November 14, 2002
The U.S. Is Lucky in Its Central Bank
At its mid-November meeting, the United States's Federal Reserve decided that it needed to lower the short-term nominal interest rate by half a percentage point, to 1.25 percent per year. At its--immediately following--mid-November meeting, the European Union's European Central Bank decided that there was no need to change its short-term nominal interest rate, which remains fixed at its previous value of 3.25 percent per year.
Is this inaction because the ECB expects economic growth in Europe to be faster than in America? No. The U.S. economy's recovery may, as Alan Greenspan has said, be going through a "soft spot," but the heart of Europe's economy--Germany--is threatening to fall back into a full-fledged recession. Is this inaction because Europe starts today from a better macroeconomic position than America? No. Europe's unemployment rates are easily four percentage points higher than America's. Is it because inflationary pressures are threatening in Europe? No. It is true that the ECB is missing its inflation targets by a hair, but that is because the ECB has set itself a stringent target?
So why, then, isn't Europe's central bank cutting interest rates? It remains a mystery to those of us on this side of the Atlantic.
However, the ECB's stubbornness should remind us how lucky we are. We are lucky enough to have a central bank that has both solid-gold credibility as an inflation-fighter and the collective wisdom to recognize that fighting inflation is not a central bank's only task.
Posted by DeLong at November 14, 2002 05:35 PM
As prepared for delivery: J. Bradford DeLong (2002), "The U.S. Is Lucky in Its Central Bank," Nightly Business Report (November 25) [TV].
"I'd rather be lucky than good."
- Lefty Gomez
And no, that is a description of his pitching, not his politics.
"So why, then, isn't Europe's central bank cutting interest rates? It remains a mystery to those of us on this side of the Atlantic."
A mystery? I am fully aware that my European ancestors are silly people whose only goal in life is enjoying their six week vacations courtesy of the government. Will lowering the interest rates result in working longer hours? If so, they want no part of it. What's so hard to understand? Socialism inevitably destroys the morals of the citizens.
Bizarre - taking 6 weeks holiday is held to be IMMORAL, not a simple tradeoff of income for leisure. The materialist treadmill has really got you in its grip David - chill out a little. We work to live, not live to work.
I really want to think that the ECB has good reasons for doing what it's doing. In fact, perhaps they do, but my fear is that it is actually comes down to being an issue of a psychological hangup.
What if they view financial markets as an angry god to be appeased, not a collecion investors trying to maximize their ROI? In a way, the ECB's policy is a form of human sacrifice: they're trying to say "Look! We're willing to sacrifice millions of jobs and cause vast economic inefficiency! Are we not worthy of your blessing, O Financial Markets?" Meanwhile, financial markets look at Europe, look at how European companies and economies are doing, and put their money elsewhere.
All of the above is not even worthy of being called hearsay: it is mere, rank speculation. Still though, over the past... however many years, there seems to have been a feeling growing among some economically conservative elements -- central bankers? -- that not only is pain sometimes necessary, but it's a good thing. It shows that you've earned credibility, or something. Paradoxically -- or perhaps appropriately, if one looks at the chain of cause and effect from psychology to performance, rather than vice versa -- this philosophy seems to be most popular in countries that are going through great hardship, such as Japan, Argentina (though,then again, I don't know what they pain-free way out of Argentina's problems would have been. Maybe they were earnestly trying to choose the least-misery causing path all along.), etc.
Again, the above is speculation. It might be a straw man that I'm attacking, but it's definitely a feel I get sometimes.
Oh, and while I'm at it, a picture of David Thomson:
"I am fully aware that my European ancestors are silly people whose only goal in life is enjoying their six week vacations courtesy of the government."
Obviously, a number of generations of separation have given rise to trollish mutations on the western side of the Atlantic. One would need an electron microscope to look for substance in that last comment of yours, David, and only then if it appeared through a Heisenbergian quirk.
It's also argueable that the Fed's 50-basis point cut smacks of something akin perhaps not to headless chickens, but certainly to chickens who've just noticed that the man with the axe has entered the henhouse.
Interest rate cuts are about the only real tool the European central bank has at its disposal.
