Europe’s problem isn’t just the deflation

by on August 15, 2014 at 9:29 am in Current Affairs, Economics, Uncategorized | Permalink

Leonid Bershidsky writes:

For more than four years, consumer prices in Switzerland have risen at an annual pace well below 1 percent. In 2012 and 2013, the country even experienced deflation. Yet its economy has grown at a steady pace, and is expected to expand by 2 percent this year. The unemployment rate is a low 3.2 percent.

He makes some good points, but I think he is too complacent about the costs of deflation for less flexible economies.

1 J August 15, 2014 at 10:03 am

I’m no Switzerland expert, but this article is lazy. Briefly: “deflation” isn’t cyclically bad, it’s off-trend NGDP growth that’s cyclically bad, hence “good” and “bad” deflation (paging Scott Sumner); Switzerland has always had an idiosyncratic labor market due to its guest worker program and other reasons; finally Switzerland’s economy has indeed been growing but both RGDP and NGDP remain below where we would have thought it would be now in 2007.

2 Andrew' August 15, 2014 at 10:49 am

“deflation” isn’t cyclically bad, it’s off-trend NGDP growth that’s cyclically bad, hence “good” and “bad” deflation (paging Scott Sumner) –

I still can’t tell if you people are putting us on.

3 Jason Smith August 15, 2014 at 12:03 pm

Here’s an analysis I coincidentally did of Switzerland and the EU (and Portugal as a representative of the worse off members):

Portugal is experienced NGDP shocks due to changes in their financing situation when the EU raised interest rates. These shocks (plus those from Greece, Spain, etc) bring down the overall EU NGDP growth relative to Switzerland. I think interest rates on debt that isn’t in a currency you control is a key factor.

4 The Anti-Gnostic August 15, 2014 at 10:08 am

All prices should constantly rise, except the price for labor.

5 Yancey Ward August 15, 2014 at 10:38 am

How do economies become “less flexible” in the first place?

6 Xmas August 15, 2014 at 10:38 am

Aren’t the central bankers of Switzerland desperately fighting deflation? Their current overnight LIBOR is 0.0000%, interbank lending rates are actually negative. They’re printing francs as fast as they can to keep 1 CHF = 1.2 Euro. Yet they are still running into deflation.

I know the Swiss are much more thoughtful and sober than the Icelandic, but I can only imagine the bad behavior this situation is encouraging among Swiss businesses and people.

7 Someone from the other side August 15, 2014 at 12:09 pm

There are a bunch of special things going on here which are not related to a slump in AD but related to a bunch of simultaneous one-off shocks

1) Incredibly fast strengthening of the CHF in 2010/11 as the EUR crashed leading to dramatically cheaper imports
2) Entrant of the German discount chains in earnest, finally putting some real pressure on the fantastically inefficient Swiss incumbents

As for the real estate bubble, it’s real, but it at least is partially fueled by immigration pressure (think Hong Kong or Singapore) and not just low interest. As a reaction to the low interest rate environment (you can literally finance at little over 1% these days), the national bank has gradually tightened financing requirements for real estate transactions which seems to have dampened price increases quite a bit.

I will also add that I believe the Swiss CPI to be a fairly bad proxy for overall cost of living developments (last I looked, it had all the issues that core inflation has and then some).

8 Someone from the other side August 15, 2014 at 12:13 pm

I should also mention that on average, pricing for identical consumer goods is still quite a bit higher in Switzerland (partially because of higher cost in the retail channels but also substantially higher margins) than neighboring countries so clearly there is space to deflate prices further.

Things are a little more complicated for locally sourced products, of course.

9 ThomasH August 16, 2014 at 2:26 pm

How much QE have they been doing? What is happening to ngdp growth?

10 QWERTY August 15, 2014 at 10:52 am


Switzerland is in a lot of trouble.

Its clear to everyone.

Caplan is surely right to warn everybody , that we shouldn’t try to be more like switzerland. Very possible in the near future, america will have to open its borders to all the refugees “trapped” in switzerland.

11 Andrew M August 15, 2014 at 10:56 am

Nailed it. Most countries would kill to have Switzerland’s economic “problems”.

12 T. Shaw August 15, 2014 at 11:03 am


Could that be called, “prosperity?”

I think that during the 19th century, some of America’s bigger economic growth and development years between financial panics, there was huge GDP growth and a small amount deflation. As in, say, a loaf of bread cost slightly less in 1900 than it did in 1800.

Economies experience GDP growth with inflation when central planners and politicians play at administering markets. Often the results are misallocations of capital and resources.

13 JS August 15, 2014 at 11:52 am

This notion that the 1800’s had fast growth and deflation is a line often parroted by Austrians but it is just not true. Per capita growth during the 1800’s was nothing special, and basically the whole second half of the century was below the longer run 2% trend. This even overstates most people’s experience since it was a particularly unequal time during the Gilded age. People in retrospect get duped because the overall economy grew quickly from fast population growth but living standards grew slowly. There were three major recessions including the long depression which had lasted 5 years, what had been called the Great depression at the time. Then people like Rothbard came along with their revisionist history because that period corresponded most closely to their policy recommendations. Yes, deflation from good supply shocks are fine, but deflation from weak demand can have negative feedbacks particularly when the major problem is debt overhang.

14 Adrian Ratnapala August 15, 2014 at 12:52 pm

Googling about, I only found a graph half-way down this page []. That shows US per-capita growth taking off after the civil war. There is no source for that graph though. Do you have a better source?

15 The Anti-Gnostic August 15, 2014 at 1:04 pm

but deflation from weak demand can have negative feedbacks particularly when the major problem is debt overhang.

IOW, inflation to avoid the fallout from an unsustainable credit bubble, which the Austrians would point out is the fundamental problem. Deflation is the antidote.

Anybody who thinks prices are too low is perfectly free to pay more.

16 Daniel August 15, 2014 at 3:43 pm

IOW, inflation to avoid the fallout from an unsustainable credit bubble, which the Austrians would point out is the fundamental problem. Deflation is the antidote.

Because if a car runs you over and breaks your bones, running you over again from the opposite direction will heal them.

God you’re stupid.

17 The Anti-Gnostic August 15, 2014 at 5:33 pm

More like, don’t play in the street, but now that you have, you have to go under the knife and endure physical therapy.

18 JC August 15, 2014 at 11:52 am

Deflation can keep consumption from falling or even improve it but if it turns out to be an operating margin eater for companies future investments and employment expansion will be compromised. On the other hand, foreign demand can improve your exports number and add some sugar to your economy… maybe we should check Switzerland exports of goods.

19 nl7 August 15, 2014 at 2:30 pm

“…a direct democracy in which populist proposals are voted down in nationwide referendums”

Einwanderungsinitiative? The country (narrowly) voted for an amendment that would force their government to renegotiate or abdicate their EFTA and pseudo-EEA commitments. Not very common sense. Every country has its flaws, of course.

20 The Devil's Dictionary August 15, 2014 at 5:32 pm
21 The Devil's Dictionary August 15, 2014 at 5:33 pm
22 ThomasH August 16, 2014 at 2:34 pm

European policy makers have made the error of looking at structural reforms as substitutes for macro policies to maintain NGDP growth. The are compliments that shift a larger share of NGDP growth to real GDP growth. The ECB has done a pitiful job of maintaining NGDP growth

23 Tom August 18, 2014 at 6:16 am

Nope, Bershidsky is spot on. It’s your brand of monetarism that’s kooky. Europe’s deflation is not a problem. The problem is that Italy is running large deficits despite low growth and having to pay high real rates.

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