We’re on the radio…

By skepticlawyer

This week, we published Lorenzo’s cracker of a guest post on the slow demise of the Euro, and someone at ‘Aunty’ ABC must have noticed, because he’s been interviewed on the strength of it.

The show in question is called ‘Counterpoint‘, and airs on Monday October 17th. The show itself starts at 16:05; Lorenzo’s segment will air at about 16:20. The interviewer is publisher Michael Duffy (I know the latter a little, although haven’t spoken to him for many years). Apparently we get a mention too, so there will no doubt be visitors via the ABC website.

In the interval, of course, do feel free to chat away in this thread. There are more great posts coming this week (for those who like this sort of thing!), including what I think will be the definitive commentary on Eatock v Bolt (by Legal Eagle), a follow-up from Lorenzo to my piece on Europe’s resurgent paganism and a piece of mine on why we ought to be harder on hypocrites, as David Cameron stands back and allows Defence Secretary Liam Fox to fall on his ministerial sword.

19 Comments

  1. Posted October 23, 2011 at 11:44 am | Permalink

    Market Monetarist bloggers have just about universally praised Clark Johnson’s short and accessible paper taking apart six myths about (US) monetary policy in the current debacle.

    I agree, it is required reading if you want to understand our current circumstances.

  2. Posted October 23, 2011 at 12:12 pm | Permalink

    Getting back to the eurozone, this excellent guest post by Henry Kaspar explains how important economic adjustment is.

    If you reduce your unit labour costs, investors conclude you can grow out of your debt problems and your borrowing costs fall (Ireland, and to a lesser degree, Spain). If you do not, they get nervous and your borrowing costs rise (Portugal and Italy).

    Sclerotic, massively over-regulated labour markets are at the heart of much of Europe’s problems. They make having children more expensive (since women’s capacity to work and raise children is greatly reduced), reducing fertility rates helping to create seriously adverse demographics. They waste human resources, driving down revenue and up welfare expenditure. They encourage Muslim alienation.

    But protecting job-incumbents (including government bureaucratic job-incumbents) remains the political winner, so European labour markets mostly continue to be over-regulated disaster areas.

  3. TerjeP
    Posted October 23, 2011 at 1:05 pm | Permalink

    [email protected] If long term growth in y is about 3% and NGDP growth is set at say 5% and people believe that the central bank has that spending target and will keep to it, then prices are going to grow around 2%pa.

    If you grow Py at 5% come hell or high water then when y is growing at minus 7% you will be running growing P at 13%.

    In short you are saying that Greece needs an inflation rate of 13% right now (13 + -7 = 5). That seems nuts. And if the economy declined even worse under your prescription you would have the monetary authority push inflation even higher.

  4. TerjeP
    Posted October 23, 2011 at 1:48 pm | Permalink

    Actually your formulation was based on growing nominal GDP by 5% not Py. However that still leaves you with a crazy policy prescription. To turn a real GDP growth rate of -7% into a nominal GDP growth rate of 5% you still need inflation at 13%. And the ’70s in the USA showed that ramping up inflation does not turn a recession into growth. It just created stagflation.

  5. TerjeP
    Posted October 23, 2011 at 1:50 pm | Permalink

    Excuse my math. 12% inflation not 13%.

  6. kvd
    Posted October 23, 2011 at 2:58 pm | Permalink

    [email protected] I must be missing something here.

    If Py is affected by a 2% increase in y, then an increase of 3% in P would overall result in a touch over 5% in Py. Put another way, 1.05%(Py) is just slightly less than (P*1.03)*(y*1.02) – I think.

    But I could be wrong, and the Rugby’s about to divert further thought, other than spitting in the general direction of the French 😉

  7. TerjeP
    Posted October 23, 2011 at 4:10 pm | Permalink

    Yes but in Greece at the moment y isn’t growing by 2%. it is growing by -7%. And hoping that 5% growth in Py or in NGDP will translate into modest growth and modest inflation is just a big wish. It presumes more of monetary policy than it can deliver.

  8. Posted October 23, 2011 at 4:33 pm | Permalink

    [email protected] Three points. First, this is forward-looking. To get a 5% growth in nGDP from its new (lower) base you would only have to get a 13% increase in prices if you think the output of the Greek economy is AGAIN going to fall by 7%. (In which case, they are so screwed.)

    Second, the whole point is to get a recovery in y. If the GDP has just fallen by 7%, there is a lot of unused capacity, this is not the supply-constrained economies of the 1970s. (Particularly if you are adding in liberalising reforms, which are all about getting rid of supply constraints.)

    Third, nor is it the spending-glutted economies of the 1970s, which had double digit nominal spending increases year after year. Do read Clark Johnson’s paper (my link @101). Or Douglas Irwin’s paper (pdf) I also linked to in my original post.

    We really are going through a repeat of 1929-32 in policy debates, except instead of people obsessing over the inflations/hyperinflations of the early 1920s people are now obsessing over the stagflation of almost 30 years ago even though circumstances are now so different than they were in the 1970s.

