Another way of thinking about the European economic collapse

by on April 11, 2013 at 7:07 am in Current Affairs, Economics, Uncategorized | Permalink

Let’s start with a few claims that (most) people agree with:

1. U.S. median income is down since the 1990s and down almost eight percent since the end of the recession in 2009.

2. The U.S. has higher income inequality than most of Europe and our high earners have done quite well for some time.

3. Many events happen in the U.S. first.

4. The U.S. is more flexible than most European economies, though not obviously more flexible than say Germany or Sweden.

OK, let’s tie those pieces together, but please keep in mind that I consider the following to be speculative.

IT and China, taken together, seem to imply a big whack to median income.  This whack should be higher for the less flexible polities, and furthermore the wealthy and the well-educated in the U.S. get back a big chunk of that money through tech innovation and IP rights.  Plus we’ve had some good luck with fossil fuels and even the composition of our agriculture.  If you had a country without those high earners in the tech sector, and an inflexible labor market, those economies will have to contract and I don’t just mean in a short-term cycle.  Equilibrium implies negative growth for those economies, at least for a while.

By how much?  If the relatively flexible U.S. lost 8% of median income, perhaps Italy and Spain and Greece have to lose 15%, but with no offsetting major gains on the upper end of the income distribution.  (How flexible is Ireland or for that matter France is an interesting question and so far the answer is not obvious.)

In sum, the less flexible European economies will lose at least 15% of their gdps, due to trade and technology.

There is then the question of what the path downwards will look like and feel like.  Being in the eurozone makes adjustment much harder, and brings the doom more quickly, for reasons which are by now well-discussed.

The initial path looks like this.  The real sectors of those economies start to appear weaker, and this sets off some deposit flight and also a credit contraction.  AD and AS fall together and set off some further negative interactions.  In the case of Greece the expectation of the country being “a European economy” gets replaced with the expectation of the country being “a Balkan economy,” to the detriment of investment of course.  Along the way, the true nature of the EU political equilibrium is revealed, expectations of EU cooperation decline, and that sets off further AD and AS downward spirals.

Trying “austerity” will hasten the fall, but at the same time it is hard to see how an economy contracting by 15% could in the longer run keep its previous level of government spending, or for that matter find a “good” time to do fiscal consolidation.  It will appear that “austerity” is more causally important than it really is.

All sorts of particular stories will get told along the way, including the austerity story.  Those stories may look true, but ultimately they are more about timing and trajectory than about fundamental causes.  What I call “time compression” will very often appear to be causality.

A lot of the problems caused by fiscal consolidation are in fact “sectoral shift” problems.  For instance cuts in government spending lay off workers and the Mediterranean private sector — in the midst of a significant contraction and somewhat inflexible to begin with — is unlikely to rehire those workers.  The fiscal policy advocates actually have an argument against their “let monetary policy do all the work” critics, although their obsession with AD prevents them from emphasizing the sectoral shift aspects of the fiscal story, which are in fact the paramount aspects.

How much has the Greek economy contracted already?   (Hard to say with black markets and bad numbers but I think at least 20%).  It is predicted that the Cyprus economy will collapse by 20% over the next three years.  Think of their banking sector as unsustainable in the first place, but its decline being hastened rather suddenly by the curious structure of the euro and bank runs (again, time compression).  It is not crazy to expect a ten percent permanent contraction for Italy and a very slow recovery for Spain after what is already a major contraction.

By the way, UK employment is now at an all-time high, as jobs have been reshuffled to lower-value service sector activities, and out of oil and finance.  Does that fit the Keynesian story?  Sorry people, but I have to say “no way.”  Maybe the UK economy — which is flexible but not well-geared to export and to compete internationally — is on a path to lose five or ten percent of its gdp, with or without “austerity.”

Empirically, how would one distinguish this story from a more traditional Keynesian account?

