September 14, 2003
Note: Strong Views Weakly Held

In comments, A. Pressler asks: I've always wondered why inflation is such a huge bugaboo to AG and many corporate economists (other than their tendency to see things from the POV of lending institutions.) In my relatively short life, the only serious inflation problem was the supply-shock inflations created by energy costs in the 1970s.... I understand the theoretical arguments, but what is the worry when the inflation rates are still under 5% (as they were in the late '80s) or under 3% as for most of the Clinton administration? Well, the argument that inflation above 10% per year does serious harm to resource allocation and economic growth (as incentives get scrambled by an inflexible tax system, as nobody is sure what relative prices really are, and as perceptions of risk rise substantially) seems solid. And then you can argue that you need to keep inflation at 5% or below in order to eliminate the risk that a couple of bad shocks will land you in the bad zone of more than 10% annual inflation. You can also argue (and Larry Summers and I did argue back in 1992) that you want to avoid deflation and the liquidity trap--you want...

Posted by DeLong at 02:04 AM

August 27, 2003
Fast Food-Style Journalism

Ah. A piece of fast food-style journalism--i.e., low-quality, hastily-prepared, and bad for your brain (if not your heart)--from John Kay. There is only one possible response: it is time to break the glass, to sound the siren, to pull out the fire-axe, and to start channelling Milton Friedman: FT.com Home US: ...there has been intensive lobbying by smaller merchants. It is almost impossible today to create new shopping centres on greenfield sites. But these self-serving arguments have been successful not because their proponents made donations to political action committees but because many French people are sympathetic to the cause. They fear the marché municipal might disappear. I doubt if there is much justification for these fears. There are three supermarkets within a quarter of a mile of the market, which stock the same categories of goods, mostly of lower quality and at lower prices. On the outskirts of town is a much larger store with extensive parking. A 20-minute drive will take you to a Carrefour with more than 100,000 square feet of retail space and a US-style mall. In the face of this competition, the marché municipal and another daily market a mile away seem to be doing fine....

Posted by DeLong at 09:57 PM

August 15, 2003
Little Fear of Accelerating Inflation in Europe

More bad news about the pace of economic growth in the euro zone. It leaves me, once more, scratching my head and trying to figure out what the ECB thinks that it is doing. WSJ.com - German Economy Shrank 0.1% In Quarter, Confirming Recession: FRANKFURT -- The euro zone, collectively the world's second-largest economy, stagnated during the second quarter, highlighting its relative weakness against the U.S. and even perennial laggard Japan. Although economists say the worst may be over, several major European nations -- Germany, Italy and the Netherlands -- saw their economies shrink, the European Union's statistics agency said. For Germany, it was the third straight quarter of contraction; Europe's largest economy is in its second recession in two years......

Posted by DeLong at 03:55 PM

July 23, 2003
Optimism About Europe

For once, the Economist is relatively optimistic about continental Europe's structural reform efforts: Economist.com: BY MANY standards, the health-care reforms unveiled by Germany’s government on Monday July 21st, with the vital support of the opposition, are far from revolutionary. The levy on companies for their employees' health care is set to fall from 14.4% to a still-hefty 13% by 2006, and the overall national health bill is not expected to decline: the new plan simply transfers costs by making individuals pay for things like dentures. The health minister, Ulla Schmidt, was forced to drop more dramatic proposals, like allowing health funds to have contracts with individual doctors, rather than collective agreements with doctors' associations. Even so, the reform is radical by German standards, and Ms Schmidt hopes that increased transparency will cut down on fraud and increase efficiency. Moreover, the government’s success in getting even this measure of reform enacted is a sign of a new realism in Germany about the extent of the country's economic malaise. Germany is not alone. In neighbouring France, the centre-right government of Jean-Pierre Raffarin has succeeded in driving through unpopular pension reforms that had brought hundreds of thousands on to the streets in protest....

