Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 11 June 2013

Does the Dutch central bank employ any macroeconomists?

Did you think that the policy of fighting recession by increasing austerity was now intellectually bankrupt? No one seems to have told the Dutch central bank. (Hence the deliberately provocative title of this post.) The latest forecast by the Bank says

  • The economy will shrink by 0.8% this year, followed by growth of 0.5% next, “accelerating” to 1.1% in 2015
  • The unemployment rate will rise sharply, reaching a peak point at 7.2% of the labour force midway through 2014.
  • The budget deficit will increase from 3.5% this year to 3.9% next.

What should the government do about this? The central bank says “"The forecast course of the factual and structural deficit in 2014 does not meet the recommendations given in May by the European Commission to correct the excessive budget deficit in the Netherlands. Extra consolidation measures are therefore necessary."

Unfortunately the central bank is being entirely predictable in continuing to urge austerity as the economy weakens. In earlier posts (here and here), I noted how the central bank’s advice was rather different from the Dutch CPB (Bureau for Economic Policy Analysis), which clearly does employ macroeconomists. What is just so depressing is that the central bank seems oblivious to the increasingly overwhelming evidence that austerity during a recession is the complete opposite of what you should be doing in a country without its own monetary policy. Unlike some other Eurozone countries, there is no market pressure forcing policymakers’ hands in the Netherlands.

If you think this is excessively rude, please read my own checklist on the subject. I am not disdainful of those in 2010 who thought austerity was necessary because either a debt crisis was around the corner, or economic recovery had been assured, and have subsequently done what Keynes suggested should be done when the evidence becomes clearer. I think they were wrong back then, and said so, but it was an understandable mistake, and even the best economists make mistakes. But I’m afraid to continue in 2013 to advocate a course of action which anyone can see is doing immense harm to so many people is just inexcusable. If you understand this, and are a macroeconomist working for this or another European central bank with similar views, then you have my sympathy. If you work for one of these banks and think I’m being too harsh, please tell me why in comments. But more importantly, let’s hope that Dutch politicians treat this advice, along with the recommendations of the Commission, with the contempt it deserves.


  1. Re: "...austerity during a recession is the complete opposite of what you should be doing in a country without its own monetary policy."

    Am I missing something? Surely austerity during a recession is always a complete no-no.

    I was under the impression that it was precisely because Eurozone countries didn't have their own monetary policy that they were being forced to undertake austerity.

    There may be "no market pressure forcing policymakers’ hands in the Netherlands (yet)" but there is plenty of pressure from elsewhere: ECB, Germany, EU Commission to name a few.

    Maybe all these institutions should instead hire Sue Marsh's parruchiere to run their economic policy?
    He couldn't do any worse, and he clearly understands the real problem with the Eurozone.

    1. If your central bank targets inflation for your whole country, like the UK, then the fiscal stance is, to first order, irrelevant. Since fiscal deficits generate inflation, an inflation targeting central bank will raise rates in response.

      In the EU, the staggering failure of the ECB to but a floor under aggregate demand (NGDP) has meant that fiscal authorities have to do it.

      Monetary dominance is pretty well established theoretically and empirically - check out the US job growth largely unaffected by the sequester, or Japan's massive deficit's (2000-2010) complete failure to stimulate the economy when the BOJ was determined to maintain the price level (zero percent inflation targeting effectively), although in practice austerity has small negative effects anyway, as some demand is lost due to having more people "between jobs" as it were.

      Some policy makers believe we are in a Liquidity trap, but I think Scot Sumner is right about that. The idea that a central bank cannot put NGDP on any path that it wants is misguided. Japan has also pretty much destroyed that idea, as it is providing evidence that you can exit a liquidity trap pretty much as soon as your central bank wants you to.

    2. You don't seem to grasp that the ECB has only one mandate, price stability, something it takes very seriously and has delivered excellent results on.
      It has no interest in putting a floor, or a ceiling around aggregate demand, why would it, it's just a currency issuer.

