A lot has been written, as it turns out, on Canada's experience with fiscal discipline in the mid-1990s. In 1993, Jean Chretien's Liberals were elected with a majority government and, with their February 1995 budget, embarked on a period of fiscal tightening. The change in policy was a response to a long period of federal budget deficits, and accumulating federal debt, which you can see in the following charts. The first shows the Canadian federal government surplus as a percentage of GDP, and the second shows the U.S. and Canadian federal government debt/GDP ratios. 1995 Jackson Hole conference. His program focused primarily on spending cuts, particularly reductions in corporate subsidies, and reforms to unemployment insurance and federal transfers to the provinces. As well, the original budget proposed a 15% cut in federal public employment.
You can see the results in the above charts. Martin was even more successful in reducing federal deficits than he expected, and the Canadian government ran surpluses, on average, from the late 1990s until the 2008-09 recession. As well, the debt/GDP ratio fell from a high of close to 80% to about 40% before the Great Recession. Further, government expenditures on goods and services (all levels of government) fell significantly, as a fraction of GDP:
So, given those kinds of fiscal cutbacks, maybe you're thinking that we should have seen a contraction in aggregate economic activity in Canada. But that didn't happen. Here's what the time series of real GDP in the U.S. and Canada (normalized to 100 in 1995Q1) look like: celebrated on the right. But left-leaning types aren't quite so happy about it. Canadian electors didn't seem to have a problem with it though. Chretien's Liberals were re-elected with a majority government in 1997, and again in 2000.
Of course, the basic outline from the above four charts doesn't give us that much to go on. We know there could have been a lot going on at the time in Canada, other than changes in fiscal policy. For example, suppose you are a textbook Keynesian, and you read this piece on the Cato Institute's web site. So what, you might say. Maybe those Canadians cut spending when cyclical conditions were very favorable - we know that Keynesian economics only applies to periods of slack. That's roughly what Stephen Gordon had in mind in this post. So, we might look more closely at Canadian labor market data for this period. Here's the labor force participation rate, the employment/population ratio, and the unemployment rate: in this blog post. This only looks like a recovery "well under way" (as Gordon puts it) if you're looking at it with hindsight. In February 1995 it wouldn't have looked so great. There had been a persistent decrease in the employment/population ratio and in the labor force participation rate beginning about 1990, and the unemployment rate stood at 9.6% - below its peak but still quite high. It was pretty common for people to observe those features in the post-Great Recession U.S., and call that labor market slack. So, if you are a textbook Keynesian, those observations would have to puzzle you. How can we radically cut the size of government in a slump and not see signs of big fiscal multipliers and disastrous aggregate performance?
But, not so fast. Maybe monetary policy is helping things along? Indeed, in some discussions of the Greek crisis, people have suggested that Greece could have solved its problems in a more straightforward way if it were not tied to the Euro. A country with an unsustainable deficit has to correct that problem, but it's easier to do that if devaluation is an option. This has two effects, according to this logic. First, we can now pay back our debt to foreign creditors in devalued currency - we have implicitly defaulted on part of our debt, and have avoided the costliness of negotiating with nasty Germans and being thrown out of office by a grumpy electorate. Second, assuming sticky prices, our exports are now cheaper and our imports more expensive. Therefore, as long as the Marshall-Lerner condition holds, there should be an increase in net exports - i.e. a boost in Keynesian aggregate demand.
Indeed, during the 1990s, Canada experienced a depreciation in its exchange rate with the U.S. dollar, and a large increase in net exports:
What was going on with monetary policy? One standard approach might be to look at short-term overnight interest rates. Here's the fed funds rate and the overnight interest rate in Canada, which is what the Bank of Canada targets day-to-day:
What are we to conclude from this? Post-1990 Canada certainly looks like a country with successfully managed fiscal and monetary policy. The federal government brought fiscal policy under control and reduced the burden of government debt, and the central bank adhered to its announced inflation target. How did they do it? In the 1995 federal budget, some well-liked social programs, including government health care, remained more or less intact, and cuts were made in a politically palatable way. Of course, it didn't hurt that the U.S. economy was booming at the time. Are there lessons that we can translate to Greece in the current era? Only the obvious I think. Political stability and good government are important.
"Political stability and good government are important."ReplyDelete
Nope. We are macroeconomists and leave the political stuff to the political scientists.
