Visions of an Unstimulated Land
Somewhere in Barcelona (Yglesias Photo)
In Europe, the shoots are not looking very green:
Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States.
“The shock originated in the U.S., but Europe is paying a higher price,” said Jean Pisani-Ferry, a former top financial adviser to the French government who is now director of Bruegel, a research center in Brussels.
As Tim Fernholz says, this is probably the closest we’re going to get to a natural experiment about different approaches to dealing with the huge negative demand shock inflicted by the collapse of the housing bubble. In the United States, we’ve had aggressive fiscal policy and extremely aggressive monetary policy. In Europe, monetary policy has been more restrained and fiscal policy has been much more restrained. Meanwhile, US growth looks set to recover faster. And the UK, which has been more aggressive than other European countries, also appears to be pulling out of the tailspin faster than Europe.
All that said, this is an interconnected world we live in, and it’s possible that the dead brown shoots emanating from Europe will wind up sparking a secondary economic collapse and pull us back down.
28 Responses to “Visions of an Unstimulated Land”
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June 12th, 2009 at 1:51 pm
For good or ill, trade with Europe is probably not important enough to the U.S. economy for this to do more than slow down our recovery (as opposed to reversing it).
Also, I agree this is an interesting natural experiment, and worth tracking. But I doubt a lot of the people opposing Obama’s economic programs are going to care much about what the real world is telling us.
June 12th, 2009 at 1:51 pm
Frankly, this post, and talking point, approaches new frontiers of inanity. Just a few months ago, on these very pages, it was suggested that Europe would have a shorter, shallower downturn than the US because of its “generous” safety net. I argued then that it was not likely, simply because of the built in rigidities of the European economies that are the result of the very safety net that was being praised. This, not a lack of stimulus, is the reason for the extended, deep downturn.
The stimulus here is still very questionable, and success should not be claimed, as early reports, both statistical and anecdotal, are uniformly negative. You really could do your readers a service by being less of a blatant hack. You don’t want them laughed at when they parrot your arguments in public. Do you?
-AM
June 12th, 2009 at 1:53 pm
Some of the analysis I saw at the time suggested that the difference between US and Europe was not as great as initially believed if automatic stabilizers like unemployment benefits were considered jointly with ecomomic stimulus programs.
The experiment may not be as clean as he suggests.
June 12th, 2009 at 2:06 pm
And, this directly impacts interest rates and the dollar. The OMB expects US budgest deficits of 12% in 2010. The EU expects German budgest deficits of 8.5%. It wouldn’t take much for those numbers to reverse.
For all those worried about USD inflation vs. EUR inflation, German 30 year Bunds are paying 4.34% US Tresuries are paying 4.62%.
June 12th, 2009 at 2:09 pm
It seems fairly obvious that if you borrow more money you can get the wheels rolling faster. But you end up with more debt.
June 12th, 2009 at 2:14 pm
it was suggested that Europe would have a shorter, shallower downturn than the US because of its “generous” safety net
I think you’re conflating two issues. What I recall was that tough economic times were less bad for Europeans as individuals because of the robust safety net.
Now, it appears that these programs themselves are not counter-cyclical enough to obviate the need for direct government spending when private demand is anemic. It’s not clear to me that anyone was arguing this was necessarily true, but it’s clear now that it’s not.
It’s also interesting to note that the US and China have taken a far more interventionist approach to boost economic demand by deliberately spending public money when private demand was anemic. I suspect the key factor may be political integration as opposed to severity of demand–remember, it was the states hardest hit by economic problems whose governors were grandstanding that they wouldn’t take federal money. Unlike the EU, though, they have no ability to stop a bill from passing. In Europe, you have a Germany that’s got an irrational terror of inflation because of their unique political history, and can veto a lot of spending.
But the role of public suffering and demand for action should not be overlooked. China definitely appears to have acted out of a terror that unemployment would cause severe political problems.
June 12th, 2009 at 2:18 pm
Bengt,
It seems fairly obvious that if you borrow more money you can get the wheels rolling faster. But you end up with more debt.
As you know Japan’s debt is 190% of GDP vs. our 40% debt held by the public. Japan didn’t get the fiscal and monetary stimulus going soon enough, many argue, and that was what contributed to the “lost decade”.
One could make the claim that by borrowing a large amount at the onset of the crisis we may reduce the overall cost substantially.
Europe, rather than take on a large debt at the start, may instead be bled dry by years of high social insurance payments and low tax revenue.
Your conjecture is not obvious at all.
June 12th, 2009 at 2:21 pm
Also, I agree this is an interesting natural experiment, and worth tracking. But I doubt a lot of the people opposing Obama’s economic programs are going to care much about what the real world is telling us.
