Brad: Marshall Auerbach [2010] was, of course, 100% right. The turn to severe austerity in 2010 by the then-newly elected Conservative-Liberal Democratic government looks to have cost Britain 4% of GDP in a slowing-down of recovery. It was not quite enough to knock the UK back into recession–in large part because the government in the end did less to cut spending than its manifesto had committed it to. But it was very damaging.WCEG — The Equitablog
Must-Read: Marshall Auerback: The United Kingdom Draws the Wrong Lessons from Canada
Brad DeLong
5 comments:
The fairly strong growth that the Canadian economy registered from 1997 to 1999 (4.4 percent on average) may be attributed in some measure to an extraordinary loosening of monetary policy from mid-1996 to mid-1998. Indeed, for over a year in 1997 and into 1998, Bank of Canada Governor Gordon Thiessen permitted not only nominal but real interest rates to drop, almost unprecedentedly, below U.S. rates. This appears to have been an urgent attempt to forestall deflation, for Thiessen’s anti-inflationary intervention in 1995 and Finance Minister Paul Martin’s cuts in 1995 and 1996 had combined to drive the annual change in the CPI below one percent by 1998. At the same time, Thiessen could be assured by the excessively low inflation that "monetary stimulation"/collapsing Canadian dollar would be unlikely to "ignite" inflation. Thiessen’s monetary theology was not disturbed by the simple facts that, under the sway of neo-classical and rational expectations theory, the Canadian economy had just:
• Traversed two decades of low inflation with high unemployment, and,
• Registered a recessionary gap for the entirety of the low-inflation decade of the 1990s.
Actually, I have trouble understanding the "Great Canadian Slump" of the early 1990s, when historically high real interest rates apparently drove Canada deeper into recession than any other developed country (see Pierre Fortin's 1996 Presidential address to the Canadian Economics Association). The higher real interest rates, according to a lot of heterodox and MMT theory, should have added money to the economy, whereas they appear only to have increased demand leakages (i.e. increased the "savings desires" of the private sector, as I imagine Warren Mosler might say). I wonder if Circuit or another Canuck could provide an MMT view of the Great Canadian Slump of the 1990s? (Or indeed anybody else!)
MMTers say monetary policy effect is uncertain so set at 0 and use fiscal policy. Job guarantee and fiscal policy to have full employment and target inflation.
Pearce,
I was out of the country at the time, so I have to work from data or other histories. I have not looked at this recently, so I am working from memory.
- There was a real estate bust which hit the biggest cities (Toronto, Vancouver). It took a long time for the real estate market to recovery
- At the beginning of the 1990s, the Canadian dollar was overvalued, and the new North American Free Trade agreement blew a hole in previously protected industries.
- Finally, I believe that some cutbacks in government spending started then. Maybe not "austerity", but enough to drop growth rates.
I would not ascribe much importance to real interest rates, just nominal, when it comes to the income effect. The fact that real rates were high was just because inflation was collapsing, which is not a reason to get excited about nominal growth.
Sigh - cannot fix typo. "Recover", not "recovery."
Pearce,
The idea that high (low) interest rates can be expansionary (contractionary) is not really an MMT idea. Neo-Keynesians in the 1970s actually anticipated that in the long-run, open-market operations such as quantitative easing are contractionary, as they remove interest income from the economy. More recently, Joe Stiglitz raised the possibility that lower interest rates drive down aggregate demand in the context of the recent low interest rates in the US.
By the way, Randall Wray co-authored an unpublished (as far as I know) paper on this point, however, as I recall, the conclusions from that paper hold only under very specific conditions. (So you know, I read the paper carefully a few months ago but unfortunately cannot locate it. If anyone has the link or reference, I'd be much obliged...)
But, in the case of Canada, the Canadian slump is a typical case of central bank-induced downturn caused by overly high interest rates, which effectively killed the economy. One indicator that the BoC was overly tight during this period was that the inflation control target (total CPI) was in the lower half of the acceptable target range most of the time.
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