Fiscal policy is kind of neutered (kind of like that troll) because the Stability and Growth Act issues warnings to countries running deficits of 3% of GDP and fines to those with deficits exceeding 4%.
The Euro central bank does anticipate growth to increase by a percent next year and then increase again in 2004.
So perhaps they're just holding back their only leverage for exteme crisis; a situation they apparently believe they are not yet facing.
They also seem to feel that much of their woes are attributable to problems in the U.S. markets. They may be waiting to see what direction our markets take in the near future before acting.
I agree with Dave Thomson. In the UK, church attendance is one twentieth of that in the USA, you can buy a drink at the age of 18, holidays are longer, and welfare benefits higher.
Here in this benighted isle, we are nothing less than the spawn of satan. We seem to be completely ignorant of the self-evident truth that shorter holidays make you a better person. We are stewed in the corruption of our own leisure, while our morally superior American cousins pave their way to heaven by working 51 weeks a year.
Absolve us David, for we have sinned.
Surely the trade-off between fighting inflation and allowing growth has to be much more skewed towards fighting inflation for the ECB than for the Fed?
If the Fed allows inflation to get out of control a bit then it would harm its credibility a little, but after a few years of higher interest rates everything would be back to normal. If the ECB let inflation out of the control the resulting damage, people demanding the Bundesbank back, etc, etc coud destroy the entire single currency project.
>If the Fed allows inflation to get out of control a bit then it would harm its credibility a little, but after a few years of higher interest rates everything would be back to normal. If the ECB let inflation out of the control the resulting damage, people demanding the Bundesbank back, etc, etc coud destroy the entire single currency project.
Absolutely. The ECB has adopted an explicit inflation target of maintaining inflation at
"Oh, and while I'm at it, a picture of David Thomson"
Unfortunately, I'm not that good looking. That guy is far cuter than I am.
"Bizarre - taking 6 weeks holiday is held to be IMMORAL, not a simple tradeoff of income for leisure. The materialist treadmill has really got you in its grip David - chill out a little. We work to live, not live to work."
The question is whether you can afford to take off those six weeks spending your own money! If I'm indeed going off the deep end, why is Europe's unemployment rate so high? Why do employers seem reluctant to hire new workers in Germany?
"Here in this benighted isle, we are nothing less than the spawn of satan. We seem to be completely ignorant of the self-evident truth that shorter holidays make you a better person. We are stewed in the corruption of our own leisure, while our morally superior American cousins pave their way to heaven by working 51 weeks a year.
Absolve us David, for we have sinned."
Say six Our Fathers, ten Hail Marys, and go and sin no more. How is your economy doing? Does comic strip character Andy Capp truly represent the working classes of Great Britain? Is your unemployment rate under 10%?
"If the ECB let inflation out of the control the resulting damage, people demanding the Bundesbank back, etc, etc coud destroy the entire single currency project."
The single currency project is a joke. There is simply no realistic way to compel each and every country to abandon their Socialist policies. All you need is one cheater to destroy it for everyone else. Does anyone really think the Germans are going to get off their lazy buts and go out to work?
Speaking of Great Britain. I just found the following comments on www.andrewsullivan.com:
"Maybe he should take a look at yet another story from Britain's vaunted National Health Service. Here's a testimony from a man who is still attached to the idea of collectivist healthcare, but who saw what it means when it mattered most. He needed urgent radiotherapy for a brain tumor. Nuh-huh:
[T]he best estimate I could get from the NHS was a six week wait. I have medical insurance through my employer and I am lucky enough to now have started privately arranged treatment on Wednesday, less than two weeks after my diagnosis. There are thousands of cases like mine every year in this country and most will not have that option.Notice that in Britain, if you actually need good care, you have to both pay higher taxes and get private insurance - for healthcare inferior to much that is available here."
Brad, the ECB is Bundesbank II, just look at it's policy goals. Look at the history of the Bundesbank and you'll understand that it makes sence, or else prove us that four of Deutschmark were fundamentaly flawed. The Bundesbank wasn't afraid of humbling politicians and governements - both German and foreign (ask Norman Lamont) - and stricktly acted according to the motto "monetary policy is too important to be left to politics".
And BTW, what will the fed do if there is a double dip (Iraq war looming)? Does it really have enough room to maneuver? I don't think so.