It is important to note that you cannot simply look at the speed of recovery for your comparisons. You have to look at speed and magnitude of recovery, estimate from that how much positive economic output was gained by the stimulus, and then subtract the cost of the stimulus, including the fact that it was all funded by debt which means we have to pay compounding interest on that debt. If the gains are less than the cost then the stimulus was bad policy, and vis-a-versa.
June 12th, 2009 at 2:23 pm
I duno, the US still have a giant financial sector, unregulated and with secret balance sheets. It was at the root of the global crisis, and many of the same players are still in charge. A second shock could well start here when Bank of America or Citybank collapses.
For good or ill, trade with Europe is probably not important enough to the U.S. economy for this to do more than slow down our recovery (as opposed to reversing it).
Well the EU is the first trading partner of the US.
June 12th, 2009 at 2:24 pm
Because of the “automatic stabilizer” effect, the natural experiment is a little more clear on the monetary side than the fiscal side. Still, eventually I think we will be able to tease out the fiscal side as well.
June 12th, 2009 at 2:28 pm
JD,
I basically agree with that approach, which is why I suggested we track this, as opposed to advocating we draw any particular conclusions right now. Moreover, following up a prior comment, at this stage I would suspect any measurable difference in outcomes is more a matter of different monetary policies than different fiscal policies, since the stimulus really is just getting started.
June 12th, 2009 at 2:37 pm
Green shoots are pretty much a joke, it’s just hilarious that Matt seems to think things are getting better out here. They aren’t, banks are just back to playing make-believe, and a lot of other folks are joining with them.
Making things get worse a little more slowly isn’t really mch to crow about. Hell, I give it 2 months before we’re back in the tailspin. This looks a lot like more wishful thinking from the folks in here, mostly the same people who refused to admit we had a problem until very late last year.
June 12th, 2009 at 2:42 pm
Well the EU is the first trading partner of the US.
Which is why I acknowledged a prolonged recession in the EU may slow down the U.S. recovery. But trade in general is not a large enough component of U.S. GDP to make an EU-driven reversal plausible.
June 12th, 2009 at 2:44 pm
Why would we expect the recessions in the two areas to directly track each other? Did they both start at exactly the same time? The answer is no – the European recession starter much later than the US recession, which began in December 2007. So there is no reason to think that the European recession should end at the same time as ours, regardless of the differences in policy.
June 12th, 2009 at 2:44 pm
As you know Japan’s debt is 190% of GDP vs. our 40% debt held by the public. Japan didn’t get the fiscal and monetary stimulus going soon enough, many argue, and that was what contributed to the “lost decade”.
My impression was that it was zombie banks that people didn’t trust that held up things, and the state’s stimulus (enormous spending on infrastructure) therefore didn’t help. The debt came from something, after all. They did do a lot of stimulus spending, especially infrastructure.
June 12th, 2009 at 2:48 pm
Bengt,
It could be argued if they had been willing to do a TARP/ARRA sooner they would have got out of their tailspin faster and for less cost overall.
Much of the pressure to pass TARP and the ARRA was due to the experience Japan had when its own credit bubble burst back in the late 80’s early 90’s.
Japan eventually did go with its version of the TARP but only long after it was too little too late.
June 12th, 2009 at 3:01 pm
Bengt,
In 1998 – fully 7 years after the start of the crisis:
Under enormous international pressure, Japan’s Prime Minister Keizu Obuchi is embarking on a massive bailout of its banking system. Some $510 billion will be set aside to cover depositors, inject capital into ailing banks, and effectively nationalize the insolvent ones. The up-front money for the salvage operation represents about 12% of Japan’s economic output–a commitment that dwarfs the money spent on the U.S. savings and loan crisis. How will the plan work in practice? And will it restore Japan’s crippled banking sector to health? Here are some key issues to consider.
Obviously, if they were going to spend $510 billion they should have spent it much sooner.
June 12th, 2009 at 3:09 pm
I’m pessimistic, even if I may be wrong. We go from “worst crisis since the depression” to “green shoots” in a matter of months. The banks are still insolvent without government help, we’re still losing jobs at around 600,000 a month in an economy driven by consumer demand, commercial real estate portfolios are said to be the next thing ready to blow- I dunno. Seems odd that a little bit of government spending would turn all the long-time-brewing problems around in a matter of months.
June 12th, 2009 at 3:13 pm
If you’re counting groups of countries, NAFTA (the parts not us) is our biggest partner.
June 12th, 2009 at 3:15 pm
Taker,
I’m pessimistic, even if I may be wrong. We go from “worst crisis since the depression” to “green shoots” in a matter of months.