Posted by DeLong at 09:38 AM

July 17, 2003
ZPG and Europe's Social Insurance State

Zero population growth is not especially frightening. ZPG coupled with a very extensive social insurance state in which large benefits to the retired old are paid by the working young may well prove to be a politico-economic time bomb of amazing proportions. The Economist wakes up and looks at this issues. A little more than a decade ago, Cutler, Sheiner, Elmendorf, Summers, perhaps a coauthor or two I've forgotten, and perhaps not all those I've named wrote a paper for Brookings on "The Aging society." IIRC, they concluded that having lots of old non-workers around was about as much of a burden as having lots of young non-workers around (i.e., children), that the old had special needs (medicine) and the young had special needs (education), and that the big problems arose not because of a declining fraction of the population in the labor force but out of social institutions (and perhaps human psychology? Is it correct to say that most people love and are willing to sacrifice more for their children than for their parents?) not adapted to the forthcoming change. I need to dig it out and read it again......

Posted by DeLong at 12:39 PM

July 15, 2003
Huh?

I do not, repeat do not, understand the thinking of western Europe's economic policy makers: Morgan Stanley: Finance ministers of the 12 EMU countries gathered yesterday for their regular meeting, the first under the Italian presidency of the Council. EMU-outs will meet today in the ECOFIN meeting.  While recognizing the difficult juncture for the economy, the assemblage reiterated the usual rhetoric, supportive of the Stability Pact and the process of fiscal consolidation. The EU Commission released a briefing note ahead of the Eurogroup meeting.  The Commission said that growth in the euro area this year would be 0.7%, lower than its original forecast and more consistent with the 0-0.4% range that its indicator-based model suggests for Q2 and Q3. Weak growth will put budgets under pressure and lead to further slippage. "The weak economic outlook poses a risk to the budgetary targets set in the last round of stability programs, despite the fact that all member states remain committed to fiscal consolidation", says the report. EU Commissioner Solbes reiterated that the Stability Pact does not need to be modified, and the same message emerged from other several comments.  French Minister Francis Mer said that Europe should try to restore growth...

Posted by DeLong at 05:17 PM

May 09, 2003
Be Careful: If You Look Into the Abyss

Morgan Stanley's Stephen Roach looks into the abyss that is the western European business cycle conjuncture, and emerges even more frightened and desperate than usual... Morgan Stanley: ...Therein lies the potential for a serious growth shock to Europe. Lacking in support from domestic demand, a sharply appreciating currency will likely deflate Euroland?s external growth cushion, unmasking the full extent of the weakness that has emerged on the domestic demand front. In that context, and with layoffs and unemployment back on the rise, it is all the more critical for policy makers to apply counter-cyclical stimulus in order to jump-start anemic growth in domestic demand. Unfortunately, those options have all but been closed off by the institutional constraints of the European Monetary Union -- the Growth and Stability Pact, which effectively rules out fiscal expansion, and the backward-looking inflation-targeting mandate of the ECB, which inhibits aggressive monetary ease.... And dramatic change is exactly what?s now in the air. The Federal Reserve said it all with its extraordinary policy statement of May 6: After nearly 18 months of steadfast denial, America?s central bank has finally conceded that the risks are now skewed toward deflation. With most of Asia in deflation and US...

Posted by DeLong at 01:58 PM

September 04, 2002
How Stands the Federal Republic of Germany?

How Stands the Federal Republic? The New German Problem By Brad DeLong As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced. Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb. What will the unemployed, especially the long-term unemployed with only dim memories of integration into the world of work, do with themselves and their time? What will happen to confidence in governments that can not solve the unemployment problem? We all try hard to forget that little more than 50 years ago Europe was and had for half a century been the world's most violent continent. Europeans had slaughtered each other on a scale unprecedented in human history. Against this backdrop, Western Europe after 1950 has been remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece. The most remarkable transformation of all was that of the Federal Republic of Germany. Anyone familiar with German history since 1800 is still astonished at the enthusiasm with...

Posted by DeLong at 07:33 AM

September 03, 2002
Europe's Economic Policy Dilemmas

Here Morgan Stanley's Eric Chaney gives his take on western Europe's current fiscal policy dilemma. Given that the European economies are on the edge of recession, it makes neither economic nor political sense for them to cut their short-run budget deficits. But neither the "Stability and Growth Pact" nor the discourse about European fiscal policy allows one to try what the Clinton administration wanted to try in 1993--a larger deficit now coupled with lots of planned reduction in the deficit in the future. Morgan Stanley: Euroland: The Arithmetic and Politics of Fiscal Policies - Part I...

