OK, like Brad DeLong, I’d like to move on. Let’s stipulate that:
1. I am a big meanie
2. Reinhart and Rogoff never should have claimed that there is some kind of critical threshold at 90 percent, and they certainly should disavow any such claim now (which I don’t think they have, yet). I believe that the 90 percent claim had a remarkably malign effect on policy discussion, but let’s look forward.
And to start that forward look, let’s talk about German fiscal policy and European monetary policy.
From the point of the euro area as a whole, fiscal policy has been dramatically and destructively “procyclical” — that is governments have slashed spending and raised taxes in the face of a deeply depressed economy. This is a large part of the reason Europe is back in recession, and that growth over the period 2007-2013 looks more or less certain to end up being lower than growth over the period 1929-1935. (And the 2014/1936 comparison will probably be even worse).
But the peripheral countries don’t have room for stimulus (although I think you can argue that they have room for reduced austerity). This means that any attempt to make European fiscal policy less contractionary has to involve expansion in the core, mainly Germany.
R&R are opposed to any such move, however, because
for Germany, which can afford it, fiscal expansion would be procyclical.
Their point is that Germany appears to be near full employment, so that fiscal expansion would be inflationary there. And they call for expansionary monetary policy instead.
OK, this baffles me, on two-and-a-half levels.
First, the half level: what, exactly, does it mean to call for expansionary monetary policy by the ECB? Like other major central banks, the ECB has near-zero policy rates, so we’re talking about some kind of unconventional monetary policy. Are we supposed to envision the ECB doing huge purchases of unconventional assets (over and above what it’s already doing in the form of lending to banks against sovereign debt and the promise of outright monetary transactions if necessary)? Alternatively, are we supposed to see a European version of Abenomics, with the ECB credibly committing to a higher inflation target? Both are strategies worth trying, but of uncertain effect — and both would surely be viewed as anathema by the Germans.
Second, and now we get to where I’m really baffled, if we’re against policies that are procyclical for Germany,what on earth do R&R imagine a more expansionary monetary policy (however achieved) does? Europe as a whole is deeply depressed; Germany is not. So any policy that causes overall European expansion is going to be pushing the German economy up against capacity, and pushing up German inflation. There is no difference at all between fiscal and monetary expansion as far as that issue is concerned.
Finally, aren’t policies that are procyclical for Germany, and raise inflation there, the whole point of the exercise? We have a competitiveness gap between the periphery and the core that must be closed through some combination of falling wages in Portugal, Spain, etc. and rising wages in Germany. The idea is to shift the balance of that adjustment somewhat away from the deflationary countries — overheating in Germany isn’t a bug, it’s a feature, and indeed the crucial feature.
So I have no idea what their point is. I get that they’re against fiscal expansion anywhere in Europe despite the continent’s clearly too-tight overall fiscal policy, but I don’t understand why.