December 16, 2019

Economix Blog: Inflationphobia, Part I

DESCRIPTION

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Generals and admirals are always fighting the last war, it is said, designing weapons and devising strategies that are inherently out of date, rather than planning for the next war. Thus, before World War II, United States naval strategy was based on battleships, which proved largely useless when war came, rather than aircraft carriers and destroyers, which proved to be decisive.

Today’s Economist

Perspectives from expert contributors.

So, too, with economists. They tend to worry obsessively about the last big national economic problem, seeing its regeneration everywhere, rather than looking at the data and economic conditions objectively, thereby missing new problems that require a different strategy.

The Great Depression was for economists what World War II was for the military — a problem so big that it forced a complete reassessment of traditional thinking. When the depression and the war ended, the new ideas that they led to became the new orthodoxy.

The military learned the importance of air power and that formed the foundation of Cold War strategy, but left the United States vulnerable to guerrilla warfare in Vietnam, for which air power was ill suited.

Economists learned from the Great Depression that easy money and fiscal stimulus could stimulate growth. Pre-Depression classical economics had been based on a rigid balanced budget requirement for government and a gold standard that provided no discretion for the monetary authorities.

The new economic orthodoxy became associated with the theories of the British economist John Maynard Keynes and came to be called Keynesian economics. Supporters of classical economics were relegated to the sidelines of economic discussion, but they never went away. Throughout the 1950s and 1960s they continued to wage war against Keynesian economics, certain that the abiding truths of classical economics would triumph in the end.

The classical economists thought that inflation was the Achilles’ heel of Keynesian economics, and they hammered this point relentlessly. In truth, the Keynesians were vulnerable on that issue, believing that a little inflation was a small price to pay for bringing down the unemployment rate.

One problem for the Keynesians is that as time went by, their theories became increasingly divorced from the economics of John Maynard Keynes, becoming almost a caricature. Moreover, the economic circumstances were vastly different from those of the Great Depression and required different policies. But economists kept advocating more of what had worked in the 1930s and 1940s.

Keynesian economics was essentially reduced to something called the Phillips curve, which showed that there was always a trade-off between inflation and unemployment – more of one would reduce the other. The only question for policy makers was determining which problem, inflation or unemployment, was more important to voters.

Unfortunately, there was a political bias in the calculation; politicians tended to put reducing unemployment above reducing inflation and so inflation ratcheted upward. There was also confusion among economists about the cause of inflation. The Keynesians, whose view was shaped by the experience of the Great Depression, in which deflation or falling prices was the big problem, underestimated the role of the Federal Reserve and monetary policy in generating inflation.

This led to a counterattack by classical economists based mainly at the University of Chicago. By the 1980s, these economists had essentially overthrown the Keynesians by asserting that inflation had one and only one cause – excessive money growth by the Fed. Tight money had broken the back of inflation and the idea of tying the Fed’s hands, as the gold standard had done, gained popularity.

Fast forward to 2008. The nation fell into another recession. Initially, economists thought it was not dissimilar to those the economy had faced throughout the postwar era; they were slow to recognize its severity as a depression about one-third the size of the Great Depression.

Fortunately, the Fed was led by Ben Bernanke, whose expertise as an academic economist was the Great Depression. He knew that the Fed’s errors had contributed mightily to the depression’s origins, length and depth, and resolved not to make the same mistakes twice. Mr. Bernanke opened the monetary floodgates to keep the financial system and the economy from imploding. I believe that what the Fed did saved us from a rerun of the Great Depression or worse.

But the classical economists, whose ranks were much strengthened by the failure of Keynesian economics in the fight against inflation and the apparent triumph of classical policies in the 1980s and 1990s, immediately saw an inevitable replay of the 1970s. They were fighting the last war.

Virtually every classical economist declared that inflation would quickly return. Many urged people to buy gold to protect themselves, which led the gold price to rise, which was then taken as proof of impending inflation. They demanded that the Fed immediately rescind its emergency actions, withdraw the excess money that had been injected into the banking system and nip inflation in the bud.