You cannot say anything serious about contemporary European macroeconomic policy if you neglect the elephant in the room, the implicit gold standard.
Canda has independent monetary policy while Greece does not and that Canadahas offset the contractionary effects of austerity via monetary policy whereas nothing of the kind happened in Europe. The ECB violated its mandate via having kept inflation too low and it also missed the other two goals any sane central bank has: output stabilization and financial stability (OMT came too late).
"Canadahas offset the contractionary effects of austerity via monetary policy..."Delete
That's part of the point. It doesn't look like they did. As you say, Canada has an independent monetary policy, but, post-1991 they appear to be behaving as by-the-book inflation targeters. Basically, they make an agreement with the fiscal authority about their policy rule, and then they stick to it, independent of what the fiscal authority is up to.
"The ECB violated its mandate via having kept inflation too low..."
That's another issue. I think the ECB wants to be a by-the-book inflation targeter, but they don't understand how to increase inflation.
Ignoring timing issues inflation targeting does imply that the CB counteracts (or rather neutralizes) the effects of fiscal policy. This is basic macro and it seems to have worked during the Great Moderation.Delete
There are good arguments against such a regime like asset prince inflation or implicity of the output stabilization goal (and of course the regime change at the ZLB) but that's another matter.
"This is basic macro..."Delete
What basic macro do you mean? The fiscal authority determines the amount of spending on goods and services, what to spend on, total transfers, who to make the transfers to, tax rates, what to tax, and how to finance the difference between its outlays and its income. The central bank does asset swaps. Why would you expect that the central bank can somehow "neutralize" the actions of the fiscal authority?
"What basic macro do you mean?"Delete
Postmodern relativist nonsense. There is basic macro and basic micro and not a plethora of macros and micros.
Contractionary fiscal policy can be offset by expansionary monetary policy. We can debate whether this automatically happens in the case of a inflation-targeting central bank. What we cannot debate is whether fiscal and monetary policy have impacts upon GDP just like we cannot debate whether an increase of CO2 in the atmosphere will increase average temperatures on this planet.
Back to the issue.
You didn't answer the question. What's basic macro for you?Delete
"What we cannot debate is whether fiscal and monetary policy have impacts upon GDP..."
Sure, "they have impacts upon GDP." Maybe this depends what the fiscal policy is, what the monetary policy rule is. What about the quantitative effects? Etc.
Thoughtful commentary, as usual. Thanks.ReplyDelete
Aggregate demand to increase the participation rate has to come from somewhere.ReplyDelete
If it wasn't the Canadian government, or foreigners (via exports encouraged by depreciation), then I posit it was Canadian consumers.
You could consider what is going on with Canadian households debt loads? A housing credit boom?
I think you mean that, given what is going on in the third chart, and the behavior of government expenditures and net exports, there has to be something going on in the other expenditure components - consumption and investment. You could look at that and let me know what you find.Delete
Steve, where do the data not labeled as FRED come from? Thanks!ReplyDelete
It all came from the Statistics Canada CANSIM database. If you have used that, you'll know it's not very user-friendly. They tend to discontinue time series when they change the measurement approach, and you can be stuck splicing time series together on your own. Some of the time series I used here were what I had on hand from the last time I revised my Canadian macro text book. The first chart, for example. I could not find a current time series in CANSIM for the federal government budget surplus, seasonally adjusted. That's why it only goes up to 2012. Similarly for the labor market data - those are discontinued. Net exports is straight out of the national income accounts (chained), but the time series only goes back to 1981. The CPI is one of the few things that is posted on CANSIM as a long time series. It goes all the way from 1914 to the present, monthly.Delete
Good post, like the charts.ReplyDelete
Isnt there a pretty big cut in interest rates arround that time?
And shouldnt it be that the decrease in gov. spending work deflationary and the "loose" monetary policy works inflationary resulting in low inflation in the end?
I'm saying that the actual inflation rate must not be an indicator for loose or tight monetary policy since the two effects could cancel each other out?
As I discuss in the post, there's a two-year period, 1996-98, when the Canadian overnight rate is lower than the fed funds rate. So, as you say, there is a cut in the Bank of Canada's target rate, relative to the U.S. Problems with your interpretation:Delete
1. The policy begins in early 1995, the low nominal interest rates come a year later, and the cut is temporary, relative to the U.S.
2. Not clear the level of the nominal interest rate is the correct measure of monetary "tightness." In the long run, lower nominal interest rates imply lower inflation.
