Posts Tagged ‘Nick Rowe’

Nick Rowe on macroeconomics

Sunday, December 18th, 2011

Nick Rowe is amazing!

There’s something really wrong with the way we do short run macroeconomics. We focus all our attention on the output of newly-produced goods and services. That’s what we call “Y”. We talk about Aggregate Demand and Aggregate Supply, and what we mean by AD and AS is the demand and supply of those same newly-produced goods and services.

Keynesians then go on to divide Y into C+I+G, and C+S+T. Monetarists talk about MV=PY. Both agree that a recession is a fall in Y, caused by a drop in demand for Y.

But a moment’s reflection tells you this is wrong. It’s not just new stuff that is harder to sell in a recession; it’s old stuff too. New cars and old cars. New houses and old houses. New paintings and old paintings. New furniture and antique furniture. New machine tools and old machine tools. New land and old land.

If you want to sell new stuff in a recession, you have to either drop the price, or not sell it. If you want to sell old stuff in a recession, you have to either drop the price, or not sell it. And some people can’t or won’t drop their price, and some stuff doesn’t get sold. That’s true for both new and old. There is absolutely nothing special about new stuff.

[continued at the link below]

Nick Rowe, “Why Y? A disproof of Keynesian macroeconomics?“, Worthwhile Canadian Initiative”, 18 December 2011.

Why couldn’t I have had a macro professor like Nick Rowe? With that good fortune, I might have become a macroeconomist. Instead, since graduating, I have done my best to avoid macroeconomics. The truth is, my macroeconomics classes were incredibly boring. (Sorry, if I offend any of my macro professors who might be reading this blog. But I speak truthfully.)

DeLong defends Stiglitz

Saturday, December 17th, 2011

Berkeley economist Brad DeLong defends Joseph Stiglitz  – but only his coherence, not his relevance – writing that Stiglitz, in the Vanity Fair essay, must be assuming that consumers who benefit from lower prices have a low propensity to spend compared to the stressed producers:

Rapid technological progress in a very large economic sector (agriculture then, manufacturing now) leads to oversupply and steep declines in the sector’s prices. Poorer producers have less income. They come under pressure to cut back their spending. Others–consumers–are now richer because they are paying less for their food (or their manufactures), but their propensity to spend is lower than that of the stressed farmers or ex-manufacturing workers.

Brad DeLong, “I Don’t Fully Buy Stiglitz’s Argument That Our Macro Problems Have Deep Structural Roots. But I Do See Its Coherence“, Brad.DeLong, 16 December 2011.

Nick Rowe, commenting on DeLong’s post (December 16, 2011 at 03:17 PM), asks:

Where does Stiglitz say that? Suppose his argument is that: (1930) farmers had a higher marginal propensity to spend than manufacturers; (2008) manufacturers had a higher marginal propensity to spend than people in the service sector. Wouldn’t he have made that assumption explicit, and spent some time defending that assumption? In my reading, he totally ignored the increase in real income of those in the sector with rising terms of trade. He jumped straight from a decline in farm incomes into multiplier analysis.

A reader (“jeff”) responds (at 04:32 PM):

Nick, on your thread someone pointed out that in another paper published this year he wrote a sketch of this argument where he says that “But more generally, distribution matters: if prices of agricultural goods fall rapidly, farmers reduce their spending by more than urban workers and rentiers increase their spending. Aggregate demand thus falls. More generally, with both supply and demand concave functions of firm equity, there are real, and potentially large, consequences to such redistributions.” It is easier to believe that this was left out(or mistakenly cut out) of this vf article than that he was unaware of this.

Nick’s response (at 05:47 PM) was:

Hmmm. OK. Fair point. But, well, it is absolutely central to his argument though, if that’s what his argument is. It’s a really big editing glitch. It’s a bit like forgetting to mention you are assuming MV is constant, when arguing that fiscal policy can’t work. 😉

Update: Scott Sumner has much more here. Oh dear! This does not look good for Joe Stiglitz!

reaction to Joseph Stiglitz’s views on how to avert a depression

Friday, December 16th, 2011

Columbia University economist Joseph Stiglitz:

Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago.

Joseph E. Stiglitz , “The Book of Jobs“, Vanity Fair, January 2012.

Carleton University economist Nick Rowe’s reaction:

Joseph Stiglitz is a great economist. A great microeconomist. But this  is really bad macroeconomics. God it’s depressing.

[O]ne thing that has become clear to me over the past few years is that very smart economists can sometimes say very foolish things, even about topics in which they’re supposed to have expertise. This would appear to be one of those cases.

Nick Rowe, “The gizmo theory of the recession“, Worthwhile Canadian Initiative, 13 December 2011.

Bentley University economist Scott Sumner is also puzzled by Stiglitz’s macroeconomic model:

Stiglitz is a distinguished Nobel Prize winner.  But he didn’t win for business cycle theory.  I doubt even his fellow progressive Paul Krugman could make heads or tails out of Stiglitz’s essay.  ….

