Paul Krugman and Robin Wells have a lengthy discussion of Reinhart and Rogoff here.
Barry and I have updated our graphs here.
To recall: the red lines show what happen when governments respond to a worldwide economic crisis with monetary and fiscal stimulus. The blue lines show what happens when governments stick to monetary and fiscal orthodoxy. All very purgative and morally satisying no doubt, except that it led directly to the election of Adolf Hitler (something that I have been meaning to blog about for a while, but now I have to prepare for class..)
A reader has pointed me towards this nice post by Michael Pettis, which strays from his usual Chinese turf to take a look at Europe. It makes the same points as the ones Martin Wolf has been making about the need for the large countries with ‘fiscal room’ in the Eurozone, particularly Germany, to do everything they can to maintain aggregate demand in the Eurozone.
This should be obvious to anyone with an understanding of intermediate macroeconomics, so I won’t comment on it. But Pettis also cites Barry Eichengreen’s classic Golden Fetters, which readers may not be familiar with, and in particular Barry’s views on the implications of democracy for the maintenance of the gold standard. That system required adjustment through deflation for countries suffering negative shocks. This was not necessarily a problem in the 19th century, when wages and prices were flexible, and universal suffrage was rare. By the 20th century, however, rigidities in the economy were such that deflation implied unemployment; and democracy meant that this economic cost translated into a direct political cost for policy makers. The gold standard, inevitably, broke down when confronted with the pressures of the Great Depression.
I don’t think it’s fair to compare the euro to the gold standard, as Pettis does. The ECB has lowered interest rates, not raised them, although not by as much as other central banks; and both the French and the Germans have applied fiscal stimulus to their economies. On the other hand, it is true that adjustment in the PIIGS now implies deflation there (unless, as the FT points out today, inflation in the Eurozone as a whole is increased). This is going to be both economically and politically costly, and will have unpredictable effects, especially if the Eurozone as a whole experiences a double dip recession.
I suspect that Ireland will find these adjustments easier to bear than most, since emigration gives us both an economic and a political safety valve. (That was a positive rather than a normative statement by the way.)
À propos of nothing in particular, I can’t resist posting a link to this.
Will Hutton has an op-ed piece today in the Observer which includes some striking historical charts. These are extracted by a very interesting article by Andy Haldane, Executive Director, Financial Stability at the Bank of England. Haldane’s article is well worth a read, as a simple conceptualization of the long run problems facing financial regulators.
Haldane describes “the latest incarnation of efforts by the banking system to boost shareholder returns and, whether by accident or design, game the state. For the authorities, [these pose] a dilemma. Ex-ante, they may well say “never again”. But the ex-post costs of crisis mean such a statement lacks credibility. Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises. And the larger these costs, the lower the credibility of “never again” announcements. This is a doom loop.”