Heed the yaysayers not the naysayers

There is one principal divide in global economic policy and despite the summer holidays a bout of policy meetings and data releases has ensured that both sides remain exercised. Last week featured second-quarter growth numbers for the largesteconomies and a policy decision (or largely non-decision) meeting at the Bank of Japan. This week sees a number of agenda-setting data and decision-making events, including “super Thursday” at the Bank of England with publication of the quarterly inflation report and an expected monetary loosening.

Most people agree that central banks around the world have gone to extraordinary lengths to support their economies (some think letting budget deficits grow so huge early in the crisis reflects strong fiscal support as well). Most also agree that the results have at best been disappointing. Last week’s numbers saw the economies of the eurozone and the US grow at a sluggish 0.3 per cent in the second quarter, or an annualised 1.2 per cent. The UK grew faster than expected (see below), but the Bank of England is expected to slash its forecasts this week.

There are two common reactions to this continuation of middling (or worse) news. One is to say the medicine is working but the dosage is too low. The other is to say it is not, so we should not expect better results from more of the same. An example of the latter was Michael Schuman’s Bloomberg View column that argues that the BoJ may be demonstrating “the outer limits and ultimate effectiveness of monetary policy”. That is a somewhat paradoxical reading after an announcement that was widely judged — even by Schuman himself — to have offered only minor additional measures. But this sort of naysaying is increasingly common. Lest we are encouraged to give up on policy altogether, it is worth considering the other way of looking at things — that of those we may call the yaysayers.

Thus the Economist has just published a good article in defence of Abenomics, Tokyo’s three-pronged economic policy strategy of which monetary stimulus is a key part. It notes that while Abenomics has fallen short of its promises, it has recorded successes, including in turning round monetary developments. For the eurozone, European Central Bank executive board member Benoît Cœuré analysed the ECB’s negative interest rate policy in some detail in a recent speech. It provides evidence that so far, ECB policy is working as it should — it is stimulating lending and demand, and any supposed perverse effects of negative rates on the banking system are not hampering the effectiveness of stimulus.

There is a simple statistical measure that can make the point: the dollar, euro or yen value of the economies in question — that is to say nominal gross domestic product. In our current predicament with large debt overhangs everywhere holding back economic activity, there is a sense in which policymaking should be easy. NGDP could expand either because of inflation or real growth, but either way faster NGDP growth would be a good thing. If it doesn’t directly reflect greater production of goods on services it helps reduce the debt burden that is limiting the growth of such production. The chart below shows the rate of year-on-year NGDP growth in four economies. The main observation to make is that in the eurozone and Japan, whose central banks have redoubled their stimulus efforts in recent years, NGDP growth has duly picked up. In the US and the UK, where central banks have stood still or moved to tighten, it has been slowing since early 2014.

Monetary policy works and monetary policymakers know it. Which raises the question why do they not do more? That goes for all the main central banks. As Brad DeLong puts it in the US case: “If you had told the Federal Reserve at the start of last December that 2015Q4, 2016Q1, and 2016Q2 were going to come in at 0.9%, 0.8%, and 1.2%, respectively, a rational Fed would not only have not raised interest rates in December, they would have announced that they would not even think of raising interest rates until well into 2017, and they would have started looking for more things they could do that would safely boost demand.” And if that is true, surely they too should now aim to loosen further rather than tighten.

Other readables

  • A reflection on concepts of waste in economics. You may know “Keynesian” waste — the degree to which an economy operates below its potential — but what about Schumpeterian or Marxian waste? Hat tip: Branko Milanovi?
  • Andres Schipani’s recent FT report from the ever more depressing state of Venezuela tells of how the army has now been given responsibility to manage food shortages.

Numbers news

  • (By Rewayda Abdulahi) UK economic output accelerated in the second quarter, growing faster than expected ahead of the EU referendum. A closer look at the official statistics, however, puts the acceleration into perspective. Production and services rose sharply in April but fell back or remained flat in May and June in the run-up to the referendum. The increase in GDP, in other words, was entirely driven by the exceptional performance in April.

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