Posted by DeLong at 12:49 PM

September 01, 2002
Consequences of European Monetary Union

Back in the years between when the Maastricht Treaty was negotiated and when it was implemented, I would occasionally find an international economist and ask them why European Monetary Union was thought to be a good thing--"For," I would say, "it's hard to think that western Europe is an optimum currency area, in Robert Mundell's sense." Now comes the Economist with one of its focuses. What is the point of the focus? That western Europe is not an optimum currency area, and that as a result the macroeconomic policy problems of its governments now that EMU is a reality are knotty and difficult--and made more difficult by the fiscal "Stability and Growth Pact." The Csae for Co-Operating: ...Christopher Allsopp and David Vines of Oxford University, together with Warwick McKibbin of the Australian National University, argue against going it alone. Budget cuts are never painless, but within a monetary union individual cuts can be excruciating. A country with an autonomous monetary policy can offset tighter fiscal policy by expanding credit and devaluing the exchange rate. But in a monetary union, where an individual country can no longer cut interest rates, nothing cushions the blow. The authors asked what would happen if...

Posted by DeLong at 08:29 PM

August 22, 2002
European Monetary Policy

The Economist worries that European interest rates are too high--especially that they are too high for the unemployment-ridden German economy. It would be nice if the writer of today's piece would talk to the writer of the piece a week or two ago about structural reform of the German labor market. "Structural reform"--meaning cutbacks in the social insurance state, especially for the unemployed--when interest rates are too high is not necessarily a good idea. Economist.com: The ECB's Monetary Policy Is Much Too Tight for Germany: ...So why does the ECB not cut its interest rate, currently at 3.25%, compared with America's rate of 1.75%? The ECB still frets about inflation. The headline rate for the whole euro area, at 1.9%, is a whisker below the 2% ceiling of the ECB's target, but core inflation, excluding food and energy, is 2.5%. Most economists do not expect rates to be cut this year. This raises two questions. First, are rates currently appropriate for the euro area as a whole? Second, how much lower would they be if the Bundesbank was still setting interest rates to suit Germany alone? Given the ECB's inflation target of "below 2%", which can be interpreted as a...

Posted by DeLong at 01:35 PM

August 17, 2002
Curing German Unemployment

The Economist pushes the Hartz Commission proposals for German unemployment insurance reform. There is, however, one big difference between the condition of Germany now and the condition of Britain--which the Economist compares Germany to--in the 1990s. In Britain the Bank of England was prepared to make sure that institutional reforms did not just shift the economy from classical unemployment to Keynesian unemployment, but instead led to full employment. It was willing to make sure that aggregate demand was high enough to do the job. Is the European Central Bank prepared to fulfill a similar mission? I see no sign that it is. German Unemployment: Too Little, Too Late? ...So the commission's proposals, already broadly backed by employers and trade unions alike, will be put before a special Social Democratic conference this weekend. The cabinet will announce its first measures, ones not requiring legislation, next week, and send further ones to the Bundestag as a bill during the debate on the 2003 budget early next month. Cutting the jobless total in half within three years is feasible, according to the commission, if its recommendations are implemented promptly. The key proposal is for the creation of state-run agencies, alongside the present unemployment...

Posted by DeLong at 08:14 AM

May 24, 2002
Why Has the IT Revolution Come Slowly to Europe?

The Economist reports on an OECD working paper--“The Role of Policy and Institutions for Productivity and Firm Dynamics: Evidence from Micro and Industry Data”, by Stefano Scarpetta, Philip Hemmings, Thierry Tressel and Jaejoon Woo. OECD working paper 329, 2002 <http://appli1.oecd.org/olis/2002doc.nsf/linkto/eco-wkp(2002)15/$FILE/JT00125006.PDF>--that tries to account for why both unemployment and productivity growth have been unsatisfactory in most of continental Europe over the past decade. Scarpetta et al. may finally have found the smoking gun linking labor and product market overregulation to poor economic performance...

Posted by DeLong at 02:25 PM

May 19, 2002
Thinking About European Unemployment

Surely the most thoughtful and brilliant macroeconomist trained in the late 1970s is M.I.T.'s Olivier Blanchard. In his Robbins Lectures he turns his mind to summarizing what he knows about the nature, causes, persistence, and prospects of and for European unemployment. [Olivier Blanchard (forthcoming 2002?), The Economics of Unemployment: Shocks, Institutions, and Interactions (Cambridge: MIT Press:).]

Posted by DeLong at 02:38 PM