Links for July 17, 2017

The action is on the asset side. Arjun Jayadev, Amanda Page-Hoongrajok and I have a new version of our state-local balance sheets paper up at Washington Center for Equitable Growth. It’s moderately improved from the version posted here a few months ago. I’ll have a blogpost up in the next day or two laying out the arguments in more detail. In the meantime, here’s the abstract:

This paper … makes two related arguments about the historical evolution of state-local debt ratios over the past 60 years. First, there is no consistent relationship between state and local budget deficits and changes in state and local government debt ratios. In particular, the 1980s saw a shift in state and local budgets toward surplus but nonetheless saw rising debt ratios. This rise in debt is fully explained by a faster pace of asset accumulation as a result of increased pressure to prefund future expenses… Second, budget imbalances at the state level are almost entirely accommodated on the asset side – both in the aggregate and cross-sectionally, larger state-local deficits are mainly associated with reduced net asset accumulation rather than with greater credit-market borrowing. …


What recovery? One of the central questions of U.S. macroeconomic policy right now is whether the slow growth of output and employment over the past decade are the result of supply-side factors like demographics and an exhaustion of new technologies, or whether — despite low measured unemployment — we are still well short of potential output. Later this month, I’ll have a paper out from the Roosevelt Institute making the case for the latter — that there is still substantial space for more expansionary policy. Some of my argument is anticipated by this post from Simon Wren-Lewis, which briefly lays out several ways in which a demand shortfall can have lasting effects on the economy’s productive capacity — discouraged workers leaving the labor force; reduced investment by business; and slower technical progress, because a slack economy is less favorable for innovation. He concludes: “There is no absence of ideas about how a great recession and a slow recovery could have lasting effects. If there is a problem, it is more that this simple conceptualization” — textbook model in which demand has only short-run effects — “has too great a grip on the way many people think.”

Along the same lines, here is a nice post from Adam Ozimek on the “mystery” of low wage growth. The mystery is that despite low unemployment, annual wage growth (as measured by the Employment Costs Index) has remained relatively low – 2 to 2.5 percent, rather than the 3 to 3.5 percent we’d expect based on historical patterns. (Ozimek doesn’t mention it, but total compensation growth — including benefits — is even lower, less than one percent for the year ending March 2017.) But, he points out, this historical relationship is based on measured unemployment; if we use the employment-population ratio instead, then recent wage gains are exactly where you’d expect historically. So the behavior of wages is another piece of evidence that the official unemployment rate is underestimating the degree of labor market slack, and that the fall in the employment-population ratio reflects — at least in part — weak demand rather than the inevitable result of worse demographics (or better video games).


The bondholders’ view of the world.  Matthew Klein has a very enjoyable post at FT Alphaville taking apart the claim (from three prominent academics) that “The French Revolution began with the bankruptcy of the ancient regime.” This is, of course, supposed to illustrate the broader dangers of allowing sovereigns to stiff bondholders. But in fact, as Klein points out, the old regime did not default on in its loans — Louis XVI went to great lengths to avoid bankruptcy, precisely because he was afraid of the reaction of creditors. Further: It was the monarchy’s efforts to avoid default — highly unpopular taxes and spending cuts, then the calling of the Estates General to legitimate them — that set in motion the events that led to the Revolution. So the actual history — in which a government was overthrown after choosing austerity over bankruptcy — has been reversed 180 degrees to fit the prevailing myth of our times: that good and bad political outcomes all depend on the grace of the bond markets. As Klein says, this might seem like a small mistake, but it is deeply revealing about how ideology operates: “ Whoever introduced it must have been working off what he thought was common knowledge that didn’t need to be checked. There is no citation.”

Klein’s piece is also, in passing, a nice response to that silly Jacob Levy post which argues that democracy and popular sovereignty are myths and that modern states have always been ruled by the bondholders. Levy offers zero evidence for this claim; his post is of interest only as a signpost for where elite discourse may be heading.


Don’t blame Germany. Here is a very useful paper from Enno Schroeder and Oliver Piceck estimating the effects of an increase in German demand on other European economies. They use an input-output model to estimate the effect of an increase in spending in Germany on output and employment in each of the other 10 largest euro-area countries. One of the things I really like about this is that it does not depend on either econometrics or on any kind of optimization; rather, it is simply based on the observable data of the distribution of consumption spending and of intermediate inputs by various industries over different industries and countries, along with the fraction of household income consumed in various countries. This lets them answer the question: If spending in Germany increased by a certain amount and the composition of spending otherwise remained unchanged, what would the effect be on total spending in various European countries? Yes, they ignore possible price changes; but I don’t think it’s any less reasonable than the conventional approach, which goes to the opposite extreme and assumes prices are everything. And even if you want to add a price story, this approach gives you a useful baseline to build on.

Methodology aside, their results are interesting and a bit surprising: They find that the spillovers from Germany to other European countries are surprisingly small.

Our main finding suggests that if Germany’s final demand were to exogenously increase by one percent of GDP, then France, Italy, Spain, and Portugal’s GDP would grow by around a 0.1 percent, their unemployment rates would be reduced by a bit over 0.1 points, and their trade balances would improve by approximately 0.04 points. The spillover effects on Greece are significantly smaller.