      Watch and admire the steadfast approach to currency stability, allowing economies to adjust naturally to the real world.

      It's an approach that you may find frightening, but best get used to it, it's here to stay.

    3. The price level in teh EUrozone is now some 10% below where it should be if the ECB targeted 2% inflation. How is that stability?

      1/NGDP is the proper measure of the value of money, in which case the ECB has presided over a devastating deflationary shock. That is not "price stability".

    4. "It's an approach that you may find frightening, but best get used to it, it's here to stay."

      I think this is unlikely in countries that have elections. The idea that economies "adjust" to the real world, and are not OF the real world is, to be kind, anti-empirical.

    5. The ECB did a lousy job on inflation since for 12 years it allow an inflation in Germany close to 1% and in the South around 2.8%. That is the only reason for the difference in competitive power in Germany and the South. That it achieved an average 2% as agreed in the Maastricht treaty has no meaning, since it is a meaningless average. If you sitting on a hot stove with your feet in ice water your average temperature might also be good, but you feel lousy.

    6. I think what Cantab83 is getting at is the "without" part of the quoted sentence.

      The Netherlands is a country WITH it's own monetary policy. That's why it's inexcusable to resort to austerity. (It's still a bad idea in the Eurozone, but national governments can be somewhat forgiven since they have no choice). I think this may just have been a typo on Wren-Lewis's part.

    7. Ok - my bad. I took the term "Dutch Central Bank" to imply that if the Netherlands had its own Central Bank, then it had not joined the Euro.

      So I guess this raises the question, if the Dutch Central Bank isn't actually in charge of the currency, to what extent is it a real central bank? It seems that once you're part of the Eurozone there's really only one central bank, the ECB, and everyone else is just there for support.

      In light of that, I'm not sure why austerity in such a country is especially unforgivable. True, a nation without control of its own monetary policy can't rely on the monetary authority to offset austerity measures. However, a country without its own monetary policy also can't rely on the central bank to bankroll its deficits. Basically, once you give up control of your currency, you're in a tight spot no matter what.

      That said, maybe the Netherlands is different than the crisis countries. For one thing, the Netherlands has a current account balance. My guess would be this gives the Netherlands more room to run deficits, and makes internal devaluation less of a concern. Thus, maybe in the Netherlands case a burst of stimulus might be enough to get their economy and budget back into balance. Maybe.

      In any case, it seems the main problem remains with the Eurozone is the ECB's reluctance to do anything about austerity. Still, I suppose the Dutch Central Bank isn't helping.

  2. Prime minister of Finland just said couple of days ago that additional budget cuts may be necessary because debt/GDP ratio keeps increasing. Now Finland's gov debt stands at 62% of GDP which is obviously not alarming.

    The main argument was that economic policy needs to be "credible". Words can't describe anymore how depressing it's to hear this same nonsense after 3-4 years of completely failed policy.

  3. I totally agree! (But then I don't work at the DNB...)

  4. Why should the Dutch Central Bank employ macroeconomists? It's not a central bank.

    And I think you might be misreading that last sentence. Suppose we amended it to read:

    "Extra consolidation measures are therefore necessary to comply with the recommendations of the European Commission."

    Good Europeans, after all, would think it unnecessary to add that last bit.

    Next you'll be thinking about joining UKIP. ;-)

  5. But it gets even worse, I'm afraid. As you mention, the CPB was the last important institute withstanding the austerity mania. Unfortunately, it's director recently retired. He was replaced by someone from the finance ministry, in fact the same person that was most responsible for drafting the austerity budgets of the recent governments that brought The Netherlands into its downward trajectory since 2010. Already now, the CPB has since called for more austerity. Soon it will be even more clear how far they've moved to the dark side, when they have to present their next projections.