1. Both imply that “austerity” appears causally correlated with bad outcomes.  (By the way, ngdp targeting is still the way to go, although the lack of such a policy is a secondary or residual problem rather than the primary problem.)

2. Given the massively high unemployment we have seen, the Keynesian account would lead us to expect corresponding rates of price deflation comparable to those of the Great Depression, such as negative ten percent.  We’re seeing rates of inflation between zero and two percent, with prices often continuing to move up.  Inertia in sticky wages won’t get prices moving up like that, not if AD is supposedly collapsing to an extreme degree and as a driving force.  This is pretty close to a “one fact” refutation of the simple Keynesian account.  Study economic history all you want, 0-2% inflation may be suboptimal but the associated AD implications simply aren’t that bad, nor will adjusting for a few VAT hikes make it so.  What we get is a series of blog posts measuring AD collapse by invoking surrealistic standards, and obscure concepts from modal logic, and failing to notice that price level behavior simply does not fit the story.

3. The Keynesian account implies a fairly quick bounce back for the plagued countries which (eventually) reject “austerity” and goose up AD.  The theory here implies a quick bounce back for flexible economies, economies with IP and resources, but no rapid bounce back for the euro periphery, no matter what their policies, at least short of an extremely radical and probably impossible set of structural reforms, such as making Italy into Sweden.  In any case, this test has not yet been run as those countries are still on the downswing.

In this account, AD economics, including its Keynesian and neo-monetarist forms, is correct, but it is also far from the entire story.

UKGB April 11, 2013 at 8:02 am

Hi Tyler

You write “By the way, UK employment is now at an all-time high, as jobs have been reshuffled to lower-value service sector activities, and out of oil and finance.”

This is the performance of jobs by sectors since Sept 2010 (below)- or the beginning of Austerity. From job-gaining sectors to job losing sectors. There has been a big loss in public administration, education and construction, and a big gain in private administration, accommodation, IT and Professional Scientific and Technical activities.

I don’t think this fits your story of the UK moving into deservedly lower value-added activity. It is austerity – necessary austerity as you say (and some reclassification – college lecturers have been reclassified as private). In particular, there has been no big movement from Oil and from Financial Sector, really; but those activities have become less remunerative/productive as various oil fields have suffered a shut down, and big deals have dried up in the City. In the latter case, higher NGDP would certainly solve it.

The loss of Construction jobs is a 100% austerity story. Unlike in the US, we never had much of a construction boom, and austerity has hit the capital budget and therefore construction industry hard. That is uncontroversial.

Sticky CPI in the UK is 50% about imported prices, 20% about administered/tax prices (see Ian Macafferty BOE speech for the breakdown http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech627.pdf chart 17).

As ever, you get a lot of info about people’s priors whenever you read blogposts about faraway countries … but this is very interesting, I don’t mean to sound ungrateful.

Figures
From http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/march-2013/sty-uk-employment.html
Professional scientific & technical activities 237
Administrative & support service activities 212
Accommod-ation & food service activities 203
Information & communication 129
Transport & storage 64
Wholesale & retail trade; repair of motor vehicles and motor cycles 61
Other service activities 42
Manufacturing 41
Water supply, sewerage, waste & remediation activities 26
Human health & social work activities 14
Electricity, gas, steam & air conditioning supply 9
Mining & quarrying 8
Real estate activities 8
Arts, entertainment & recreation 1
Financial & insurance activities -9
Agriculture, forestry & fishing -34
Construction -99
Education -116
Public admin & defence; compulsory social security2 -155

Owl April 11, 2013 at 8:21 am

Note that the “record employment” in the UK is in terms of overall numbers in a growing population: the actual employment rate remains 1.7 percentage points below the pre-recession peak.

collin April 11, 2013 at 8:21 am

Couple Other Points

1. Why is Sweden and Germany more flexible than the US as that doesn’t seem to be the facts. What would have happened to Texas or North Dakota wages with state immigration.

