Scott Fullwiler from New Economic Perspectives (ht Economists View) describes some issues he has with the “negative interest rate” idea being put forward by Willem Buiter , Greg Mankiw , and Scott Sumner
Now I have previously put my foot forward and said I agree with this idea (here and here) and I still feel the same, let me describe why with reference to Dr Fullwiler’s post.
Paul Krugman has just mentioned that the “paradox of thrift” has shown up in the data. Now my opinion has moved over time, and I do think that the US is now experiencing a paradox of thrift – but his evidence appears to have nothing to do with this.
I believe that we are hitting a “paradox of thrift” as unemployment in the US is at 9.5% and rising – that is a hell of a lot of wasted labour input, and implies to me that there is a large failure in the labour market reducing national output. As a result, if lower individual private savings could bring some of these guys back into producing it is possible that total private savings could rise (although it is not a given).
However, Krugman puts in the following graph and says this shows the paradox of thrift:
Earlier we discussed the urban regeneration project. Now it appears that the project requires a bailout (ht Greg Mankiw):
We have all heard a lot about how the Taylor rule suggests the US needs a -5% cash rate, which is why this quote in a Bloomberg article was not surprising:
The rule might suggest the need by the end of 2009 of a funds rate of minus 7.5 percent, Laurence Meyer, vice chairman of Macroeconomic Advisers, said in a note to clients in March.
Another quote in the article, from John Taylor himself, was far more interesting:
He said his rule suggests a fed funds rate of 0.5 percent, while the central bank has cut rates to between zero percent and 0.25 percent.
What the hell? So the guy that invented the rule is estimating a completely different appropriate target rate. Now John Taylor is a clued on guy, so this definitely has led me to revise down my view of how much monetary stimulus the US will need.
My suspicion is that his view of potential output is well below the view of some other economists. It is a possibility that we have also raised.
In a recent column by Paul Krugman, he bemoans the fact that wages appear to be falling (ht Economist’s View). His primary justification for this comes from the following section:
Over at the Big Picture blog there has been talk about how bad GDP would have been if we take away the positive contribution of imports.
Fundamentally, imports fell and this “increased GDP”. As a result, some people there have been looking at GDP excluding imports.
Now, this doesn’t actually make sense as a measure to look at. Why? Well when we measure GDP we are interested in “domestic production”. When we measure consumption, investment, and government spending we get some domestically made stuff and some foreign made stuff. We take out imports to remove the foreign made stuff that appears in consumption, investment, and government spending – leaving us with only domestic production.
If we don’t include imports we are effectively “double counting” (in this case double subtracting) and so a figure without imports doesn’t tell us much about domestic production – it effectively gives us some measure of world production associated with activity in the US.
Now, if we are interested in a hypothetical where imports had been unchanged and consumption and the such remained the same then inventories would have risen – as the goods and services don’t just disappear after they turn up at the port. As a result we would have got the same GDP figure that we received the other day (a 6.1% annualised contraction).