Woops: "... prove us that four decades of Deutschmark...". That too is wrong: five decades.
Sure, Greenspan's willingness to flout the NAIRU wisdom is nice and all, but it seems one reason he did it was his moronic infatuation with the "New Economy" infotech mania. That led to his unwillingness to take the air out of the stock market bubble.
And don't forget the damage that Greenspan does, like arguing that Congress shouldn't undo the Bush tax cuts.
DT's post about the British Health Care system is stupid. How does the system perform *on average*, at *at what aggregate cost*, compared to ours? So some guys with brain tumors can't get into the hospital right away. Why is that so much worse than the crappy care people without health insurance (40 million and counting) get here? How frequent are brain tumors? This is weak-kneed wishy-washy brain-dead bleeding-heart thinking that DT would, I imagine, lambast in liberals and "socialists".
This thread is about central banking, a thoroughly timely topic. We had an earlier thread on healthcare services.
The implied issue here about the ECB is whether, unlike the FED, it should have an explicit inflation target and, if so, whether it should insist on adhering to it. We might then speculate on the likely consequences if the ECB didn't and whether the FED should be set an explicit target, which seems to be the current fashion.
Here's a non-economic, cultural explanation:
The ECB latches on to the folk memory of Weimar Germany, the Fed the folk memory of the Great Depression. To anyone who believes in the accumulated wisdom of the ages, how incredible it would be to those who lived through the thirties, that seventy years later Europe's biggest economy would be raising taxes in the teeth of deflation.
First as tragedy, then as farce.
Er...David...Andy Capp or no Andy Capp the unemployment rate in Great Britain is rather lower than that inb the US and rather lower than 10%. But I realise facts aren't really your strong point.
Back to the issue -- The ECB does have a growth objective-- it says something like 'without prejudice to its main aim it should support the general economic policies of the European union as a whole'. Those policies include growth. The price target is also symmetric, unfortunately it's symmetric abound 1%, which is probably a little low.
>First as tragedy, then as farce.
That line is really staging a comeback these days ;-)
I agree with you that the hyperflation of 1923 is still an important element of the explanation. But there's more. Europe and esp. Germany has a SERIOUS insider-outsider problem. All the insiders are complaining about the state of the economy, but personally, they hardly feel it. Public opinion is shifting in the outsider's favour, however, only very slowly. I believe in the no pain, no gain argument. People react to icentives. If they don't feel them, they won't react.
As to the question above - why are German employers so reluctant to hire people? Because of the rigid laws that make it almost impossible and costly to get rid of them again. That's why the growth/employment barrier is so high over here. Plus, there's the European solution to low productivity jobs - welfare.
However, a closer look at the European unemployment structure will reveal that Germany is still a divided country. The West's unemployment rate is amazingly low given all those rigidities and the current recession. The east's problem's are actually mostly historical, in my opinion.
Last time I took a look at the Standardised Unemployment rates at OECD the following European countries had a lower unemployment than the US: Austria, Portugal, Norway, Netherlands, Switzerland, Ireland and Denmark. And still with 6-7 weeks of vacation? Damn, but I guess that's probably because they parasite of the American army or something similar in your little crazy world.
Tobias>>> I have a hard time seeing that Eurosclerosis should be the problem for Germany. The problems more or less started with the unification concerning unemployement and I think the real dilemma lies somewhere else than in EPL. Today it's kind of hard defending the case that EPL should be the main problem concerning the high unemployment rates in Germany, France and so on...see OECD Employment Outlook 1999 for example.
Gosh, if you're worried about six weeks' holiday, imagine the sin here in France, where after the "35 hour" legislation, employees in many big companies turn out to be have around 10 weeks of vacation per year.
But a few more points:
1) Add all those people in prison to America's low unemployment rate.
2) When I was back in the States this summer, exiting from a parking garage at Logan Airport, I (full of hope) made a bet with my wife that payment at the exit would be with a machine and not a person. I lost. Here in France the exits at Charles de Gaulle are all "manned" by machines. So America may have a lower unemployment rate, but it's basically a trade-off. The cost of labor in Europe is higher, so a lot of tasks done in the US by people are done here by machines, so there's more unemployment. But is Europe really the loser in having machines handle the parking exits but with one person on the dole, while the US uses that person to "work" collecting parking fares?