2) It helps to catch a little energy Dutch disease.

JWatts April 11, 2013 at 8:52 am

Why is Sweden and Germany more flexible than the US as that doesn’t seem to be the facts.

That’s not what TC said. He said that the US is not obviously more flexible than Sweden and Germany.

Osual April 11, 2013 at 10:29 am

Germany went through an internal devaluation and labor reform (Hartz iv) round the turn of the century. Painful stuff, not sure if club med is up for the same.

John Mansfield April 11, 2013 at 8:24 am

“In sum, the less flexible European economies will lose at least 15% of their gdps, due to trade and technology.”

But, but, but, . . . isn’t it some inviolable law of the universe that trade and technology increase everyone’s economic welfare? Aren’t there all kinds of disparaging names for any foolish person who thinks otherwise?

anon April 11, 2013 at 8:33 am

Makers?

Enjoy the decline!

derek April 11, 2013 at 10:12 am

Competition and free markets are about failure. That is the only strength and the only benefit. For a country like Greece, failure means that you can’t 56% of your economy as government, that you can’t all retire at 52, and that you have to set up a fiscal system where taxes are paid by people figuring they are getting their money’s worth.

I talked to someone two days ago that employs 50 people, have a growing business, and has been through a two year wringer trying to get a building permit to expand their premises. The only limit on that type of activity by the local government is failure, catastrophic failure where the bureaucracy essentially disappears. Or better someone figures out that having tax paying businesses that are successful is a good idea instead of forcing manufacturers to move their operations to china.

This hasn’t happened and the reason why is the root of the financial crisis. Governments, households, businesses have been able to borrow money cheaply and seemingly in unlimited amounts. That created growth in some places and papered over the non competitive nature of their economies or businesses. Now everyone has to figure out a way to pay their own way. If the competitive pressures of two decades ago had been heeded, they wouldn’t be in the situation they are today. Sweden heeded those pressures, so did Germany and a few other, very rare. Everyone else added overhead.

Brian Donohue April 11, 2013 at 12:01 pm

+1.

Slocum April 11, 2013 at 10:16 am

Ricardo’s law means that everyone is better off trading than not trading, but it does NOT mean that traders cannot be made poorer when competitors become more efficient.

zbicyclist April 11, 2013 at 2:53 pm

Mankiw’s principles:
#5. Trade can make everyone better off.

Yoram’s translation:
#5. Trade can make everyone worse off.

“To see what it is, compare the following phrases:
A: Trade can make everyone better off.
B: Trade will make everyone better off.
Now, Statement B is clearly superior to Statement A. Why, then, does Mankiw use Statement A? It can only be because Statement B is false. By saying that trade can make everyone better off, Mankiw is conveying one of the subtleties of economics: trade can also not make everyone better off. It is a short hop from here to my translation, “Trade can make everybody worse off.””

The above is economist/comedian Yoram Bauman. http://www.improbable.com/airchives/paperair/volume9/v9i2/mankiw.html

Alex Godofsky April 11, 2013 at 10:18 am

In Tyler’s example, Greece is worse off because its trading partners end up choosing to trade with India instead of Greece, because it’s cheaper. Greece couldn’t become better off by putting up its own trade barriers. Greece could become better off by convincing e.g. the UK to only trade with Greece instead of India, but why would the UK want to do that?

prior_approval April 11, 2013 at 11:38 am

‘but why would the UK want to do that’?

Shorter and cheaper flight time between one former imperial possession and another`

GC April 15, 2013 at 5:35 am

” but why would the UK want to do that?”

because Uk would get some preferential treatment in some sector of choice. In fact, Cyprus has no leverage, but what if France, Italy, Spain, Portugal would together decide that it’s time to stop cheap import from China to give a lift to, more expensive and inefficient in absolute terms, but local, tax paying and internal demand inducing jobs?

john personna April 11, 2013 at 8:26 am

A good, full, read. My first reaction is that Keynesianism is not the biggest dragon in the room. Remember first the simple economic parables that free trade was (an immediate) good, because comparative advantage.