Unfortunately, this was more than an academic debate, because many of the Federal Reserve’s regional bank presidents, five of whom sit on the policy-making Federal Open Market Committee, were inflation hawks who shared the view of the classical economists that high inflation was certain unless the Fed tightened monetary policy as soon as possible. They were supported by Republicans in Congress, who berated Mr. Bernanke in the harshest possible terms at every opportunity, as well as a large number of private economists and pundits with access to wide-circulation publications such as The Wall Street Journal and its editorial page.

While the Fed has generally maintained an easy money policy, inflation has remained dormant; some of the Fed’s inflation hawks have even become doves. But the constant drumbeat of attacks on the Fed for fostering inflation has constrained its actions, condemning the economy to slower growth and higher unemployment than necessary.

Next week I will have more to say about inflationphobia.

Article source: http://economix.blogs.nytimes.com/2013/07/09/inflationphobia-part-i/?partner=rss&emc=rss

News Analysis: Germany Resists Europe’s Pleas to Spend More

Could, but almost certainly will not. Even if German lawmakers had not made a balanced budget a constitutional obligation two years ago, there is a deep consensus among policy makers and economists that austerity and growth are not enemies. They are comrades.

Jens Weidmann, president of the Bundesbank, the German central bank, was channeling generations of hawkish predecessors last week when he called on the government of Chancellor Angela Merkel to speed up efforts to cut new borrowing close to zero.

“We must quickly achieve a structurally balanced budget,” Mr. Weidmann said in an interview with the Tagesspiegel newspaper. Germany should set an example for the rest of the beleaguered euro zone, he said.

The Bundesbank president speaks for a large swath of the German public, and his comments suggest that President Nicolas Sarkozy of France and Prime Minister Mario Monti of Italy should not expect more of a financial commitment when they meet with Mrs. Merkel in Berlin this week. Mr. Sarkozy’s visit is Monday and Mr. Monti’s is Wednesday.

“One of the lessons of the crisis,” Mr. Weidmann said, is that cutting budget deficits “should be postponed as little as possible.”

That view annoys many people outside Germany, who see it as another example of the country’s lecturing the rest of Europe while putting a priority on its domestic interests. Germany, with the lowest borrowing costs and strongest economy among the big European countries, should lend the rest of Europe a hand, they say.

“Germany is the only country that has this freedom, and if they don’t use this freedom, that is bad,” said Éric Chaney, chief economist at AXA Group, a French insurer.

With interest rates on German bonds close to zero, Mr. Chaney noted, should the country not be using this cheap money to invest in education and infrastructure and to promote long-term growth while stimulating demand around Europe?

And Germany should do so for its own good, he added. “If Germany has a problem, it is the instability of the euro,” Mr. Chaney said.

Evidence of a coming downturn in the euro zone remains strong, despite some economic indicators in recent weeks that have been better than expected. Retail sales in the euro area fell nearly 1 percent in November from October, according to data released Friday, while unemployment remained at 10.3 percent. The European Commission’s confidence indicator fell in December for a 10th month in a row.

Despite the worsening circumstances — which most economists schooled in the thinking of John Maynard Keynes see as a compelling reason to loosen monetary reins and increase government borrowing — German fiscal policy is already effectively set in stone. In 2009, the country adopted a constitutional “debt brake” that requires a nearly balanced national budget by 2016.

Berlin can achieve that requirement only if it starts reducing deficit spending now. Mr. Weidmann called for the government to achieve that goal sooner.

There are sightings of Keynesians from time to time at German universities and research institutes, but they are a rare breed. Mr. Weidmann represents the prevailing school of thought, as does Jörg Asmussen, a former high-ranking official in the German Finance Ministry who joined the executive board of the European Central Bank last week.

Both studied at the University of Bonn under Axel A. Weber, a hawk’s hawk who was Mr. Weidmann’s predecessor as president of the Bundesbank.

Mr. Weber, in turn, followed in the footsteps of guardians of fiscal and monetary probity like Otmar Issing, a former official at the Bundesbank and E.C.B. who remains a towering figure in German economics. On Friday, the Frankfurter Allgemeine newspaper devoted a full broadsheet page to an essay by Mr. Issing calling for rigid fiscal discipline to restore confidence in the euro.