    BTW, a funny thing happened yesterday in a (short) tv interview of Olli Rehn. The interviewer started to ask whether he wasn't just stupidly looking at numbers, without considering the people and the broader economic impact. Of course he answered no. But then for the rest of the interview, he just kept on mentioning numbers (like 3% and 6 billion of cuts), without any real underlying reasoning why that should happen (except the stability pact), and without acknowledging what impact that would have on the people, growing unemployment, or economy. Except of course the empty words about getting a stronger economy or something. So in his answers, he implicitly gave a strong "yes" to that first question. Unfortunately, the interviewer did not follow up on her first question. Anyway, Rehn made very clear that he is convinced the problems in the EU economy are all structural and require structural changes, even though he did not even say what structural problems that may be.

  6. Hello.

    I note you're an economist, so your view that more government spending and debt are solutions to an economic contraction is understandable and entirely mainstream.

    Sadly for you and your economics colleagues, the world is stuck with a huge debt bubble, and more debt won't help, it'll just prolong the bubble.

    Allowing the economy to find its own natural level is what Europe now does, finally we have a shot at a free market economy, no pointless debt and spending by governments.

    I love this approach, but I can understand why the collectivists would prefer government to distort matters once again. One day the whole world will be like the Eurozone, the sooner the better.

    1. A natural level of massive unemployment, misery and revolution. Sounds great

    2. Don't get me started on those filthy collectivists. With their elected officials, their laws, their justice systems, their ceaseless efforts to avoid violent revolution...

    3. Let me know how you feel when you lose your job.

    4. Well SugarLover I'd be all for an experiment in completely free markets if the wealth accumulated by the few was evenly redistributed to make sure this experiment in completely "free markets" is done in a way that ensures the accuracy of the results.

      And secondly once all of the western democracies prohibit the influence of our elected leaders with money.

      But if we can do that I would be interested in seeing if these vaunted "free market" solutions would solve all of the world's problems. Other than that doing what you are calling for now is just a massive advantage being given to the people who have the most...and isn't that what you free marketeers are all about?

    5. I smell Austerian Economics.

      Go to Somalia with its unregulated economy and leave the civilized world in peace. Now.

    6. "One day the whole world will be like the Eurozone, the sooner the better."

      You mean one day everyone will be using a currency with obvious flaws which hamper economic growth in its member states?

      I doubt it. I'll keep my dollars, thank you.

    7. Sugar Lover, for my own sense of faith in humanity, I hope you're a troll

    8. Free markets: finally the freedom to sell slaves and have children working for you. You would love that would you? If not, please think some more about the concept of economic freedom.

    9. The world does have too much debt, which built up during the credit boom of 2003-2008. The debt is mainly owed by households and firms, who have too little income to service it, and must save over time.

      Assuming no export boom, the natural thing to happen is for this private saving to be offset by government borrowing. It is not a solution to the contraction, but a natural stabilizer. The real recovery will only come when the private sector is done deleveraging, and growth returns. But to say that the government should do nothing, or actively cut those naturally occurring deficits... well, that self-immolation is arguably unnecessary and "artificial", in the sense that it moves the "natural level" of the bottom down, down, down, down.

      Then the IMF and the EC will say: "Congratulations, you cut your deficit (all the way to Depression, 27% unemployment and economic collapse!)"

  7. I have long thought that the two sides of the austerity conflict could be labelled "Bankers" and "Economists"

    Economists depend on their theories, bankers worry about the opinions of the markets.

    Econonists' knowledge has empirical roots; bankers rely on the wisdom of crowds.

  8. One thing to remember: the mandate/target of the Dutch central bank is not growth, but financial stability. Given that the Netherlands is one of the core EMU countries (and that Wim Duisenberg was one of the fathers of the ECB) they probably feel compelled to adhere to the Maastricht Treaty, even if some/most of their staff would agree that budget cuts lead to lower growth. What is surprising, however, is that DNB is giving (quite specific) economic policy advice to the government (which is not their job), especially in the same week in which the CPB releases their own forecast.

