by Tyler Cowen
on May 30, 2012 at 9:50 am
in Uncategorized |
In per capita terms, they were higher seventeen years ago. There is more here, hat tip goes to Merijn. I am still calling this evidence for a “reset.”
I am calling this as two data sets pretending to be one.
Isn’t the point of austerity to drive prices down — making sure retail sales go down with it.
I’d hate to be El Corte Ingles, though.
And contrast with de Rugy’s graph. What does this say about the relative behavior of Spanish consumers and Spanish gov’t?
That more government stimulus is necessary when a trillion euros in real estate assets disappear, and if Spain had a printing press, they should be printing paper left and right?
It is a double irony that Rajoy is doing to the regions what Germany wants to do to Spain — use this as as tool to teach greedy Catalans they can’t have their cake and eat it too.
At some point, you run out of other people’s money, and unfortunately the Germans won’t let them print euros.
It’s an interesting question, though — what would Spain look like today if they were still on the peseta?
I would say unemployment is much lower, but their currency is in free fall and their interest rates are higher, while overall living standards are roughly the same but the pain is more distributed (because of inflation/devalulation) rather than focused on the unemployed.
Well, presumably since it was their current account that killed them, the peseta would have been pushed down to automatically adjust the trade deficit unless the German banks rushed in to do what they did anyway. Then the peseta would have been overvalued, everyone would be screaming about it, and the Spanish bank would have intervened the way the Swiss have by flooding the market with pesetas.
In the short term, you are probably right, but in the medium term, a country can’t afford to have unemployment as high as Spain is experiencing. You lose too much human capital that way, or you lose the development of human capital that you need. 4 years is already the medium term, in my opinion. In the long term, the Euro has advantages but the human capital loss is also greater. I think Spain would have been better off on the peseta.
What’s also interesting that Italian Retail sales volumes have fallen only half as precipitously as Spanish sales volumes:
Not enough Italian austerity?
The Spanish case is interesting overall; I don’t read as many Spanish stories of rampant corruption, inefficiency, free-riding, etc. that get Greece and Italy notoriety. No equivalent of Berlusconi to vilify? I’m hoping for more coverage of what went wrong with Spain.
You’re saying this a day after Rato was indicted?
Or after the solar market has collapsed because of withdrawl of subsidies.
Forget about retail prices, particularly since retail is sourced from across Europe.
Look at Spanish real estate prices.
Here is a link: http://www.globalpropertyguide.com/Europe/Spain/Price-History
And, going lower.
oops. Tyler’s index was sales, not prices. It is relevant., but so is real estate.
What TallDave said.
Interesting blog, that “Real World Economics Review”, it is like a different planet. One quote from the authors on the US budget ceiling debate last year may suffice: “As it stands, the 1 percent are insisting that the country genuflect over the non-problem of the budget deficit”. These economists really, truly, do not get it.
This is a beautifully presented graph.
So far the result of this depression seems to be that the hardest hit places are returning to the level of economic activity of the 1990s, which I don’t remember as a time of poverty and deprivation. Of course the world population has increased since then.
It goes to humans being much more psychologically sensitive to trends rather than levels. A wall street trader who makes 1mm per year after making 2mm is devastated. I think this sensitivity to changes rather than levels is at the heart of asset bubbles as well. Economists are just as guilty, except they have the additional burden of thinking government policy is worth obsessing about in this regard. Why it can’t be understood that after a period of irresponsible deficit spending by households and governments gloabally, asset prices and yes, spending itself have to go down is pretty amazing.
Spain will be in rough shape adjusting to the wringing out of debt overhang and overspending, but exactly right, the 90′s were not somehow a period of misery and devastation.
Prior to the recently established record highs, unemployment in Spain peaked at 21.5% in 1994. The 1990s may not have been a period of misery and devastation for everyone in Spain, but with unemployment above 15% from the beginning of 1992 to the end of 1998, it was for a lot of people.
I think another factor is the extent government policy in these situations is framed so that somhere sectors or people do not in fact see their spending drop to 1990s levels. In a declining economy, that means that others will have to see their spending drop well below that.
You are correct but sticky wages make the transition harder and that is why they could use some inflation. IMHO The first problem was the prices of homes and to a lesser extent wages rising too fast now they need some inflation to reduce them them.
The question once more: What’s a reset, Professor?
The mighty Mish points to a suggestion that Spexit might occur before Grexit.
It’s hard to see how Spain gets out. I think the Germans will print money first.
Private Debt Continues to Drag Down Europe (http://bubblesandbusts.blogspot.com/2012/05/private-debt-continues-to-drag-down.html):
Acting in a similar manner as the US private sector during the previous decade, the private sector in peripheral Europe largely borrowed from abroad to support current consumption and investment in housing. Rising debt levels were manageable, for a time, without an increase in incomes as long as asset prices were rising and new credit was available to service current debts (Minsky considered this stage “ponzi” finance). When asset prices stopped rising and credit became more restricted (which must always happen), the private sector was forced to reduce consumption and investment to pay debt servicing fees and attempt to deleverage.
This above dynamic is especially important for understanding Spain, where sovereign debt levels (at least those officially reported) are not particularly high. Spain’s housing bubble, however, continues to decline putting further pressure on private sector balance sheets. The public and private sectors cannot both successfully deleverage, in tandem, without destroying incomes and growth. Debts that cannot be repaid, will not be repaid.
If this showed more than one business cycle then we could tell how similar or different it is to past recessions.
For all the people tut-tutting over Spanish deficits, it should be kept in mind that Spain was running a budget surplus when the crisis hit. This was not due to them engaging in deficit spending, although some of their regions have been doing so. They had a major housing bubble that led to a banking crisis, and then the economy went down hard. When that happened (although Tyler’s retail sales pic suggests they started going down sooner than others), their tax revenues fell, and they began to get budget deficits.
Curious contrast with the US. Here, state and local governments generally have to balance budges, but in Spain it is the regions that are more profligate than the central government.
All of the above seems like an argument for decentralized competitive privatized monetary systems. The ECB cannot do what is good for the holders of cash whether Germans or Spanish and for the debtors. The fact that there is great confidence that the Euro will hold its value (or in Spain rise in value) makes the problems worse. People are taking their money and putting it in German banks because they are confident that it will not loose much value if it was private money and they feared it might fall in value I think that they would try to turn it over fast. Inflation would help but it does not have enough political support yet.
I think Sumner is right that the ECB should try NGDP targeting.
Finally cheaper homes are a good thing but too many voters are home owners and money holders, that is a problem because Government currency is voter run currency.
Well c’est la vie we are stuck with central banking, eventually things will adjust wages will fall, homes will be foreclosed and sell at much lower prices and things will start up again.
NGDP targeting in combination with fiscal surpluses, both current and projected, seems like a reasonable proposal. Otherwise the EU risks becoming a race to the bottom. I think the Germans are going to print money eventually one way or the other, even if the Greeks get kicked out first.
Cheaper homes are also maybe creating some perverse incentives. In the next couple days I am closing on the sale of a property in which I have a six-figure loss, and signing a lease to rent to someone who foreclosed out of two underwater properties despite having plenty of income. After buying a house in a short sale a couple months ago, I’m starting to wonder if I was the sucker for paying off so much on my loans that I wasn’t underwater anywhere. Is my credit rating really worth a six-figure loss, if I never plan to buy anything on credit again? Incentives matter, are we training people to be irresponsible?
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