Scott Sumner  

Don't root for (or against) countries, policies, models, etc.

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The world is a very complicated place, and people who look at things from just one dimension end up missing much that is important. For instance, in this post Bob Murphy talks about how Ireland has done well in recent years, despite being in the eurozone. He suggests that this somehow conflicts with my negative view of the eurozone.

In fact, I've always viewed things from an AS/AD perspective. Both sides of the model matter, and they matter a lot. Thus even as monetary policy was too tight for the US after 2008, I often did posts pointing out that Texas was booming, due to its superior supply-side policies. The same is true in the eurozone. The overall policy was too contractionary after 2008, but areas with poor governance (such as Greece) did far worse than areas with good governance, such as Germany. Ireland was hit hard by the drop in AD, but recovered much faster that Greece because it's a much more neoliberal economy. Bob should have addressed his comments to Paul Krugman; I've always been a strong supply and demand-sider.

Suppose you favor policy X. And suppose country Y adopts policy X. Should you predict good things for country Y? Only if you are a complete fool. Economies are extremely big and complex, and it is almost never the case that a single policy adjustment will have a major impact on the trajectory of a given economy.

Countries are not our friend or enemy, and you are making a big mistake if you forecast good or bad things just because you like or dislike one aspect of their policy. China is a perfect example. Some pundits have noticed that China has major problems, such as excessive lending by banks to local governments and SOEs. This is all very true--it's a huge problem. But then they make the mistake of forecasting bad outcomes for the overall economy. They forget that "there is a great deal of ruin in a nation". A country can have enormous problems and enormous strengths at the same time. China might well grow despite its problems. And even if it has a crash similar to the 1998 South Korean financial crisis, it's very unlikely that a pundit would be able to predict the timing of that crash. IMF economists have predicted zero of the last 220 drops in GDP for its member countries, one year ahead of time. Recessions cannot be predicted. I always predict growth, because growth is more likely than recession.

Last year, I decided to play the contrarian and predict that China will keep growing at 6% in 2016, not because I have any ability to predict China's economy (I do not), but rather to push back at those who predict recessions. On what basis does someone think they can predict a recession right now, especially in a country that averaged near double digit growth since 1978, despite having many of the problems that skeptics insist will cause a recession, during much of that period? Now admittedly, the China skeptics will eventually be right, and when China has a recession they will receive great acclaim, as the rest of the media will forget all of the previous false predictions. (You can be sure that I won't.) They will also exaggerate the implications of the recession--just as many did for the 1998 Korean recession.

I would like to think that the new right-wing governments of India and Japan would pursue neoliberal economic policies, despite their distasteful nationalistic policies in other areas. But in fact, they have not done the significant reforms they promised, and wishing something would happen does not make it come true. I'd like Abenomics to raise the Japanese inflation rate, and it has done so over the past 3 years. But the fact remains that current policy is turning increasingly contractionary, and my desire to see inflation in Japan should not (and does not) lead me to predict inflation going forward.

Similarly, I detest the North Korean government more than any other government on the planet, but that does not make me predict slow growth in North Korea. Indeed I expect North Korea to grow faster than any other country in the world over the next 40 years. In contrast, I like the economic policy regimes in places like Australia, Singapore and Switzerland, but that doesn't mean I am optimistic about their growth prospects--they are already quite successful.

The same is true of public policies. I think that QE and negative IOR are effective ways to boost aggregate demand. But I do not expect good things from countries using QE or negative IOR, because if they truly planned on using them enough to be effective, then they would never have had to use them in the first place. Interest rates are negative when policy has failed, and is expected to keep failing. By analogy, a fire hose can be effective during a house fire. But I do not forecast good outcomes for all of America's houses that are currently being sprayed with fire hoses. Indeed many will be severely damaged.

PS. I mentioned Texas above. The Census Bureau just announced that Texas added more people (nearly 1/2 million) between mid-2014 and mid-2015 than any other state. That's its fastest growth in years. Its unemployment rate is 4.5%, below the national average and just 0.1% above a year ago. Liberals sometimes claim that Texas depends on oil, despite overwhelming evidence that it has a broad-based economy. Indeed Texas's population growth slowed during the fracking boom, and is now speeding up during the bust. Liberals seemed to almost root for failure, as they don't like the Texas model. Conservatives will often latch on to the tiniest failing in Nordic countries, to "prove" that the welfare state doesn't work. They are both wasting their time.