Given how much larger Germany is than most of these countries, and how tightly integrated European economies are understood to be, these are surprisingly small numbers. It seems that a large proportion of German demand still falls on domestic goods, while imports come largely from the euro area — particularly, in the case of intermediate goods, from the former Warsaw Pact countries. As a result, even

if a German demand boom were to materialize, France, Greece, Italy, Spain, and Portugal would not benefit much in terms of growth and external adjustment. The real beneficiaries would be small neighbors (e.g. Austria and Luxembourg) and emerging economies in Eastern Europe that are well integrated into German supply chains (e.g. Czech Republic and Poland).

Of course, this doesn’t mean that more expansionary policy in Germany isn’t desirable for other reasons. (For one thing, German workers badly need raises.) But for the balance of payments problems in Southern Europe, other solutions are needed.


Today’s conventional is yesterday’s unconventional, and vice versa. Here is a useful NBER paper from Mark Carlson and Burcu Duygan-Bump on the conduct of monetary policy in the 1920s. As they point out, much of today’s “unconventional” policy apparatus was standard at that point, including large purchases of a range of securities — quantitative easing avant le lettre. As I’ve written on this blog before (here and here and here) discussion of monetary policy is made needlessly confusing by economists’ habit of treating the policy instrument as having a direct, immediate link to macroeconomic outcomes, which can be derived from first principles. Whereas anyone who reads even a little history of central banking finds that the ultimate goal of control over the pace of credit expansion has been pursued by a wide range of instruments and intermediate targets in different settings.

Also on the mechanics of monetary policy, I liked these two posts from the New York Fed’s Liberty Street Economics blog. They do something which should be standard but isn’t — walk through step by step the balance sheet changes associated with various central bank policy shifts. In my experience, teaching monetary policy in terms of balance sheet changes is much more straightforward than with the supply-and-demand diagrams that are the basic analytic tool in most textbooks. The curves at best are metaphors; the balance sheets tell you what actually happens.

12 thoughts on “Links for July 17, 2017”

  1. re: What recovery?
    Recently I’ve been thinking about why Marx disliked the term “underconsumption” and preferred the term “overproduction”, although the two are under many points of view the same thing.
    I think that the main reason is this: the term “underconsumption” impies that there is a consumption level where crises don’t happen, and therefore is stable.
    For example, as many underconsumption theories are based on the assumption that workers save less and thus a low wage share causes underconsumption, we would have a certain situation where the wage share is, say, 60%, and this causes underconsumption, but at an higer level of say 70% there would be no underconsumption so the economy would be stable.
    However, what if this level doesn’t exist or is so high that isn’t attainable in a capitalist economy (like 100%)?
    Then we would have booms, where the “excess production” is channelled into investiment, and then when for whatever reason there aren’t new investiment venues we have an “overproduction” crisis, and the economy goes in tailspin. But we wouldn’t have a “normal” level around wich the conomy “gravitates” (a metaphor from Shaik), but rather an economy that constantly jumps up and then falls down.

    Reversing this argument into a keynesian framework, keynesianism assumes that there is a certain situation that we can call “full employment”, at least approximately, where all “unvoluntary unemployment” disappears a part from transitional unemployment and “voluntary” unemployment.
    But, the distinction between voluntary and unvoluntary unemployment is rather dubious and sounds like moralising about “deserving” and “undeserving” unemployed.
    For example, suppose that John wants a job, and he expect to be paid 100$, but then the only offers he gets are at 80$ so he refuses. Is he a voluntary or unvoluntary unemployed? If we assume that there is a “natural” wage level, it depends on whether 100$ is above the natural wage or not. But If the wage level depends on unemployment, this distinction fades: for example John initially refuses the 80$ job, but when his spouse becomes unemployed he accepts it because he needs the money more. So as the wage level that workers can negotiate from employers changes with unemployment, the distinction between voluntary and unvoluntary unemployment sort of disappears.

    If we think in thoese terms, “full employment” doesn’t really exist, or rather is some sort of “potential” level that is unobtainable in pratice, such as when enough workers are employed that they can push the wage share to 100%.
    Rather, we should think of “high pressure” or “low pressure” economies.

    I think that for a certain period the economic policy was to keep the economy constantly at high pressure, whereas today we have a policy of keeping the economy at low pressure. I think it’s also possible that the “normal” state of capitalism low pressure, and the economic policies of the postwar era kept the economy at an higher than natural pressure.

    1. I basically agree – it makes more sense to think of a continuum from high-pressure to low pressure than of a unique level of “full employment” or “potential output.” However, the policy debate is conducted in terms of such a level and there is actually a good reason for that — policy has to have some definite target. I must admit I get a bit impatient when people — not you, but some mainstream folks I’ve had this debate with — respond to arguments that we are still below potential with arguments of the form “but what is potential really anyway,” when they are perfectly happy to use the official estimates in other contexts.

  2. Re: Don’t blame Germany.
    I think that there are various implicit theories about the umbalances in the EU, that often are treated as equivalent but actually aren’t.