  9. It's important to remember that bankers view austerity as moral payback for years of excessive credit, and that view is now entrenched. A banker suggested to me that "people are just going to have to get used to a lower standard of living". Except of course that "people" doesn't include those expounding all this nonsense. Their indifference to mass unemployment and poverty is frankly chilling. To the extent there is any intellectual justification for austerity's effects, the usual old tropes about voluntary or structural unemployment are wheeled out. It's all very depressing.

  10. Tax increases have been the bulk of austerity and that is the mistake when the burden on the private sector is too large (Europe and many others). Austerity via spending cuts is what most of Europe needs as they are having a sovereign DEBT problem in economies with bloated government. When you have borrowed too much and your credit rating is at risk and/or been cut, you must reduce borrowing but don't do it by increasing taxes. Literally 80% of the austerity in Greece and Portugal was from the revenue side. It is no wonder why their economies tanked. A healthy private sector is the answer not more government spending. If you have borrowed too much, you are going to have pain and you can choose to take a little now or a lot later. Look at Latvia that went through a massive austerity with teacher wages cut as much as 40%; they have had credit upgrades and are growing. They have restored some of the wage cuts. Ireland leaned towards spending cuts and is doing better. Greece and Portugal increased taxes on the private sector and killed their economies.

  11. Why is nobody addressing the weird rationale that making people jobless (which is the result of spending cuts) is an answer to a period of too much borrowing. If we owe too much, lets all work harder. I do not see where the rationale comes from for: We owe too much, lets work less.

  12. Unfortunately you got these types of central bankers all over Europe. A while back I caught Erkki Liikanen, chief of Bank of Finland, giving some gobbledygook about debt levels. It would have been bad enough if he was merely harping on about how the government should balance the budget, but he then went on to display his total lack macroeconomic knowledge by worrying about the general debt levels. He wanted all sectors of society to reduce their debts. Which is impossible without export growth (is Nokia off the sickbed yet? No? Well, Finland's f'd then). Next he got too clever by half when he tried to bamboozle us with some great counter intuitive truth by pointing out that after WW2 the overall global debt levels were lower. Golly gee, now why would that be so? Perhaps because governments essentially moved most of private sector and household debts onto its balance sheet, an incidental Keynesian boon from funding the war?

  13. Have a look at the Rabo Bank's research of roughly a week ago on this.
    They make a 'product' of their solution. Probably the first decent piece of research I have seen from them, usually it is utterly poor.

    You should have noticed by now that just the idea of spending more simply doesnot catch with anybody (except the people that directly benifit from it).

  14. This is class warfare, that's it. The minority in power like the feeling of being relatively more reacher than the majority of the population. Let us start to think that elites want to maximize status, not utility.

  15. The Dutch Central Bank is just giving the government advice that its forecast suggests that the Netherlands will be in violation of its obligations under EU's excessive deficit procedure.

    It is only requesting that the Netherlands take action to comply with EU laws that it has signed. I see absolutely nothing unusual in this, there are only two possible course of action it could recommend deficit reduction measures or withdrawal from the Euro -as members of the Eurozone are legally obliged to have deficits under 3%. Of the two options the Central Bank's economists are clearly correct in arguing that additional deficit reduction measures are less disruptive and therefore preferable to a change of currency.

    1. Members have routinely violated and continue to violate that 3% obligation. There are no procedures in place to expel offending countries. Continued membership is a decision solely within the purview of Dutch politicians.

      As for clearly correct, it's not clear at all. In this situation any attempt at balancing the budget will only depress the economy, reduce taxes collected, cause more spending to handle unemployment and might even trigger the need for costly bank bailouts (which would really blow a hole in the deficit). Letting things be could well be the superior way to handle deficits, and so the central bank can in clear conscience agree no cuts and new taxes need to be implemented.

  16. A banker suggested to me that "people are just going to have to get used to a lower standard of living". Except of course that "people" doesn't include those expounding all this nonsense.

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