Back in the 1930s many people thought the Great Depression was caused by too much output.  This led FDR to adopt programs aimed at reducing output (such as the AAA and the NIRA.)  They “worked.”  Today economists tend to scoff at such ideas, as falling output is essentially the definition of a depression.  But not Stiglitz.

Scott Sumner, “No Mr. Stiglitz, Ben Bernanke does not agree with you“,  The Money Illusion, 13 December 2011.

Nick Rowe on the euro

Friday, November 18th, 2011

Carleton University economist Nick Rowe finds eurozone news “really depressing” and thinks “things are going to be very bad very soon”.

Given the current ECB [European Central Bank] policy, what will be the value of the Euro, in terms of goods and services, in (say) two years time? What is the likelihood that it will be anywhere close to 4% (2 years x 2% inflation) less than it is today? Very small, in my opinion. If the crisis continues, but by some miracle the Eurozone hangs together, the most likely result will be deflation. If the Eurozone breaks up, many existing Euros will be converted into successor currencies that will depreciate. If the breakup is total, the Euro might even become worthless.

Under the existing ECB policy, I’m very uncertain about the future value of the Euro. I’m not even exactly sure how to define the question, when we start talking about successor currencies. If the ECB loosened monetary policy, and also acted as lender of last resort by making a public conditional commitment, the future value of the Euro would be much more predictable, and much closer to the inflation target.

Nick Rowe, “The ECB’s internal contradictions“, Worthwhile Canadian Initiative, 17 November 2011.

This is an excellent post, but I initially disagreed with one point. If the breakup is total, I thought, there is no possibility that the euro will become worthless. It will simply cease to exist as euros are converted into national currencies. Some successor currencies (Greece, Spain, Italy, Ireland) will depreciate, but others (Germany, Austria, Finland, Netherlands) will probably appreciate. I couldn’t imagine all successor currencies depreciating together.

Then I thought, suppose the breakup is so messy that there are bank runs, with a flood of euros flowing, for example, from Greece to Germany. With this scenario, depreciation of all successor currencies might be possible.

saving the euro

Friday, November 11th, 2011

The euro project will fail unless the European Central Bank (ECB) acts as a lender of last resort to member countries. The ECB is the only institution that can perform this function, because only the ECB can print an unlimited supply of euros. But won’t this send the wrong message to deadbeat governments? Not necessarily, explains Carleton University economist Nick Rowe.

[N]obody would want to act as lender of last resort to a deadbeat, and the ECB wouldn’t want to act as lender of last resort to a fiscal deadbeat. With the guarantee of unlimited loans from the ECB, the fiscal deadbeat would have every incentive to keep on borrowing and spending unlimited amounts. It’s a mix of: the free-rider problem (because they are only one in 17, and even less than that for a small country); and the Samaritan’s dilemma (if they know you are going to help them get out of trouble, they are not going to stay out of trouble).

The Eurozone lacks a central fiscal authority to match the central monetary authority. And it seems to lack the ability to create a central fiscal authority in the normal way. Nobody seems to have the power to exert that central fiscal authority, and force the 17 governments to do what they are told.

But the ECB does have that power. It can say to each of the 17 governments: “We will act as your lender of last resort if and only if you do what we say. If you don’t do what we say, we will loudly announce that we will no longer act as your lender of last resort, and the bond markets will make mincemeat of your bonds, and there will be runs on all your banks.” ….

Is this democratic? Of course not. Might it happen? I don’t know.

Nick Rowe, “Could the ECB become the central fiscal authority?“, Worthwhile Canadian Initiative, 10 November 2011.

Nick is saying that the ECB could – and should – violate the “no bail out” rule of monetary union provided it attaches harsh conditions to the loans. It is somewhat like placing a bankrupt financial institution into receivership. Or sending an IMF mission to a third world country.

Scott Sumner on Martin Feldstein on mortgage debt

Monday, October 17th, 2011

During the Great Depression prices fell by about 25%.  You might think that a deflation that bad would convince even the most hard-hearted conservative that monetary stimulus was needed.  Not so, conservatives were horrified by FDR’s attempt to reflate, even though the price level remained far below 1929 levels for the rest of the 1930s. ….

If we’ve got a demand problem, why not simply have a bit more demand, and leave the free market system in place?  I just don’t get it.  What is it about demand deficiencies that makes people become unglued? ….

I thought of the Great Depression when I read this essay by Martin Feldstein:

HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away.

Gee, I can’t imagine why someone who lives frugally would be resentful of seeing an affluent neighbor with a good job use his house like an ATM machine, with one re-fi after another to buy boats and fancy vacations, and then dump his mortgage on the taxpayer, even though he could afford to pay it, just because his house was underwater.  Why would anyone have a problem with that?

Scott Sumner, “Martin Feldstein and Francisco de Goya“, The Money Illusion, 13 October 2011.

Scott Sumner, a political conservative and ‘market monetarist’, teaches economics at Bentley University in Waltham, Massachusetts. Harvard economist Martin Feldstein was chairman of the Council of Economic Advisers and chief economic advisor to President Ronald Reagan from 1982 to 1984.