    1) the “german view” that was the base of the policies against Greece: the idea is that souther Europe is uncompetitive because wages are too high; therefore, the correct answer is to smash wages down in souther Europe. This actually requires a big crisis in souther Europe, since wages don’t fall by themselves, plus “flexibility” laws that lower bargaining power of workers so that wages fall faster and then the crisis might last less.
    If you have this theory about souther europe, then the austerity policies imposed on Greece make sense. It is also a morality play about lazy greeks that live on government largess, ultimately paid by hard working germans.

    2) the “Krugman view” isn’t all that different from the german view: The southeners are still overpaid, but since we assume some nominal rigidity, it’s faster to have inflation in the euro area so that southern wages fall (inflation in prices but not in wages), while northeners wages for some reason go up with inflation so they become less competitive, so that the EU on the whole stays more or less neutral in terms of net imports (as was before the 2008 crisis).
    Here umbalances are caused exclusively by nominal rigidities in the exchange rate, that cause different levels of “competitivity”.

    3) the “northern underconsumption view” where the problem is that germans are conuming too few and this causes problems for souther Europe.
    This seems to be the view that the paper is trying to assess.
    But first of all, it isn’t all germans that are consuming too few (german households do have high debt levels), the problem would be to redistribute income from german businesses to german households.
    Now this high level of profits might well be caused by the low wages in eastern Europe rather than in Germany itself (german right wing economist H.W. Sinn is also of this opinion, though for some reason his answer is to lower german wages even more).
    In fact the idea that the german government should run huge deficits is also problematic, since the “excess saving” doesn’t come from the german government but from german businesses, so it’s them who should be “dissaving” to square the circle.

    1. Right. Part of the question here is how closely linked northern surpluses are to southern deficits. It’s natural to suppose they are but it needn’t be the case. My impression — which this paper tends to confirm — is that at this point southern Europe does not provide an important share of either German imports or exports. One obvious piece of evidence for this is that the past few years have seen a big improvement in the current account balances of peripheral Europe without any decrease in the German surplus.

      it isn’t all germans that are consuming too few (german households do have high debt levels)

      Are you sure? My impression is that debt is quite low in Germany — in large part because homeownership is relatively rare there. This survey is a few years old, but it shows median household debt in Germany at 12,600 euros — lower than any other major European country, lower even than Greece. And I’m pretty sure that consumption for the great majority of German households has been stagnant in the past 20 years, tho I don’t have a link handy.

      1. It looks like Germany’s household debt to GDP is falling continuously since at least 2005, which caused my misunderstanding (my opinions on Germany’s debt are more than a decade late!).
        Italy and Spain have very different patterns:

        Austerity works then?!? (apart from the huge jump in household debt in Italy in 2009-2010)

        1. Without knowing the details, I’d guess that there is some change in definitions or coverage in the Italian data in 2010.

        2. Thank you for highlighting the paper!

          Yes, German households and also non-financial firms were **deleveraging** in the run-up to the crisis. They entered the global financial crisis with healthy balance sheets. The healthy balance sheets I think can explain part of the relatively good economic performance during the Great Recession — there was no balance sheet recession in Germany.

          Regarding your other comments: many commentators used to view the German surplus as the mirror image of the Southern deficit. Because for the euro area as a whole, trade with the rest of the world was balanced. Therefore, the argument went, if you bring down the German surplus, you support adjustment in the South. That reasoning is clearly wrong; it would apply if the euro area was a closed system. Today the Southern deficits have vanished and the German surplus has survived. Not many people argue along these lines anymore. But it was a motivation for writing the spillover paper.

  3. Josh (JW? Professor Mason? Our esteemed host?) recommended some books five years ago or so, and I’m finally getting around to reading them (hey I’ve got two small kids so cut me some slack). Here is my extremely brief report. Minsky’s JMK is great but maybe not totally worth the effort. Keynes’s GT is a blast. I think the best thing about it is his general approach, even more so than his models. I mean, there’s a new model every four pages or so, so it’s a lot to take in. I spent a couple of hours at my local university library reading Keynes’s collected writings from around the time he wrote the GT: Hayek seemed unable to form coherent questions about it, Roy Harrod struggled a lot but I think eventually got it. I think the only person who was in sync with him was Joan Robinson. Anyway, I can appreciate how the New Keynesians etc went wrong. It’s hard.

    Lance Taylor’s “Maynard’s Revenge” was excellent. I’ve never seen it mentioned anywhere other than here and that’s really too bad. I would have liked chapter two (“Macroeconomic Thought during the Long Nineteenth Century”) more if it had been three hundred pages longer. I’m not sure the book would have made any sense if I hadn’t heard of most of it already, but I got a lot out of how Taylor puts it all together. His chapter on international macro is the only thing I’ve ever read about international that’s made any sense to me. I especially enjoyed his treatment of balance-of-payments flows in recent decades.

    Anyway, I’ve got about a zillion more books left on my list, but reading this blog for years (time flies!) has spoiled most of the good parts already (“What Adjusts,” for example), so I don’t know why I bother reading books. Keep it up, Josh!

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