(Cue “you hate poor people” because I do not like decades of US middle class decline -and I hope that I am not supposed to accept both that decline and the unsovability of it!)

john personna April 11, 2013 at 8:43 am

To expand slightly, I think the biggest error sold to the American people was that ANY non-zero tariff was “protectionist” and “leads to the Great Depression.” I think that small uniform tariffs are economically efficient, and broaden the tax burden to foreign producers. After all, when two gizmos are sold at Walmart, one is manufactured under the US tax system, and one is subsidized in China and arrives under free trade … there is more than natural, comparative, advantage going on. We need small uniform tariffs to equalize tax burden for US producers.

JWatts April 11, 2013 at 8:56 am

It’s always been a little fuzzy to me why small, uniform tariffs are supposed to be bad.

ThomasH April 11, 2013 at 11:24 am

Because they are the equivalent of an export tax. They prevent just a smidgen of specialization. Of course they are tons better than NON-uniform tariffs.

Stephen April 11, 2013 at 11:05 pm

If you want to pay more in order to protect someone else’s job, then go for it, but as Sam Goldwyn said, “include me out”.

GC April 15, 2013 at 5:42 am

““include me out”.” is nice when it’s “someone else’s job”… not so much when it is your own.
In other words, shall you hold to your belief also when everyone wanting to pay less will cost you your job and also the possibility of getting another not paying a third less?

Ray Lopez April 11, 2013 at 8:57 am

People, forget the small nits about German flexibility. Focus on the big picture. Chess master and economics master Tyler Cowen shows us his brilliance in this post, by synthesizing something like 80 years of economic thinking and several years of blog posts in one article. Brilliant! Reminds me of the 22nd move by black in Rotlewi vs Rubinstein, http://www.chessgames.com/perl/chessgame?gid=1119679

Mark April 11, 2013 at 9:01 am

Seems a rather long rehash of your usual ‘it’s not AD it’s structural’ refrain.

prior_approval April 11, 2013 at 9:12 am

‘Another way of thinking about the European economic collapse’

Not that this is a way to frame anything, of course. Because personally, I can’t imagine any part of the U.S. that wouldn’t have been glad to experience a German style economic collapse over the last five year. Or anyone who would want Detroit style economic growth (and by the way, Detroit has a population roughly the size of Cyprus – ask yourself, where would you prefer to live?).

dan1111 April 11, 2013 at 10:28 am

Detroit is worse off than Germany–yes, I think we can all agree on that. But what is your point, exactly?

prior_approval April 11, 2013 at 11:22 am

My point is how do you define ‘European economic collapse?’ I was in East Germany just last week (brutal spring weather in the Erzgebirge, like they last had just a decade ago, according to the Dresdnerin I spoke with who was not merely interested in piously hoping for spring to arrive) – how does that fit into the narrative here? East Germany was Germany’s Detroit, in a not precisely metaphorical sense – how does it look after 2 decades? And considering that East Germany alone has 17 times the population of Cyprus, how does one measure ‘economic collapse?’

And this becomes a broad question, one that this blog tends to avoid – a generation ago, Spain and Portugal were fascist dictorships (a no longer true reality that at least one commenter at volokh..com considers one of the major accomplishments of the EU till now). Not to mention the peaceful integration of most of what was called the ‘Eastern Bloc’ during the Cold War.

One should check Spanish unemployment rates at the end of the Franco era – or after the Carlos restoration, for that matter – to get a feel for what ‘collapse’ means in European terms. (Hint – Spanish unemploymen is not exactly extreme by the standards of the previous generation).

GC April 15, 2013 at 5:54 am

“Spanish unemployment is not exactly extreme by the standards of the previous generation”

???