PS. Let's all wait a couple of years before saying how thankful we should be for Alan Greenspan.
Andrew B: I have to take issue with your point #2. First of all, your point is made by anecdote. In fact, the US has higher absolute productivity than Europe and most likely has a deeper capital stock (can anyone confirm this?) so in fact America does make us of automation in greater quantities than Europe. Secondly, you consider a person on the dole and a machine as equivalent to a person doing that machine's work. This is just wrong economically and culturally. Economically: someone is supporting the welfare recipient in Europe and paying for the equipment. Culturally: you don't factor in the positive social effects of working as opposed to a ghettoized welfare-receiving underclass.
"Back to the issue -- The ECB does have a growth objective-- it says something like 'without prejudice to its main aim it should support the general economic policies of the European union as a whole'."
You are dodging the main question: how does the ECB adequately respond to those countries unwilling to put their economic house in order? Why are some people pretending that the ECB is comparable to the Federal Reserve of the United States?
“Gosh, if you're worried about six weeks' holiday, imagine the sin here in France, where after the "35 hour" legislation, employees in many big companies turn out to be have around 10 weeks of vacation per year.”
The question remains: can the French economy afford this luxury?
“Damn, but I guess that's probably because they parasite of the American army or something similar in your little crazy world.”
I guess the truth hurts. The Europeans do indeed parasite off the United States. That’s just the cold facts of the matter. We do the serious spending while they do the mooching. Have you already forgotten how America had to pull the Europeans’ bacon out of the fire regarding the Balkans?
>The ECB does have a growth objective-- it says something like 'without prejudice to its main aim it should support the general economic policies of the European union as a whole'."
That is about as specific as Robespierre's objective of creating a "virtuous society" but then the FED's remit is equally vague, I believe. At least the ECB does have an explicit inflation target.
The fundamental issues are whether central banks should have such specific, published targets for comparison with performance outturns and the downstream consequences of dropping the targets under pressure.
"In fact, the US has higher absolute productivity than Europe." You don't read this blog enough! Italy, Germany and France have a higher GDP/hour worked than the U.S. See:
Very nice point (#1). What about the costs of our entire welfare system --including the incarcerated? That welfare is not cheap. Perhaps about $35K/year if I recall?
Of course another way to think of it is a 52 week vacation for 2 million, right? Now if you put it that way --its IMMORAL!
Point (#2) Yeah, its anecdotal. However, how valuable is the productivity measure in today's economy (value of goods & services/hours worked) right? Are US productivity numbers inflated? What are the effects of offshore labor (converting hours to dollars) on the statistics?
The question remains: can the French economy afford this luxury?
And how about this question: can the American economy continue to afford all those McMansions and SUVs? Americans have a higher debt level than the French - so it's the Americans, not the French, who are living beyond their means, i.e. who are not working enough to support their lifestyle. (And now lower American interest rates will just entice more debt.)
"Damn, but I guess that's probably because they parasite of the American army or something similar in your little crazy world.”
I guess the truth hurts. The Europeans do indeed parasite off the United States.
Doesn't hurt me, I've already made that comment. (By the way, I'm American...) Europeans pay much less for pharmaceuticals (the government controls prices), so it's the American consumer who pays for the research into new drugs which benefit everyone. They much less for broadcasting rights for the Olympics (the government doesn't allow individual networks to bid against each other and so to pay outlandish sums), so it's the Americans who pay for these extravagances (Communist China thanks them ever so much). And they pay much less on the military (especially factoring in the fact that their spending is less efficient than the Americans). So? Every parasite has to have a willing host. If Americans are so dumb or naive that they are willing to let other countries take advantage of them, well then other people will take advantage of them.
But just to be honest, I think the American debt level exceeds the amount due to European parasiting, so we (i.e. we Americans) probably come out ahead. Though this is complete hand-waving and I don't have any figures to back it up.
Just to remind some posters before they start going into blaming everything on the welfare system in europe. Unemployment rates for 2 of the most "leftist" countries in Europe with 6-7 weeks of vacation: Sweden 4.2% and the Netherlands an amazing 2.3%. Compare that to 5.7% for the US. How about them apples!!!