3. Lower government spending lowers inflation according to a Phillips curve theory of inflation. But we know there are empirical problems with Phillips curve theories of inflation. Lower government spending could give you a higher price level - lower output implies lower money demand, which raises the price level.
Note also that the unemployment rate is going down at a rapid rate beginning in 1995. By Phillips curve logic, this would make inflation go up.Delete
Also notice another interesting feature in the last 2 charts. For about the first 10 years after the Bank of Canada starts inflation targeting in 1991, there is a lot of variability in the overnight rate, and then things settle down post-2000. Part of this may just be the Bank learning how to do it. That's another reason for not taking the dip in the overnight rate too seriously.
The only thing you haven't covered is the insane boom in housing in Canada. 1990 was a time of major doom/gloom in the Canadian real estate market and prices didn't recover until 1998 (roughly). From there it has been onward and upward with only a mild interruption in 2008.ReplyDelete
Canadians have piled on more debt than just about any other developed nation in per capita terms since 1990 and I think that explains most of it.
We shall see!
Well, debt is not always a bad thing, nor is asset price appreciation. If you are worried about an event like what happened in the U.S. post-2006, mitigating factors are: (i) loan/value ratios tend to be much lower in Canada than in the U.S., in part because mortgage interest is not deductible - other reasons as well of course; (ii) there is some securitization of mortgages, but not as much as in the U.S., so even if housing prices fall, the mortgages aren't supporting all of the financial market activity (through using the asset backed securities as collateral) as was the case in the U.S. pre-financial crisis; (iii) the Canadian financial system is well-regulated.Delete
Still, the housing price appreciation is rather mind-boggling. Why would prices be so high, for example, in Calgary? Or maybe they're not so high now, after the drop in oil prices?
"Political stability and good government are important." That sounds like a reasonable conclusion.ReplyDelete
But regarding Greece (which you bring up) and other European nations what do you think of this.
Sumner says "When some of the best managed countries in the eurozone can’t even outgrow Iceland, you know that something is very, very wrong."
Well, the eurozone is a very heterogeneous and complicated thing to manage. Iceland, not so much. If you want to draw a parallel with Europe, Canada consists of provinces which have significant power, and the provincial governments (in contrast to state governments in the U.S.) are not constrained to balance their budgets. Further, there's a fair amount of heterogeneity in Canada, both given the original French/English divide, and due to a large amount of immigration from all over the world. But somehow the Canadians have managed to sort that out. The Bank of Canada does not buy the debt of provincial governments; there is a system of interprovincial transfers, engineered by the federal government; Canada has endured threats of separation by french-speaking Canada coupled with referenda. So, there are some of the same elements you see in Europe, but in spite of some rancor, problems get solved and there appears to be no economic disruption.Delete
Thanks for the reply. What do you think of Beckworth's post on this?Delete
I think he's too focused on the period immediately around the policy change. It's important to take a broader perspective on this. You need to look at the whole path of overnight interest rates from 1991, when the Bank of Canada's policy rule changed, and think about what they were trying to target.Delete
"You can see in the chart that the Bank of Canada has been successful, since 1991, at achieving their 2% inflation target"ReplyDelete
Hmm.. I see that as Canada consistently undershooting their 2% inflation target. A successful targeting of 2% would spend as much time over 2% as under it.
What they say they are targeting is year-over-year inflation, and what I show in the chart is performance relative to a price level path of 2% growth per year. A lot depends on what you treat as a base year. If the base year is 1995, it's a lot closer to 2% average. And if you did that, you would be above the 2% trend as of the beginning of the last recession. It's certainly true that the Bank of Canada has been on average undershooting since the beginning of the last recession, much like most central banks in the world, but the other ones are doing worse, I think.Delete
It was good to see the Marshall Lerner Condition referred to, there are strong reasons to suggest that people arguing for a Grexit are putting too much faith in a devaluation (perhaps a result of the influence of open-economy ISLM analysis).ReplyDelete
I thought what might be missing from your discussion was the role of a commodity price boom in driving export and GNP growth with a major change in the terms of trade. Certainly this has been the big variable in Australia driving GNP growth (with obvious and less obvious effects on everything else), largely down to China's (re)emergence in the globalised economy. I had always thought the two economies (Australia and Canada) were similar (two small open economies that are major commodity exporters). The effect of the boom in Australia was to greatly relieve a tight balance of payments constraint and an adverse terms of trade situation (although this tends to be volatile in Australia's case as export growth is quickly followed by a rapid increase in imported manufactures - including inputs needed for the production of those exports). In terms of government and budget deficit/GNP ratios, naturally it was the denominator driving a lot of what was going on.