For OECD data, unemployment in Spain in the late 70s was about 12%, grew to almost 25% after Spain entered EU as its economy was re-engineered to comply with EU acquis communitaire, dropped in the late 90s and early 00s, now we know, thanks to a huge bubble in real estate fueled by joining the euro.

Unemployement under Franco was half as it is now (of course, you can argue about GDP and income being much lower, but people were actually working)

T. Shaw April 11, 2013 at 10:56 am

That would be Cyprus for sure.

ECB released its all-country wealth report. Cypriot households were the second richest in the Eurozone when measured by median and average wealth. Median household wealth was €266,900, or over five-times Germany’s meager median €51,400. Cypriot average household wealth was a plutocratic €670,900 ($872,000!), 3.4-times Germany’s €195,200.

Does anyone see a problem with bailed-out Cyprus and bailer Germany occupying (the counter-intuitive) opposite ends of the wealth distribution spectrum?

Lastly, of what Eurpoean economic collapse are you referring?

Steven Kopits April 11, 2013 at 9:16 am

I think you’re underestimating the role of oil here. For example, North Sea oil production is down by half Q1 2013 on Q1 2005. For Q1, it is down 18% on the previous year, equal to a decline of 610 kbpd. For purposes of comparison, US oil production is up 750 kbpd in the same period. Thus, the UK has suffered a “negative shale boom” in the last year and the same scale as the US has enjoyed a positive boom. Considering how much shale oil has helped the US, the loss of a similar amount in a country with 1/5th of our population is bound to be substantial.

Second, the global oil supply in Q1 is down 830,000 bpd (-0.9%) compared to Q1 last year. This reduction comes entirely from Saudi Arabia (with US shales (+750k), Iraq (+420k) and oil sands (+90k) offsetting declines elsewhere).

Meanwhile, the oil majors saw deteriorating returns from upstream activities pretty much across the board in 2012, and all the majors bar Chevron are reducing their upstream spending in 2013. So oil production is down, and yet returns on oil investments are also down.

This is not a great story, no matter what Ed Morse tells us. And in this environment, the oil supply will be reallocated from the OECD to the non-OECD countries. Oil consumption is falling rapidly in Europe (-2.5%) and Japan (-3.4%), with the US up a smidgen (+0.5%) for the first time in two years. But the story will remain unchanged. OECD oil consumption will continue to fall, and this reduction in consumption has to be offset by gains in efficiency if GDP growth is to reach desired levels. It is far from apparent that the necessary 4.5-5.0% annual efficiency gains are possible to attain year in and year out. If that is so, growth in the OECD countries will be capped at a lower level.

So, I’m for all the other explanations, many of which I agree with. But if you’re going to write on this topic, you need to have a solid understanding of the path of oil production, the impact on oil consumpiton in the OECD economies, and linkage between oil consumption and GDP growth.

dirk April 11, 2013 at 10:55 am

Good points. How do we quantify the production decline and consumption decline (the part which we can attribute to higher prices and not to a result of other weaknesses in the economy) in Europe in terms of median income loss? Your narrative enhances Tyler’s (It’s now: IT, China, oil) , the question is what percentage of lower European income is due to oil vs. IT and China? On the question of Italy, Spain and Greece, where Tyler guesses a 15% income loss, I’d guess the decline on the oil revenue side has little or nothing to do with it. Or have ENI and Repsol taken huge enough hits to account for part of this national revenue decline?

Steven Kopits April 11, 2013 at 11:55 am

OECD oil consumption may be expected to fall at a 1.5% pace (it’s falling faster now in Europe and Japan).

Efficiency gains for oil in the US have been:

- 1.9% since 2005

- 3.8% in the last six quarters

- estimated long term, back of the envelope basis, at 2.5% by Jim Hamilton

- my guess: 3.5% in an up market; probably around Jim’s number overall (2.5%)

This gives you potential GDP growth of 1.0-1.5% for the OECD full cycle; in the low to mid 2%’s for the up cycle. Keep in mind that oil production is an offset to this. Major oil or commodity exporters–Austrlian, Norway and Canada–have in fact been able to increase oil consumption. The US is also up just a bit now.