Andrew: thanks for the correction on the productivity data. I'll have to read this blog more often.
This brings up the vision of social justice that economists tend to preach: avoid derigiste regulation (a la France and Germany) whenever it is reasonably possible, but feel free to use taxation, income redistribution, and incentives: it may create small deadweight losses, but you won't see vast imbalances of supply and demand as you will if you try more rigid regulations.
Now, France in general has a reputation for inefficient, dirigiste regulation, and reputation that it has done nothing to live down recently: the 35-hour workweek, foreign takeover laws, etc. Germany, however, seems to have a fairly good reputation about trying to be rational about economic policy: environmental laws, for example, in Germany, were using cap-and-trade and fee approaches while the United States was long still using rigid regulations (I think).
Now what I'm wondering is, people look at, for example, Sweden, and say "gee, the 70% of the economy passes through the government's hands. How do they manage the 4% unemployment thing?" From what I've heard, Sweden tends to take a more rational, incentive-oriented approach than, say, France, Italy, or Germany. I don't have any figures, though: how big is the Swedish equivalent of the EITC vs. unemployment benefits, and how do they compare to France or Italy, for example? Then, of course, there's the case of Switzerland, which has about 2% unemployment, 1% inflation, a gini coefficient of about .33, and a very small central government.
It's when you compare policies, results, and countries that one's tempted to throw up one's hands and say "Who cares about policy! It doesn't matter anyway! Long run performance in terms of unemployment, inequality, productivity, and such is really determined by institutions anyway!" Not that it isn't a copout, though.
Interesting points - There is an important article in the NYTimes by Princeton's Krueger about economic mobility in America and Europe - There is growing evidence that American mobility is lacking....
Nov 8th 2001
From The Economist print edition
Julian Callow, at CSFB, has calculated NDP per hour worked in America and the euro area. He finds that, over the past five years, America's productivity growth has only slightly outpaced that in the euro zone, at 1.8% and 1.5% respectively. However, over any period longer than the five years of America's boom, the euro area's productivity growth pulls well ahead. In the seven years to 2000, NDP per hour rose by an average of 1.8% in the euro area, but by only 1.4% in America.
These calculations also ignore the fact that American number-crunchers have done more than their European counterparts to take into account improvements in the quality of goods and services.
Europe's productivity growth is therefore probably understated relative to America's.
>So? Every parasite has to have a willing host. >If Americans are so dumb or naive that they are >willing to let other countries take advantage of >them, well then other people will take advantage >of them.
Intriguing thought - could there possibly be (structural) similarities between the way Eastern European states plundered the Soviet Union in the later years of the Cold War by supplying low quality manufactured goods at political prices in exchange for market-priced primary goods from the Soviet Union, whose leadership probably realised it was paying the price for uncontested political hegemony by raising living standards in the periphery above those in the center.
I really doubt it is true in the transatlantic case. But it seems to be a thought worth looking into.
'Then, of course, there's the case of Switzerland, which has about 2% unemployment, 1% inflation, a gini coefficient of about .33, and a very small central government.'
That's what you get for being the banking capital of the world.
Did Switzerland stop the horror of the Balkins? This very small nation essentially lives a care free existence waiting for others to do the dirty work. The Swizz are perhaps your best example of a parasitical nation. Tyranny would run rampant across the globe if Americans were as selfish as the Swizz. We should hold them in contempt.
The Swizz are the ones who routinely sent back Jews to their Nazi nurderers. They then stole the money in their Swizz bank accounts. The Swizz are a very self centered and vile people.
David Thomson>> It's interesting how you always neglect to answer to facts that state your obvious mistakes, for example that unemployment is lower in US than in European countries. On average, yes. But there are as I stated plenty of European countries with lower unemployment then the US.
"Did Switzerland stop the horror of the Balkins? This very small nation essentially lives a care free existence waiting for others to do the dirty work. The Swizz are perhaps your best example of a parasitical nation. Tyranny would run rampant across the globe if Americans were as selfish as the Swizz. We should hold them in contempt."
- I think we can discuss how much the US "helped" in the Balkans and so on.