Article source: http://www.nytimes.com/2012/01/09/business/global/germany-resists-europes-pleas-to-spend-more.html?partner=rss&emc=rss

Germany Resists Europe’s Pleas to Spend More

Could, but almost certainly will not. Even if German lawmakers had not made a balanced budget a constitutional obligation two years ago, there is a deep consensus among policy makers and economists that austerity and growth are not enemies. They are comrades.

Jens Weidmann, president of the Bundesbank, the German central bank, was channeling generations of hawkish predecessors last week when he called on the government of Chancellor Angela Merkel to speed up efforts to cut new borrowing close to zero.

“We must quickly achieve a structurally balanced budget,” Mr. Weidmann said in an interview with the Tagesspiegel newspaper. Germany should set an example for the rest of the beleaguered euro zone, he said.

The Bundesbank president speaks for a large swath of the German public, and his comments suggest that President Nicolas Sarkozy of France and Prime Minister Mario Monti of Italy should not expect more of a financial commitment when they meet with Mrs. Merkel in Berlin this week. Mr. Sarkozy’s visit is Monday and Mr. Monti’s is Wednesday.

“One of the lessons of the crisis,” Mr. Weidmann said, is that cutting budget deficits “should be postponed as little as possible.”

That view annoys many people outside Germany, who see it as another example of the country’s lecturing the rest of Europe while putting a priority on its domestic interests. Germany, with the lowest borrowing costs and strongest economy among the big European countries, should lend the rest of Europe a hand, they say.

“Germany is the only country that has this freedom, and if they don’t use this freedom, that is bad,” said Éric Chaney, chief economist at AXA Group, a French insurer.

With interest rates on German bonds close to zero, Mr. Chaney noted, should the country not be using this cheap money to invest in education and infrastructure and to promote long-term growth while stimulating demand around Europe?

And Germany should do so for its own good, he added. “If Germany has a problem, it is the instability of the euro,” Mr. Chaney said.

Evidence of a coming downturn in the euro zone remains strong, despite some economic indicators in recent weeks that have been better than expected. Retail sales in the euro area fell nearly 1 percent in November from October, according to data released Friday, while unemployment remained at 10.3 percent. The European Commission’s confidence indicator fell in December for a 10th month in a row.

Despite the worsening circumstances — which most economists schooled in the thinking of John Maynard Keynes see as a compelling reason to loosen monetary reins and increase government borrowing — German fiscal policy is already effectively set in stone. In 2009, the country adopted a constitutional “debt brake” that requires a nearly balanced national budget by 2016.

Berlin can achieve that requirement only if it starts reducing deficit spending now. Mr. Weidmann called for the government to achieve that goal sooner.

There are sightings of Keynesians from time to time at German universities and research institutes, but they are a rare breed. Mr. Weidmann represents the prevailing school of thought, as does Jörg Asmussen, a former high-ranking official in the German Finance Ministry who joined the executive board of the European Central Bank last week.

Both studied at the University of Bonn under Axel A. Weber, a hawk’s hawk who was Mr. Weidmann’s predecessor as president of the Bundesbank.

Mr. Weber, in turn, followed in the footsteps of guardians of fiscal and monetary probity like Otmar Issing, a former official at the Bundesbank and E.C.B. who remains a towering figure in German economics. On Friday, the Frankfurter Allgemeine newspaper devoted a full broadsheet page to an essay by Mr. Issing calling for rigid fiscal discipline to restore confidence in the euro.

Article source: http://feeds.nytimes.com/click.phdo?i=eac87ad55d19f68a5a5f1fd0b96e72f6

News Analysis: With 1% Growth and Staggering Debt, Italy Might Have to Cut Its Vacation Short

On Friday, Mr. Berlusconi, a born salesman who seems constitutionally unable to deliver bad news, gave a surprise news conference with his finance minister, Giulio Tremonti, to say the government would speed up the pace of reforms, among other things aiming to balance its budget by 2013, not 2014 as planned in an austerity package approved by Parliament last month.

Many analysts doubt the government will be able to achieve a balanced budget by then, but even that may not be enough to head off an eventual solvency crisis. Last week, Italy’s borrowing rates spiked to a record 6 percent on a debt that is 120 percent of gross domestic product, the second-highest in Europe, after Greece.