In any event, oil is knocking something like 0.7-1.2 percentage points off of GDP growth from my perspective.

Steven Kopits April 11, 2013 at 11:27 am

To clarify North Sea production:

Norway: production fell 18.6% (380 kbpd) in the last year.

UK oil production fell 13.9% (150 kbpd) in the last year. UK oil production has fallen 650 kbpd (42%) since Q1 2009, ie, in the last four years.

Amelanchier April 11, 2013 at 9:18 am

“In sum, the less flexible European economies will lose at least 15% of their gdps, due to trade and technology”

Huh? Why is there no comparative advantage for Europeans?

Norman Pfyster April 11, 2013 at 12:26 pm

I think the sentence means the less flexible European economies (such as Greece or Italy) compared to more flexible European economies (such as Germany or Sweden).

Claudia April 11, 2013 at 9:31 am

Interesting. As I read it I kept thinking…there has to be some good data test to this. Your assertions don’t strike me as wacky, but also not too hard to downplay without empirical support. Otherwise I kept asking myself: why now? If all these non-adjustments and inefficiencies had built up over time, what made them spill over to center stage now. And why did we get here? Maybe we are just seeing the economic value of the Eurozone in reverse or something else.

One last thing: I don’t think the sensible adherents of AD frameworks are trying tell the “entire story” … there’s plenty of story to go around. The trade/tech story has been running in the background for a while, so I don’t think anyone is going to push it off in the corner. In addition, many of the macro frameworks are trying to build more meaningful ties to the financial side of the economy. I have also been wondering lately about the lack of distributional issues in our macro frameworks (a two-speed income economy for households seems like it could be important) and of course, there were some important expectation resets to consider.

The Original D April 11, 2013 at 11:15 am

Why now? I’m not an economist but it seems likely that a combination of shocks knocked everything out of equilibrium:

1. The financial crisis
2. Much higher energy prices after a period when they were at historic lows (i.e. when the Euro came into being)
3. Loss of faith in the Euro, followed by austerity in many EU countries

prior_approval April 11, 2013 at 11:29 am

‘Loss of faith in the Euro’

Except in Germany, as already noted in the comment section, there has never been higher faith in the euro, with almost 70% of citizens finding the euro worthwhile, the highest total in Forsa polls since the introduction of the euro. See the comments of http://marginalrevolution.com/marginalrevolution/2013/04/could-this-euro-have-been-made-out-of-ice.html for a link.

Johann Grabner April 11, 2013 at 9:59 am

GDP per capita has risen from $28k in 1990 to $38k today: https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=united%20states%20gdp#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_kd&scale_y=lin&ind_y=false&rdim=region&idim=country:USA&ifdim=region&hl=en_US&dl=en&ind=false . Where did it go? mostly to the top 20%: http://www.decisionsonevidence.com/wp-content/uploads/2012/05/2010-Census-Reveals-Income-Inequality-Gap-1947-2010.png and among the top 20%, most of it landed in the top 1%.

so the US economy did produce hefty gains in the last 30 years. It is only that almost all of that wealth gain was siphoned off to only a handful recipients. Why? Lower taxes for the upper income brackets and dwindling union membership. If we still hat the Eisenhower tax rates like 92% for everything you make about $2 million a year (in 2013 dollars), the top 1% would have lost most their income gains and if every firm would be unionized workers would be paid decent wages.

the US didn’t only not lose any income, it is today much more wealthy than it was 20, 30 years ago. Who got screwed is the average worker. He got brainwashed into believing that unions are bad and that the flithy rich would somehow give some breadcrumbs to the lower 75% if they just don’t have to pay any taxes. Both are fat lies and the general public is paying the price.

Ritwik April 11, 2013 at 10:04 am

Excellent!