A truly excellent article. Too many people only focus on one or two aspects of an entire economy.ReplyDelete
- I see the CAD weakened against the USD throughout the 1990s. I would like to throw in the exchange rate of the USD/DEM in the 1990s as well.
- I disagree with one thing here. In general, central banks DO NOT control interest rates (both long & short term) !!!! In general central banks FOLLOW market rates. The direction of canadian short term rates reflect developments in the canadian economy. But the same story applies to the US.
- Canada benefited in the 2nd half of a US economy powering on all cylinders. 70 to 75% of canadian exports go to the US. The US has a population of some 300 million people and Canada has a population of say 30 to 40 million. people. In other words, the smaller canadian economy benefited massively from a very strong US economy.
- I would like to add that it wouldn't have worked this well (for Canada) if the canadan population was 320 million and the US population had been 35 million.Delete
I’m wondering what you make of these comments by Bernanke:ReplyDelete
“The risks for the European project posed by these economic developments are real, no matter what the reasons for them may be. In fact, the reasons are not so difficult to identify. The slow recovery from the crisis of the euro zone as a whole is the result, among other factors, of (1) political resistance that delayed by many years the implementation of sufficiently aggressive monetary policies by the European Central Bank; (2) excessively tight fiscal policies, especially in countries like Germany that have some amount of “fiscal space” and thus no immediate need to tighten their belts; and (3) delays in taking the necessary steps, analogous to the banking “stress tests” in the United States in the spring of 2009, to restore confidence in the banking system. I would not, by the way, put “structural rigidities” very high on this list. Structural reforms are important for long-run growth, but cost-saving measures are less relevant when many workers are already idle; moreover, structural problems have existed in Europe for a long time and so can’t explain recent declines in performance.”
“ What about the strength of the German economy (and a few others) relative to the rest of the euro zone, as illustrated by Figure 2? As I discussed in an earlier post, Germany has benefited from having a currency, the euro, with an international value that is significantly weaker than a hypothetical German-only currency would be. Germany’s membership in the euro area has thus proved a major boost to German exports, relative to what they would be with an independent currency.”
Well, we could probably go on all day about that. There are of course many assumptions that go into what Bernanke is saying.Delete
1. ECB policy was insufficiently aggressive: Obviously Bernanke believes that monetary policy is very powerful. And he thinks QE works. We could argue about both of those assumptions. For example, if QE has little or no effect (and there is no good evidence to the contrary), do we think there would be much kick from a percentage point reduction in the ECB's policy rate? I don't think so. So, the ECB could have done what Bernanke did, and throw everything but the kitchen sink into the works, but likely it would not have made much difference.
2. Germany had "fiscal space" and should have increased government spending, in part to reduce its trade surplus: To work, the Euro area has to work as a fiscal union. But, it seems it doesn't want to. However, I'm wondering about these "imbalances" (see the rest of Bernanke's post) that Bernanke is worried about. If California ran a persistent trade surplus with the rest of the country, would we say that was a problem?
3. Banking regulation: Stress tests are window dressing, as far as I can tell. If anyone is reassured by these things, they shouldn't be.
4. Structural rigidities: We could put a lot of things under this umbrella - this is basically about poor incentives. People don't pay their taxes; social assistance and social security are poorly designed; labor markets are bogged down with various frictions. Southern Europe is of course plagued with these problems. When is a good time for a government to solve such problems? Does Bernanke think that, when a country gets in trouble with its creditors, the last thing that anyone should be asking for is structural reform?
"However, I'm wondering about these "imbalances" (see the rest of Bernanke's post) that Bernanke is worried about. If California ran a persistent trade surplus with the rest of the country, would we say that was a problem?"ReplyDelete
No but that's because America has fiscal union. In the early days of the country the states would fight about who trades more to who-before FU was secure.