Japan passed its bank bailout seven years after the start of their crisis. We passed ours within days of realising the extent of the problem. It is certainly conceivable that such prompt action can, if the policy prescriptions are correct, mitigate the problem.
June 12th, 2009 at 3:31 pm
PS The building in the photo is the Custom House in Barcelona.
June 12th, 2009 at 3:36 pm
We go from “worst crisis since the depression” to “green shoots” in a matter of months.
I guess the plausibility of this depends on how you define “green shoots”. The weakest definition is just preliminary indications that the general economy may turn around later this year or early next year. And since that was always the plan/hope, it really shouldn’t be too surprising that “green shoots” by that definition are showing up.
June 12th, 2009 at 3:46 pm
“It is certainly conceivable that such prompt action can, if the policy prescriptions are correct, mitigate the problem.”
If stimulus was the only issue, I agree. The question is how many problems are just due a lack of stimulus, and how many are structural? A stimulus can prime the pump, but it can’t actually build a new pump. The financial sector as a driver of the economy and as a producer of outsized corporate profits won’t be what it was.
June 12th, 2009 at 4:11 pm
“as a related point, the policy response has been much quicker in the U.S.. Within 16 months, the Fed had slashed interest rates from their peak to near 0; the BoJ took 9 years. The U.S. is already into a second and sizable fiscal stimulus package; meaningful and sustained ones were a while coming in Japan. And whereas the U.S. began injecting public money to recapitalize banks within a year after the bubble burst, it took Japan 8 years to do so…”
As it is far from a perfect world, I’m willing to entertain the notion that a prompt but less than perfect bailout, combined with a less than perfect stimulus, might just get us over the hump.
June 12th, 2009 at 5:56 pm
Re: I argued then that it was not likely, simply because of the built in rigidities of the European economies that are the result of the very safety net that was being praised.
That’s not necessarily true. Remember, Europe takes in a lot of very different economies and while all of them have a better-developed safety net than the US, it is organized in very different ways. In the “Carolignian economies” (France, Germany and their immediate satellites) the safety takes the form of extreme labor market rigidities, such that people in middle-class jobs are very secure in those jobs and unlikely to be laid off. But in Scandinavia you have generous unemployment and retraining benefits instead while the labor market is quite flexible. It would seem that the former model could indeed play a roll in retarding a recovery by not allowing inefficiencies to be excised from the economy, but the latter model should help speed a recovery by asissting workers into new jobs and maintaining consummer demand at a higher level.
Re: I duno, the US still have a giant financial sector, unregulated and with secret balance sheets.
Europe and Asia are hardly free of those dangers. In some ways the European banking system is in worse straits than the American one is.
Re: Well the EU is the first trading partner of the US.
Um, Canada? Unless you mean to say
“The EU is first trading partner of NAFTA”, which would be a more apples-to-apples comparison.
Re: We go from “worst crisis since the depression” to “green shoots” in a matter of months.
No one is saying everything is hunky-dory, Obviously the labor market is not. But any turn-arround will occur “in a matter of months” although it may (will) take much longer for full recovery to arrive.
June 12th, 2009 at 6:19 pm
Only around $20 billion of the US stimulus has been spent.
Even if you account for effects like states borrowing against expected future stimulus funding, this is quite paltry. So using the economic health of the US relative to Europe (itself a debatable proposition) to draw conclusions about fiscal stimulus is bogus.
June 12th, 2009 at 6:46 pm
But in Scandinavia you have generous unemployment and retraining benefits instead while the labor market is quite flexible. It would seem that the former model could indeed play a roll in retarding a recovery by not allowing inefficiencies to be excised from the economy, but the latter model should help speed a recovery by asissting workers into new jobs and maintaining consummer demand at a higher level.
Debatable. High unemployment benefits often lead to people staying out of work longer. Low firing difficulty and low unemployment benefits give the most flexibility, and raising either is going to increase rigidities. You may bet more stable ag demand, but that is not necessarily the case, and not always as important as some people think.
-AM
June 12th, 2009 at 9:00 pm
Re: High unemployment benefits often lead to people staying out of work longer.
If this is due to the unemployed seeking jobs that they fit well in, and which pay at levels commensurate with their skills. I fail to see any benefit to the economy in having skilled and educated people flipping burgers or telemarketing (as I once did in a spell on unemployment). That’s a waste of resources and at the extreme creates friction which costs the overall economy. And if the unemployed are using their benefits to become better skilled, then that’s a net plus to the economy. No one would suggest that we get rid of colleges and high schools and just send everyone, unskilled, into the workforce at age 14 as was once the case, even though there is an overall cost to supporting students (and it really does not matter how that support is funded; family money spent on supporting teenagers is still money unavailable for any other purpose).