    We look back at the policy debates of the 1929-32 and see the concern with the inflation-bogey (apart from a few lonely voices such as Gustav Cassell and R G Hawtrey) and wonder “what WERE people thinking”?

    While it is still odd, I understand more now. It is as AJP Taylor said: people do not hesitate to learn from the mistakes of history so they can make new ones. Except now, we are making a new version of old ones. Yes, the lesson of stagflation is year after year of double digit nominal spending is bad, particularly in economies which have built up a whole lot of supply-constraining interventions.

    But the one thing the Market Monestarists are NOT proposing is year after year of double digit spending growth: they are proposing a target of single digit nominal spending growth.

  9. Posted October 23, 2011 at 4:36 pm | Permalink

    That should be ‘If rGDP has just fallen by 7%” and “year after year of double digit nominal spending increases is bad”.

  10. Posted October 23, 2011 at 4:40 pm | Permalink

    I would also point out that that 7% drop in Greek rGDP was under a monetary regime which only cares about stabilising P.

  11. TerjeP
    Posted October 23, 2011 at 5:58 pm | Permalink

    Particularly if you are adding in liberalising reforms, which are all about getting rid of supply constraints.

    Well we agree on that much.

    I don’t know how you can say the 1970’s were supply constrained when so much labour was sitting idle. And I think you are somewhat presuming that supply factors are fungible. That an idle doughnut factory can suddenly make ball bearings. With constraints on public spending now biting the nature of supply needs to change. Public sector workers need to move to the private sector and there is friction in that process. I don’t see inflation accelerating things.

    Also I don’t have good numbers but most of the Greek decline appears concentrated in the domestic supply sector. The export sector seems to be down but not so badly. This suggests that a softer exchange rate may be of limited consequence if export supply isn’t so idle.

    Also even under the euro there will be an influx of funds to Greece as soon as the investment environment is right. That is where their focus should be.

  12. Posted October 23, 2011 at 7:01 pm | Permalink

    [email protected]

    I don’t know how you can say the 1970?s were supply constrained when so much labour was sitting idle.

    And here was me thinking that all that de-regulation, privatisation and corporatisation might have had something to do with getting rid of supply constraints.

    And I think you are somewhat presuming that supply factors are fungible. That an idle doughnut factory can suddenly make ball bearings.

    Depends on the factors and how much official approvals, etc are needed for what. Greece is notorious for under-employed bureaucrats and over-required permits.

    I don’t see inflation accelerating things.

    You continue to obsess about inflation. It is not “inflation” that increases output that is not supply constrained, it is demand and that means spending.

    If money is being held back, then changing opportunity costs via changes in expected inflation will have an effect, but that is probably not so much Greece’s position. The point is to create expected demand via expected spending.

  13. TerjeP
    Posted October 23, 2011 at 8:14 pm | Permalink

    And here was me thinking that all that de-regulation, privatisation and corporatisation might have had something to do with getting rid of supply constraints.

    Yes but that is not unlike the situation in Greece.

    Greece can’t afford the public sector services it was buying previously. So supply needs to change.

    If though for the sake of argument you are right that spending can increase and there are idle factors of production that will in turn pick up the slack then the outcome won’t be inflationary. It will simply be a quantitative easing without inflation implications.

  14. Posted October 24, 2011 at 1:42 pm | Permalink

    [email protected] That Greece needs liberalising reforms is a given. Its problems are not monetary in origin, although monetary policy is making them worse.

    So, I agree with what you are staying there, except that the trouble with “quantitative easing(s)” is they lack credibility. The point is to change the monetary regime and be seen to be doing so.

  15. Mel
    Posted October 25, 2011 at 6:14 pm | Permalink

    Even some of the goons from the gonzo Right now recognise Krugman is the messiah who will lead the US out of the wilderness

  16. TerjeP
    Posted October 25, 2011 at 6:15 pm | Permalink

    Thanks for taking the time to argue with me. 🙂

  17. Posted October 26, 2011 at 1:40 am | Permalink

    [email protected] David Frum is roughly the equivalent of Malcolm Turnbull or Petro Georgiou. Describing him as “gonzo Right” is odd, to say the least.

    Also, the list of things Krugman got right is a list of things that quite a lot of economists picked: notably the “Market Monetarists”, few if any of whom are on the left.

    Frum is right on one thing: the WSJ opinion page has been consistently appalling. David Glasner, in his Uneasy Money blog, has repeatedly torn into them. But for brutal skewering, I recommend Scott Sumner’s post on the subject.

  18. Posted October 26, 2011 at 1:43 am | Permalink

    [email protected] My pleasure: it has been a useful exercise for me in clarifying issues. I also appreciate the civility of our discussion 🙂

  19. Posted November 10, 2011 at 9:24 am | Permalink

    [email protected] Our debate helped when writing my monetary policy post (On the stupidity of [some] Central Banks). Scott Sumner provides a nice clear exposition of the case here.

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