Slightly embarrassed to plug myself, but your empirical point 2 reminded me of something I wrote 2 yrs ago. Para 4.

http://ritwikpriya.blogspot.co.uk/2011/09/old-keynesian-deceit-crisis-europe.html

Edward Lambert April 11, 2013 at 1:05 pm

It is good to add a link to a larger more thorough comment… Then we can understand you much better. I like what you say in your link… “So Professor, which is it? Does deflation reduce employment or increase employment?”

I see in your post and the post above that there are still big questions about Keynesian economics. From my work, I have come to understand that the questions can be answered by understanding what is probably the main core concept of Keynes… Effective Demand. You really don’t hear about and it is not in many textbooks. I have been posting my research into a new equation for Effective demand. Now it is my turn to plug myself, but it is ok… this is how we publish things nowadays.
http://effectivedemand.typepad.com/ed/2013/04/conceptualizing-the-value-of-effective-demand.html

What i can say is that we are nearing the end of the current expansion. We are nearing the peak of an inflationary gap. Profits are good. But there is little upside now. Here is another link to explain…
http://effectivedemand.typepad.com/ed/2013/03/inflationary-and-recessionary-gaps.html

Mike in Qingdao April 11, 2013 at 10:08 am

Im deeply confused. Tyler seems to say that ” free trade” with China and improvements in productivity have not led to general and widespread prosperity.

Maybe I had too much to drink tonight.

Chris M. April 11, 2013 at 10:38 am

Mike, I think he was pointing out the fact that it has not led to a rise in median income, not the same thing as living standards or quality of life increases. (Prosperity way to vague a term to use in this context.)

john personna April 11, 2013 at 11:15 am

We can augment median income with other measures which would map to happiness or especially security. Net worth and retirement savings in median incomes have not done well, for instance. (I am actually a critic of GDP as a measure for happiness, but family incomes seem much closer to home (pardon) than that.)

Urso April 11, 2013 at 11:18 am

The fact that Mike is in Qingdao makes me think he is referencing the fact that there are two parties to every trade, one of which is not taken into account in Tyler’s statement.

Chris M. April 11, 2013 at 11:53 am

I thought about that, but I took the “general and widespread” comment to suggest a more global outlook.

Lord April 11, 2013 at 10:19 am

Where are the growth industries? Oil, possibly tech/ip. That’s not a lot to base a recovery on. In particular, Europe should have some growth industries of its own, lack of any strongly suggests a nominal problem, more strongly than the lack of deflation which in large part is exchange rates and imports.

dead serious April 11, 2013 at 1:33 pm

Hospice care for the baby boomers.

ChrisA April 12, 2013 at 5:52 am

Professional vacation photographers! See Tyler’s next post.

ThomasH April 11, 2013 at 11:17 am

Interesting speculation which implies that there is a strong supply shock as some kinds of L become less productive. But why should that lead to unemployment? Wouldn’t good monetary policy (e.g. ngdp targeting) and opportunistic public investment be able to preserve full employment, albeit with higher inflation?

Brian Donohue April 11, 2013 at 12:04 pm

Wow. Long post, lotta ground, and I think I agree with almost all of this. Well done.

Sam Penrose April 11, 2013 at 12:44 pm

Always really appreciate these posts. Thank you.

CG April 11, 2013 at 1:18 pm

“Given the massively high unemployment we have seen, the Keynesian account would lead us to expect corresponding rates of price deflation comparable to those of the Great Depression, such as negative ten percent. We’re seeing rates of inflation between zero and two percent, with prices often continuing to move up.”

Maybe active monetary policy is keeping the price level up? That would be consistent with a collapse in AD but without the deflationary shock you’d expect to see in the absence of OMO and QE.

prior_approval April 11, 2013 at 1:39 pm

‘Maybe active monetary policy is keeping the price level up?’

And not only that – in the U.S., this policy is being explicitly implemented by a scholar of the Great Depression.