Suppose we have a world with 2 countries. Alternative 1: One country runs a persistent current account surplus, the other runs a persistent deficit. Alternative 2: The current account surplus is zero in each country. Why would like describe alternative 1 as a situation with a problem - an "imbalance" - and alternative 2 as a bad state of affairs.Delete
As applied to Germany, why is Germany's current account surplus a problem that Germany is supposed to solve, rather than the problem of the other countries running current account deficits? And why wouldn't we describe the situation as: Oh yes, those generous Germans are giving the rest of the world more goods and services than the rest of the world is giving to them?
Ok let me throw one more quote to get your response on that. I'm just an interested layman trying to make some sense of it all...ReplyDelete
This is Greg Mankiw:
"Making matters worse, however, was the common currency. In an earlier era, Greece could have devalued the drachma, making its exports more competitive on world markets. Easy monetary policy would have offset some of the pain from tight fiscal policy. Mr. Friedman and Mr. Feldstein were right: The euro has turned into an economic liability that has exacerbated political tensions. For this, the European elites who pushed for the currency union bear some responsibility."
Do you basically agree with that-any comments?
One argument people were making for the Euro was that high-inflation southern Europe could enjoy the monetary discipline that the Bundesbank had established. Devaluation and easy money always looks like a convenient solution, and you're always saying this is the last time you'll do it.Delete
Ok, so then it seems the question would be twofold.ReplyDelete
1. Has it given the South price stability
2. If so has it been worth the cost?
Stephen has given you the arguments, that (especially 2) is now for you, or more specifically, the Greeks to decide.Delete
My own view is the answer to (1) is yes, although it is had paid a big price. I remember Greece before the Euro, anything but price stability - and you will be surprised with everything that has happened how much support there still is for keeping the Euro among Greeks.
For me the question is, "is there going to be fiscal union"? If it is not on the cards, get out.
The Greeks should get out. In fact it turns out that Schauble intended that all along.Delete
They can't stay even if they want because Germany wants them out. What is in the cards is not a fiscal union but a political union where European bureaucrats tell national governments what their national budgets must look like.
A union of nation states rather than a 'Federation.'
Paul Krugman's latest is a "told-you-so" post about the Euro. Basically it says it vindicates open economy ISLM and the theory of optimal currency areas.ReplyDelete
This is misleading to put it mildly. Firstly the theory of optimal currency areas does not put in the key argument against the Euro - the importance of fiscal transfers - this was something added much later to Mundell's original construct and was not used by American critics of the Euro at the time Krugman is talking about. Labour mobility in the EU, for example, especially since the integration of the eastern bloc, is actually very hard. We are talking about movements in the millions.
The real problem is that they did not follow up with fiscal and political union after monetary union as they said they would.
Secondly it is not clear that a devaluation would fix this problem. A devaluation would need to meet the Marshall-Lerner condition, and Greece's pre-Euro history suggested a high price in terms of price stability will be paid. In fact a big reason for the large black economy and tax avoidance in Greece is the legacy from this time. When you keep having to add zeros to your currency, it makes fiscal transfers, for example pension payouts very problematic. No wonder people tried to circumvent the system.
Stephen also makes the comment about balance of payments imbalances. I agree with this. On the one hand they say that a devaluation will improve the current account imbalance and contribute to growth. Yet when you ask them what exactly is the dire consequence of a payments imbalance they say a depreciation of the currency!
The MIT tradition has also been very critical of Germany for pursuing 'hard money'. Yet, almost in the same breath they say it has pursued an export oriented strategy to cement balance of payments surpluses (which would imply a devalued currency!). Basically the problem is one where people are drawing on their favourite gadgets instead of trying to get a proper understanding of how these economies have actually worked. The answer is likely to be - yes the German pursued a strong Deutsch Mark policy, adjustment was made (very successfully) through a centralised and corporatist wage fixation system, and this was not with a view to pursuing an export led growth strategy.