Update: See the excellent exchange of views between Nick Rowe and ‘John’ on this post at The Money Illusion.

Nick Rowe on free lunches

Sunday, October 2nd, 2011

[This post] borrows from Arthur Laffer, who (I think) said (something like): “Some economists say there’s no such thing as a free lunch. Nonsense! Of course there are free lunches. Our job as economists is to find those free lunches and make sure they’re eaten!”

The patient had been eating three square meals a day. Then he stops eating lunch, because he wants to save his money. That’s bad news. But we know of a free lunch. That’s good news that totally offsets the bad news. We are thrilled! But then we hear that the monetary and/or fiscal policymakers won’t give him the free lunch. That’s bad news again. We are less than thrilled. We are depressed.

If there is unemployment due to deficient aggregate demand, we can print money for free, and give it to people. Holding more money makes them happier. And spending more money makes them happier too. They are doubly happier. And we keep on doing this until they spend so much that aggregate demand is no longer deficient.

Nick Rowe, “My answers to Steven Landsburg’s two questions“, Worthwhile Canadian Initiative, 1 October 2011.

Nick Rowe on the euro crisis

Tuesday, September 27th, 2011

Nick thinks all 17 eurozone countries should abandon the euro and restore national currencies.

I’ve written a lot of posts about the Eurozone. But they are “is” posts, about what I think will happen. And the things I think will happen are bad things. And I feel some sort of obligation to say at least something about what I think ought to be done to try to prevent some of those bad things happening, or at least make them less bad. This is as near as I can get to an “ought” post about the Eurozone.

Each country ought to restore its own national currency. I think this will happen anyway. But it would be better if they all did it at the same time, rather than one after the other. It will still be very nasty. But the nastiness won’t last as long. And what’s happening now while we wait for the break-up isn’t so great either.

Nick Rowe, “Is and ought for the Eurozone“, Worthwhile Canadian Initiative, 26 September 2011.

It is not easy to unscramble an omelette. But this might be less bad than the alternatives. I have to think about it, but not now. All this is too depressing.

Nick Rowe on money

Saturday, September 24th, 2011

Carleton University economist Nick Rowe has another great post today. I rarely feature Nick’s writings on TdJ, only because his ideas are difficult to extract or summarise in a few words. Here is one attempt.

Milton Friedman said (somewhere) that money is like a refrigerator. Both are consumer durables that yield a flow of services to their possessor.

But in one important way that is a very bad analogy. Money is a medium of exchange, and refrigerators aren’t. The stock of money, and the stock of refrigerators, are determined in very different ways.

What determines the stock of refrigerators held by the public? The short answer is: supply and demand. What determines the stock of money held by the public? The short answer is: supply. The suppliers of money, whether those be central banks, commercial banks, or counterfeiters, can force people to hold more money than they wish to hold. The suppliers of refrigerators can’t. ….

[Money is] the medium of exchange. We accept it only because we know someone will want to accept it from us. I might buy a fridge even if I could never sell it again. I would never buy money [i.e. sell a good or service for cash] if I could never sell it [use the cash to purchase something else] again. ….

In an important sense, all money is like helicopter money. The suppliers decide how big a stock will he held, regardless of the desire to hold it. ….

Most economists disagree with me on this. They think that the stock of money is determined by supply and demand in just the same way that the stock of refrigerators is determined.

Nick Rowe, “All money is helicopter money. Against the Law of Reflux.“, Worthwhile Canadian Initiative, 24 September 2011.

If Nick’s reasoning is correct, monetary policy is something more than (and different from) setting the rate of interest, as mainstream economics assumes, so is central to the debate about whether Quantitative Easing can work. Can you spot any flaws in his reasoning? I can’t, but I am not a macroeconomist.

the future of the USA

Sunday, August 7th, 2011

Uplifting words from the always humble Nick Rowe, who teaches economics at Carleton University in Ottawa.

Look, I’m pro-American. I like the US. It’s a great country. We could do a helluva lot worse than the US as the choice for the world’s most powerful country, and I don’t think we could do a helluva lot better, in practice. But that doesn’t mean that US government bonds have some sort of divine right of kings to be rated AAA. There’s more than one measure of the worth of a country, and those measures don’t have to be perfectly correlated.

FWIW, which isn’t very much at all, I’m not sure I would rate US government bonds AAA either. That’s got very little to do with any economic analysis. It’s my crude and very amateur political analysis that leads me to that view. I’m not sure the US system of government can get its act together to follow any coherent plan that conforms to the long run government budget constraint. It’s not the numbers, it’s the governance. The UK has had debt/GDP ratios twice the current US ratio more than once in the past.

But the US has been written off too many times in the past. I’m old enough to remember when educated opinion thought the Soviet Union would replace it. And then Japan. Now it’s China. I’ve learned to be sceptical. And I’m no good at history.

Nick Rowe, “US AAA: bleg and random thoughts“, Worthwhile Canadian Initiative, 7 August 2011.