If rates stay that high, it could add unbearable strains to a country that is expected to have to refinance nearly $500 billion in 2012, one of the highest amounts in the euro zone and the equivalent of 20 percent of Italy’s G.D.P.

“The situation is getting clearly worse,” said Tito Boeri, an economics professor at Bocconi University in Milan. “Markets have always perceived the risk in Italy as more a problem of slow growth than a problem of solvency, but for a country with a debt the size of Italian debt, the boundary between a liquidity and a solvency crisis is very difficult.”

There are some bright spots. A study by the Italian bank UniCredit last week said that it expected Italy to issue $110 billion in bonds by year’s end, but that the country’s cash position was still “very favorable.” “Even with the currently volatile market conditions,” Italy would end the year with $65 to $70 billion in cash, the bank said, giving the Finance Ministry “sufficient room to counterbalance a reduction in foreign demand.”

The International Monetary Fund says 75 percent of Italian debt is long-term and therefore fairly stable. The nation’s budget deficit, at 4.6 percent of gross domestic product in 2010, is below the European average. Unlike Spain or Ireland, it never had a housing bubble, and unlike Greece and Portugal, it has a strong manufacturing sector and is Europe’s second-largest exporter, after Germany.

But markets are looking for weak links in the euro zone. “When the sharks scent blood they will keep nibbling at potential victims to see if they can be turned into full meals,” said Iain Begg, an economist at the London School of Economics and an expert in European monetary policy.

Italy’s greatest weakness is its faltering growth rate. Real G.D.P. is expected to grow by 1 percent in 2011 and 1.3 percent in 2012, according to Eurostat, not nearly enough to put a dent in its overall debt.

Small businesses with fewer than 15 employees make up the bulk of Italy’s economy. But because of an entrenched bureaucracy that strangles growth — and, economists say, some businesses’ tendency to favor family control over competitive edge — even when the world economy was booming, Italy’s was not. (In 1998, when the United States economy grew 4.4 percent, Italy’s grew 1.4 percent, compared with a European average of 3 percent.)

There are other worrisome figures. Italy currently spends 14 percent of its G.D.P. on pensions. Although its unemployment rate is 8 percent, lower than the European average of 9.9 percent, its employment rate is among Europe’s lowest — at 61 percent for men and 50 percent for women, compared to a European Union average of 75 percent for men and 62 percent for women.

Youth unemployment is around 27 percent, and a full two million young people are in a kind of limbo, neither working nor studying.

In light of this, some say the austerity measures of tax increases and co-payments on health care will only make things worse. “It’s not enough to get the deficit to zero, it’s how you get there that is important,” said Mario Baldassarri, a former Italian deputy finance minister and head of the Senate Finance Committee who was elected with Mr. Berlusconi’s party but broke with him last year.

He said that rather than raise taxes, which dampen growth, the government should have opted to make significant cuts to current government expenditures. “This has to be done now, there is no time to wait,” Mr. Baldassarri said. “Until now the government has acted like a dog chewing its tail and we cannot be that anymore, and that is what the financial markets are telling Italy.”

On Thursday, Italy’s business leaders and often recalcitrant labor union leaders met with the prime minister and said they were willing to start work immediately on reforms. “We cannot allow ourselves to stay in neutral and at the mercy of the markets until September,” they said in a joint statement.

Despite the dizzying descent in the bond markets, many here say members of Parliament have yet to grasp the gravity of the crisis.

“To speak about the most serious crisis in the past 20 years in front of M.P.’s with their suitcases packed, more concentrated on their vacations than on servicing the public debt, gives the image of a political class that is blissfully ignorant,” the commentator Stefano Feltri wrote in the left-wing daily Il Fatto Quotidiano on Friday.

At a news conference on Thursday, Mr. Berlusconi struck a Hooverian pose, saying he did not expect more market turmoil ahead and urged Italians to put their money into Italian bonds. But the new austerity measures include a higher tax on the special accounts required to trade bonds in Italy. “At a time where we want Italians to buy more government bonds, that’s a silly idea,” said Mr. Boeri.

Mr. Berlusconi also urged Italians to buy shares in his companies, which include Italy’s largest private broadcaster, Mediaset. “I brought a company public and if I had significant savings, I would invest in my businesses, which continue to give economic results,” he said with a smile.