TMC April 11, 2013 at 6:08 pm

Unfortunately Obama thinks the past mistakes are a ‘to do’ list.

prior_approval April 12, 2013 at 12:33 am

Sorry, I was talking about this man –

‘On February 1, 2006, President Bush appointed Bernanke to a fourteen-year term as a member of the Federal Reserve Board of Governors, and to a four-year term as Chairman. By virtue of the chairmanship, he sits on the Financial Stability Oversight Board that oversees the Troubled Asset Relief Program. He also serves as Chairman of the Federal Open Market Committee, the System’s principal monetary policy making body.’ http://en.wikipedia.org/wiki/Ben_Bernanke

A man who has a doctrine named after him – ‘The Bernanke doctrine refers to measures that the Federal Reserve can use in conducting monetary policy to combat deflation. Ben Bernanke is the Chairman of the Board of Governors of the United States Federal Reserve.’ http://en.wikipedia.org/wiki/Bernanke_Doctrine

US IS DEAD MAN WALKING April 11, 2013 at 3:01 pm

You have GOT TO BE JOKING RIGHT! The US is toast as it has $211 Trillion dollars in debt and absolutely ZERO hope of EVER paying it back!
THE US WILL COLLAPSE LONG BEFORE THE EU!

Go Kings, Go! April 11, 2013 at 5:47 pm

At first I thought you were wrong, but the ALL CAPS caused me to reconsider, and the 3 exclamation marks tentatively convinced me. Italicize some and I am all in.

CPV April 11, 2013 at 3:26 pm

How is it possible that serious people believe that government policy is EVER the main story over time scales longer than a few years, unless it’s pathologically destructive (corruption, totalitarianism, etc)?

Bill April 11, 2013 at 10:13 pm

So, IT and austerity arrived in the fall of 2008.

Good storey.

Richard W April 12, 2013 at 12:27 am

” By the way, UK employment is now at an all-time high, as jobs have been reshuffled to lower-value service sector activities, and out of oil and finance. ”

You need a new theory because oil industry jobs are expanding.

” Kevin Forbes, from Oilandgaspeople.com, said: “Our forecast shows that with increased investment in North Sea Oil, demand for qualified staff is set to reach an all time high, which will exacerbate an already serious skills shortage, a problem that is being further exacerbated as UK candidates head abroad to earn even higher wages with a huge demand for qualified expats globally.”
http://www.livecharts.co.uk/share_prices/UK-oil-and-gas-jobs-set-to-increase–says-new-news20620367.html

The industry are complaining about skill shortages. There is an investment boom going on in the North Sea and the North Atlantic West of Shetland. Although the industry has passed peak production much of the earlier declines were driven by badly designed tax changes. With the tax changes reversed capital investment is increasing.
http://www.oilandgasuk.co.uk/cmsfiles/modules/publications/pdfs/EC026.pdf

ChrisA April 12, 2013 at 5:59 am

He is talking about the contribution to GDP of oil and gas production not the employment.

But there is actually a good issue there to discuss. More than any other countries the Brits are well over represented in the international oil business. The contribution of an oil industry person to UK GDP when they switch from the Uk to working on an overseas asset falls, but the same value is being created and they are earning the same wage. Of course the tax revenue from their work appears in a different countries accounts.

Mikko Särelä April 14, 2013 at 2:12 am

As a market monetarist, I’ve been saying for a long while that there is a real shock. The choices, when it comes to monetary policy, is to either live with falling income or increased unemployment.

Of course, increased unemployment is worse because the fall is much steeper because many people do not get to contribute to the production of an economy. This point is especially important, since Finnish experience shows that the young people away from labor market for several years, tend to be away from labor market for the rest of their lives.

It’s a terrible, terrible lag on economy. This, by the way, is one of the biggest problems in US labor market and will be a drag in the years to come.

www.planview.com April 14, 2013 at 4:51 pm

Great post.

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