Came back from Greece on Friday. Hard to fit my thoughts and frustration in a comment. Yes, it is a widespread idea also supported by former finance minister Varoufakis (who along with Krugman should receive public lashing for the damage they caused to people who didn't know any better than to listen to them) that growth comes from deficit spending. But Greece tried this from 1981 to 1990. Debt/GDP rose from about 25% to 100%, inflation stayed high despite favorable supply shocks and rose relative to the European average, yet unemployment also rose while GDP growth slowed. These are the same-old tried and failed policies in order to avoid painful but necessary structural reforms.ReplyDelete
In a recent interview with CNN, Krugman now blames the Greek government for not having a plan B. Well, what plan B did HE offer when he was blasting austerity and recommending an exit from the Euro? Not surprising of course from someone who relies on ISLM to make policy recommendations and knows very little about how banking, payment systems, and the legal framework work. How should a country deal with a long-lasting bank run when the possibility of an exit makes its banks ineligible for loans from the ECB? How can Greek companies engage in international trade when letters of credit and credit cards issued by Greek banks are not accepted abroad? How would the conversion of whatever deposits are left in the banking system to local currency which would then be devaluated significantly against the Euro affect the ability of debtors to pay off their debts, which are denominated in Euros, and which would be owned by the ECB since most of them were placed as collateral by private banks in order to borrow reserves? And what about the huge redistribution of wealth in favor of those, usually affluent, who took their money out of the system in time? What would happen when, after the Greek government failed to pay its debt, in Euros, to its creditors, these creditors tried to take ownership of the assets the Greek government has placed as collateral? How would the increase in the price of physical capital, medicine, oil and other imported goods affect production, employment and welfare? Oh wait, none of this is in the models Krugman consults. You increase G, shift the curve, and there you have it. Rubbish! I don't know of any other economist who has done so much harm with his Nobel Prize. He should be ashamed of himself, and should start taking responsibility.
Constantine its is great to the perspective of both a Greek and insightful commentator. My instincts I think are very much with yours, but you have far more of a knowledge base. I feel that institutional reforms will have to happen, but like Habermas am concerned that much of the debt restructuring deal includes neo-liberal style privatisations of state assets which really have little to do with tackling the real problems, and will probably create new ones. Also while I would support the right types of institutional reforms, I think the debts should be written off. What is happening is that we are letting irresponsible foreign banks off the hook and making ordinary Greeks pay the price. To look at an historical analogy, insisting on German reparations after WWI was a mistake, but to write them off after WWII (and combine these with reforms) was the right thing to do. I also think some some people are confusing debt repayment, austerity, and structural reform - it is the last of these which is arguably necessary,.ReplyDelete
The answer I think is fiscal union in the current Eurozone (but not wider EU). This will enable Germany to provide capital to where capital is needed (and get a return on it) while at the same time provide the opportunity for institutional reform to ensure that that capital is well invested. Before events such as the rapid expansion of the EU in the early 2000a there was momentum for this, now though I feel people are getting bit tired of what has become a neo-liberal experiment.
Varoufrakis for sure sees through the nonsense of things like ISLM. But I think Syriza was in an impossible position. They wanted to keep the Euro, but had to fight the punitive conditions of the debt deal, and at least American commentators, even if invoking ISLM, could see the folly of that and Varoufrakis needed their support.
It would take several pages and probably a formal model to explain this in detail, but let me see if I can summarize. The Greek government has for a long time been providing private goods and services, thus competing with the private sector (examples include transportation, education, healthcare, etc.). In many instances it raises legal barriers to the private sector. For example, as far as I know, Greece is the only OECD country in which the constitution grants the government a monopoly in the provision of college education. Typically, the government is much less efficient at the provision of these services. Their quality is quite poor despite a cost similar to that or the private sector, but it charges consumers a price below cost, and until recently the difference was financed not through taxes but rather through borrowing. Hence, by avoiding taxes, higher income consumers could afford to buy better-quality services at a higher price from the private sector. The result of all this was an increase in the public debt. But now the government cannot borrow any more, So what should it do?ReplyDelete
One solution is to cut transfer payments (pensions, etc.) or the provision of public goods (e.g. defense). Another is to raise the tax rate (e.g. the VAT) and combat tax evasion. A third is to reduce production of goods and services by the inefficient public sector (privatization) and instead increase transfer payments to those families who really need it and allow them to choose who to shop from. There is no way out; he government's inability to borrow from abroad will reduce welfare and there is nothing anyone can do about it. But GIVEN that the days of primary deficits are over, the question is which of the three strategies the government should pursue more (obviously a mix is necessary). I believe that privatizations are the best of the three options, as well as eliminating public employees whose sole purpose is to serve a bureaucracy that raises the cost of doing business in Greece (licenses, complicated tax law, paperwork, etc,) without providing much benefit to the people. A good example is the leasing of part of the port of Piraeus to the Chinese company (and hence ironically communist) COSCO, in 2009. Not only did the deal provide revenue to the Greek government, but productivity and quality of services increased.