PPS. I strongly dislike Trump, but his election would not cause me to forecast a recession. Ditto for Sanders.

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COMMENTS (8 to date)
marcus nunes writes:

Something on Texas:

John Hall writes:

The problem with the way people talk about most forecasts is that they focus on single values. If instead they focused on the distribution of outcomes, then things aren't so surprising.

Bob Murphy writes:

Scott wrote:

[I]n this post Bob Murphy talks about how Ireland has done well in recent years, despite being in the eurozone. He suggests that this somehow conflicts with my negative view of the eurozone.

Just to clarify, Scott, that wasn't really the point of my post. Rather, my point was more like:

(1) Scott thinks Krugman looks foolish for blaming Ireland's poor economic growth on fiscal austerity, when now Ireland is doing great.

(2) Yet Scott blames the eurozone's (including Ireland) poor economic growth on tight money, when now Ireland is doing great.

Yes, I know there are nuances, and I agree you are way more careful in your posts than Krugman is, but in any event the above is what I was saying in my post. Or to put it from another angle: I am sure Krugman would say "there are lots of things that factor into a particular country's performance." Indeed, that's exactly what he said about the US in 2013, remember? So he would presumably say that here too, just as you have in this new post.

Noah writes:

"I detest the North Korean government more than any other government on the planet"

I encourage you to think of Zimbabwe. At least in the case of North Korea, you can look at history and try to understand how the communists reacted to an external threat and imposed draconian control while redicrecting massive resources to the military.

In Zimbabwe, there is no such excuse. They kicked out an entire class of experienced white managers and Mugabe has been too busy stifling political dissent to worry about Zimbabwe's fall from breadbasket to one of the worst non-war torn places to live in the world.

I'm not sure whether life in North Korea or Zimbabwe is worse. But the combination of personality cults and stupidity in Zimbabwe shares no rationalizing factors, as opposed to North Korea, where there legitimately is an enemy that would intervene to topple the regime if they possibly thought they could get away with it, in which case draconian political control and directing huge amounts of resources to the military can be seen as not completely retarded and plausibly having some actual interest in maintaining something that is expected to be better for the country, no matter how misguided it may all be.

Scott Sumner writes:

Bob, I would put it this way. I blame the deep eurozone recession of 2008-09 and the double dip recession after 2011 on the ECB. Even Ireland had a deep recession and a double dip after 2011. The strength of recovery depends on both the amount of ECB stimulus (not enough for the region as a whole) and the specifics of each country (which are very good for Ireland).

Ireland is very small (4 million people), and their growth can vary more dramatically than for a big country. A few major investments from big pharma companies can impact GDP more than in a place like Germany.

Bob Murphy writes:


Sure. And again, I think you could tell from my lighthearted tone in that post that I was mostly just being a wiseguy.

But at this point, why would Krugman at all be embarrassed by what happened? Couldn't he say, "I was saying that right-winger defenders of fiscal austerity should stop holding Ireland up as a role model. It was doing awful at the time they were saying that. And even now, it has some big blips because of pharma investments etc. This is hardly a model for how to fix, say, the eurozone, or Japan, or the US." ?

I think you would have to agree with such a hypothetical Krugman response (since I'm just incorporating your latest statement), and so I think Krugman could plausibly argue that your post bounced off of him. Yes, you and I think supply-side is important, but that's because of a priori reasons, not because the Irish example gives us a lot of new evidence (since Ireland is such a small country etc.).

At least in the case of North Korea, you can look at history and try to understand how the communists reacted to an external threat and imposed draconian control while redicrecting massive resources to the military.
Kim was not responding to a threat, he was the aggressor, always. Stalin had doubts about attacking the South, thanks to America's atomic bomb monopoly, but after that little problem was solved, and he perceived that the U.S. had weakened its military support of South Korea, he gave Kim permission to invade and unify the peninsula.
Scott Sumner writes:

Noah, I agree that Zimbabwe is one of the worst. I still think North Korea is the country furthest from its potential. I.e. North Korea's potential might be South Korea, whereas Zimbabwe's might be Botswana.

I'd add that North Korea's extreme repression was not forced on it by the Cold War, but rather is a policy choice. Places like East Germany were no where near as brutal as North Korea (although plenty brutal in their own way.)

Bob, Yes, Ireland is just one piece of evidence that the supply-side matters, and Brazil is just one more piece, and Argentina is just one more piece. But it's worth pointing them out, each time they come up. Does Krugman still think Ireland is not the country of the future? To me, it looks like it is.

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