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