Finally, regarding the debt sustainability, the size of the debt is not important. What matters is the long-run interest rate on the debt relative to the rate of growth of the economy. In my opinion, this is what the Greek government should have focused on. Without addressing this, even if there was a haircut, in a few years it would be back to where it was.
Yes, yes, yes, a thousand times yes. Nice to see an intelligent, theory-informed discussion of the Greek problem, instead of ISLM-style nonsense about digging holes.Delete
"Well, what plan B did HE offer when he was blasting austerity and recommending an exit from the Euro? "ReplyDelete
I agree. An unbelievable nerve.
Martin cut transfers to the Provinces and provincial deficits and debt exploded. Martin increased taxes, including payroll taxes. Falling inflation and falling nominal interest rates led to falling nominal deficits. The Canadian dollar went off a cliff which increased natural resource exports and increased the Canadian dollar price of those exports. Add in the subsequent boom in global oil prices and the Canadian experience from 1995 to 2015 has very little relevance for other countries in 2015.ReplyDelete
"provincial deficits and debt exploded"Delete
That's not correct. The first thing that turned up in my google search was:
which indicates that, from 1995-2000, debt/GDP ratios increased in some provinces, and decreased in others. Even where there were increases, those could not be described as "explosive." My eyeball tells me that there was little change in the ratio of provincial debt to GDP for Canada from 1995-2000. Sorry, no explosion.
"The Canadian dollar went off a cliff which increased natural resource exports and increased the Canadian dollar price of those exports."
As you can see in the charts in my post, by about 2002 the Canada/U.S. exchange rate, and net exports are about where they were in 1995. So, what cliff are you talking about?
"...beginning in 2000, the exchange rate depreciation and the increase in net exports quickly reverse themselves. It seems to me that, if a country is really interested in exploiting the effects of devaluation - whatever they may be - it needs the devaluation to be permanent. In this case, note that there is actually a net exchange rate appreciation from 1995 to 2005."ReplyDelete
You might think that is lovely as it conforms with Dear Model, but perhaps something else is going here.
This could be the current account driving the exchange rate, not the reverse. I cannot immediately get the whole period you are talking about, but have a look at Australia which is I think is a very similar economy after 2005 and your graph,
Even if trade is denominated in US dollars, production costs are still going to have be paid in local currency, so the US dollars earned will be converted. This creates a demand for that currency if net exports rise. What was driving this export demand was obviously foreign demand (China). Whether Canadian exports were relatively more competitive than Australian ones (if) is irrelevant. Either way there was a surge in demand for the exports of both countries. This was driving up these country's currencies.
"You might think that is lovely as it conforms with Dear Model..."Delete
What is lovely, and what's the Dear Model you have in mind?
"This could be the current account driving the exchange rate, not the reverse."
Well, in most of our Dear Models, the exchange rate and the current account are endogenous variables, so it would not be correct to say that one is causing the other. I'm saying what you see is consistent with a mechanism whereby real exchange rate variation is dominated mainly by variation in the nominal exchange rate.
Yes, there could be a lot going on with trade balances. I'm not sure what point you're trying to make.
Off-topic. Is this the Stephen Williamson that gave the why the fed was founded presentation on May 28?ReplyDelete
If so, do you answer questions about the presentation? Thanks!
That's me. Send me an email, and I would be happy to answer your questions. It might take a couple of days, as I'm traveling.Delete
What is the email address?Delete
It appears that the Canadian experience is consistent with the empirical results found by Alberto Alesina and his co-authors (http://scholar.harvard.edu/alesina/publications/output-effect-fiscal-consolidations).ReplyDelete
This description largely seems right to me. One part f the story that I think deserves more attention, is the change in Canadian corporate income tax rates over the period. Check with Jack Mintz!ReplyDelete
The current account surplus---while it existed, by whom were the "loans" held. Someone's borrowings had to show on someone's balance sheet. (I assume the sales were in USD and we are talking about holding US Govt debt as the "form" of the loans?ReplyDelete
As the surplus shrank were the bonds sold at a gain or loss?
Well, the current account is for the nation as a whole. So, if a country is running a current account surplus, it's lending to the rest of the world. And that's collective net lending - this includes the government and the private sector. So, it's not surprising that, if government borrowing goes down, the nation as a whole becomes a net lender.Delete
Your questions seem to relate to how the stock of claims on foreigners was denominated, and asset flows leading to capital gains and losses, which I think we don't know much about. Further, I'm not sure it's important.