financial Times regards whether central bankers should worry about a deflationary double dip recession.  As Lex puts it:

“The supposed PLOG-effect creates a dilemma: the Scylla of deflation or the Charybdis of extraordinarily easy monetary policy.”

Based on Meier’s study of 25 episodes in advanced economies, Lex argues that recessions slowly reduce inflation rates and generally stop prior to serious deflation.  Therefore,  central bankers should not become preoccupied with such a threat.  Indeed, attempts to further stimulate economies such as ours with monetary policy is likely to be ineffective (or to use the proverbial idea: it’s like pushing on a string.)

I find the final sentence of the opinion piece particularly instructive.

“And while a PLOG may not create deflation, it can only amplify the grim economic effects of over-indebtedness, whatever policies central bankers adopt.”

Surprise! Paul Krugman Begs to Differ.

For those of you who wish to see a response to Rajan’s  (and my) argument posted earlier today, Paul Krugman in a NY Times blogpost makes the standard Keynesian case for full fledged stimulus.  He even criticizes our hero Schumpeter.  The battlelines are drawn between short term and long term thinking.

To Spend or Not To Spend…

Most economists haven’t really been thinking about this issue, they haven’t really focused on it. It’s not their specialty. Most economists today, they haven’t really been thinking about this kind of multiplier issue… I don’t think most economists are focused on this, or that they’re familiar with the empirical evidence. I don’t think they’ve really worked on the theory. So I don’t know, maybe they have some opinion that they got from graduate school or something. — Robert Barro in The Atlantic Monthly

Even if by accident, you’ve probably noticed that there is an on-going debate on whether a massive government spending campaign is needed to “prime the pump” to stimulate the economy (the Keynesian route), or whether fiscal discipline (austerity) is in order. Last week, most members of the G-20 (but not the US) came down on the side of austerity.

As a trained economist, I know the basic institutional details and understand the basic arguments, but as Barro suggests, I have no great insight on the empirics or which side of the debate is likely to be correct.

Certainly, the primary mouthpiece for the pro-spend crowd is recent Nobel Prize winner, Paul Krugman.  In a recent column, he tears into those who promote “austerity”:

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good.

Of course, not all economists agree with Krugman’s assessment. In addition to our friend Hayek, Robert Barro is pretty clearly on the austerity side. This interview with Barro is a good place to see a sketch of the battle lines in the debate, and certainly indicates that he and Krugman are not on particularly friendly terms.  This week, Harvard professor Alberto Alesina is getting some press for his advocacy of austerity measures. And, as for the regime uncertainty argument that Krugman caricatures, I would recommend Robert Higgs as the central proponent of that idea.

As for me, I am not sure exactly what I learned in grad school that prepares me to take a side in this debate. What I find interesting is that most people who engage me in a discussion seem to think the Keynsian spending route is the way to go, and many of these folks invoke Krugman on this point as if Krugman is the voice of the profession. As today’s Krugman piece indicates, he seems to think that many in the profession are moving in quite the opposite direction. It’s not clear to me whether this boils down to pre-conceived ideology or not, but that is certainly his claim.

I guess I will leave it at that.

UPDATE: Keynes v. Hayek in print. Commentary here.