Elisabetta Povoledo and Gaia Pianigiani contributed reporting.

Article source: http://www.nytimes.com/2011/08/06/world/europe/06italy.html?partner=rss&emc=rss

Volatile Wall Street Ends the Day Mixed

Stock indexes on Wall Street bounced around like a yo-yo on Friday, a day after they lost 4 percent of their value.

After a quick sigh of relief on better-than-expected jobs numbers at the opening, Wall Street moved lower as fears continued to hang over markets that the United States and Europe were not doing enough to counter their economic problems.

But then stocks moved up after indications that high-level conversations among European leaders were making progress in addressing investor concerns.

The stock market continued on the positive side after Prime Minister Silvio Berlusconi of Italy said his country would “accelerate measures” in an austerity program, with the “aim of a balanced budget in 2013.”

He also said the Group of 7 industrial nations would meet within a few days. And Angela Merkel, chancellor of Germany, said approval for the rescue package for Greece, that was finally agreed last month during a special summit of euro zone leaders, would be speeded up.

The three major Wall Street indexes were all over the map at the close, just as they were during the day. The Dow Jones industrial average was up 60.93, or 0.54 percent, to 11,444.61. But the broader Standard Poor’s 500-stock index was off less than a point to 1,199.38. The Nasdaq composite, meanwhile, was down 23.98 points, or 0.94 percent, to 2,532.41.

Speculation mounted through the day that the European Central Bank would start to buy the bonds of Spain and Italy, the two countries where investor fears about the festering credit crisis are now centered. When the central bank failed to intervene in those two countries Thursday, the markets were spooked by the apparent disconnect.

Lena Komileva at Brown Brothers Harriman in London agreed there were signs Friday that some national central banks in Europe were in the market buying Spanish and Italian government bonds.

“I see a reasonable chance they do change their stance over the weekend,” said Holger Schmieding, chief economist at Berenberg Bank in London, said about the central bank’s hesitation Thursday.

Still, the volatility was likely to continue as the overall market sought a clear direction in the face of economic statistics that were open to interpretation, though far from bullish.

United States employment growth accelerated more than expected in July as private employers stepped up hiring.  The nonfarm payrolls number rose by 117,000, the Labor Department said, above market expectations for a gain of 85,000. And the unemployment rate dipped to 9.1 percent from 9.2 percent in June.  

“There’s still a recovery but it’s teetering on the edge,” said Robin Marshall, director of investment management at Smith Williamson in London. More than two years into a recovery, he said, much stronger labor data should be expected.

The Euro Stoxx 50 index zigzagged as well: It was down 1.54 percent after reversing early losses and shooting up 1.6 percent. The DAX in Frankfurt moved briefly into positive territory then fell again, ending down 2.78 percent. The French CAC 40 was off 1.26 percent. Yields on Italian and Spanish government bonds, which have risen sharply in recent weeks suggesting their debt situations may be spiraling out of control, fell slightly on Friday. But they remained worryingly above 6 percent.

Some gauges of stress in the European banking system remained high, suggesting some banks are struggling to finance themselves in increasingly difficult credit markets in Europe.

Also of concern to analysts was a widening spread between the yields on German and French government bonds, providing a sign of a split right at the heart of the euro zone. Credit default swap rates on government debt also remained high.

Luc Van Heden, chief strategist at KBC Asset Management in Brussels, said the prospect of a double dip recession in the United States was becoming even more of a concern than the sovereign debt crisis in Europe.

“We’ve known about the euro’s debt crisis for months,” he said. “Fears of a double dip in the U.S. are making the market very, very nervous at the moment.”

The jobs report gave few analysts much hope. “It’s an encouraging figure but it’s hardly booming,” said Ryan Sweet, an economist at Moody’s, about the number of new jobs created. “Right now, the recovery is lacking vigor.”

This article has been revised to reflect the following correction:

Correction: August 5, 2011

An earlier version of this article misspelled the first name of France’s president. He is Nicolas (not Nicholas) Sarkozy.

Article source: http://www.nytimes.com/2011/08/06/business/daily-stock-market-activity.html?partner=rss&emc=rss