BUT, did the swiss create misery and murder in Nicaragua? Did they support several right-wing dictators all around Latin America? Did they support the Talibans, during the 80's. Where they the monsters in Vietnam?
The US has helped in several cases, but it has also created misery and death in many others. But you just wont see the whole picture, will you David?
"BUT, did the swiss create misery and murder in Nicaragua? Did they support several right-wing dictators all around Latin America? Did they support the Talibans, during the 80's. Where they the monsters in Vietnam?
The monsters in Vietnam were the Communists. Should the United States have involved itself in the mess is another issue entirely. Nonetheless, we mostly were acting morally.
The United States had no choice but to support the Afghan Islmamic radicals in their fight against the Russians. We also supported the vile Stalin during WWII.
The bottom line is this: a great power like America is inevitably going to be put into awkward situations. We at least deal with our responsibilities while the Swizz (and most other Europeans) sit on their parasitical behinds. I strongly recommend that everyone read Rober D. Kaplan's excellent "Warrior Politics." This author reminds us that America is often confronted not with perfect choices, but less than ideal ones.
what is sweden's unemployment rate? not F'ing relevant, and here's why: a MAJOR problem in Nordic countries (and others) is that its incredibly f'ing easy to claim disability. You're not une,ployed, you're on sick leave or disability, including for "stress". The rate is pretty disgusting and it has been widely acknowledged that people are gaming the system. The thing is that they do so in a way that doesn't hamper the economic statistics. Much more useful to look at the participation rate and the reasons why people aren't participating.
Re the vacations: it's so incredibly inefficient, as in Sweden you must take a block, and everyone takes it at the same time... nothing happens in August in Sweden (granted its the only time that they see the sun... but it still screws with the economy)
And Europe (even with WW 1, &2) should have much higher productivity, as it has such an overhanging capital stock from its 2500+ year head start on the US in terms of roads, city building, waterworks...
but one question: how do can you be an economist (pro or amateur) and not be a materialist?? isn't that a contradiction in terms??
"what is sweden's unemployment rate? not F'ing relevant, and here's why: a MAJOR problem in Nordic countries (and others) is that its incredibly f'ing easy to claim disability. You're not une,ployed, you're on sick leave or disability, including for "stress". The rate is pretty disgusting and it has been widely acknowledged that people are gaming the system. The thing is that they do so in a way that doesn't hamper the economic statistics. Much more useful to look at the participation rate and the reasons why people aren't participating."
-Are you Swedish? Your arguments are very similar to what I hear from Swedish pro-business groups. The problem is that it is not correct. The employment figure in Sweden is good in international comparisons, around 77%, which I think is around the same as the US for example.
Unemployment is according to the "Standardised Unemployment Rates" in Sweden around 5.0%, which is also more or less equal to the US.
Participation rate has at least as many flaws as the unemployement rates. Take the South European countries as an example. Several researchers has tried to prove the "eurosclerosis" idea with showing how high EPL in Southern Europe is combined with very low participation rates? Why?
This is a mistake several economists do; that they think that every aspect of economic life can be explained by economic policies or variables. Culture is another extremely important variabable? Once again about those low participation rates in Southern Europe? Was it high EPL? No, it's a cultural thing concerning low female participation rates since it's still seen as natural to become a house-wife, mainly in the southern parts of for example Italy. EPL has probably nothing to do with it.
The Taliban were not supported by the US in the 89s. The organization was founded after the red army left Afganistan and after the Afgan communists had been defeated. You are responding to an attach on Switzerland which is irrelevant to this thread with an irrelevant attach on US foreign policy.
David. The Swiss are odd parisites. They are not now and never have been defended by the US armed forces being neutral (like Sweden, Finland and Austria). They take care of their own defence and are armed to the teeth. The cases of Sweden, Austria and Finland strongly undermine your implied claim that West European prosperity was caused by US contribution to West European defence (which obviously helped NATO countries).
More to the point, what does that have to do with the future. In another thread you proposed that the US leave Nato and make Western Europe defend itself. Against what ? The threat is a bit less threatening now.
Notice I live in Western Europe and I wouldn't be afraid of foreign invasion in a NATO less world. I support NATO but for humanitarian not selfish reasons (for Bosnia and Kosovo not Rome)
i love your organisation, it's just great.