Krugman’s blog, 8/20/13

There were three posts yesterday.  The first was “Coalmines and Aliens, Again:”

Brad DeLong catches John Cochrane being remarkably dense:

Paul Krugman recommended, with refreshing clarity, that the US government fake an alien invasion so we could spend trillions of dollars building useless defenses. (I’m not exactly sure why he does not call for real defense spending. After all, if building aircraft carriers saved the economy in 1941, and defenses against imaginary aliens would save the economy in 2013, it’s not clear why real aircraft carriers have the opposite effect. But I’m still working on the nuances of new-Keynesianism, so I’ll let him explain the difference. I’m not a big fan of huge defense spending anyway.)

As I’ve explained before, the alien thing was a modern riff on Keynes’s coalmine thought experiment. It’s worth quoting that one in full:

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly ‘wasteful’ forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

In a way, I’m amazed by economists who find this sort of thing absurd on its face. Leave macroeconomics on one side: what about the theory of the second best? This theory — which is just basic micro — says that when some markets are distorted, for whatever reason, social costs and benefits across the economy don’t correspond to private costs, so that unprofitable, even seemingly wasteful activities can sometimes be beneficial. And an economy in which millions of willing workers can’t find work is surely one with massive distortions of some kind.

Oh, and let’s always remember that Keyensians like me don’t believe that thing like the paradox of thrift and the paradox of flexibility are the way the economy normally works. They’re very much exceptional, applying only when interest rates are up against the zero lower bound. Unfortunately, that happens to be the world we’re currently living in.

The second post of the day was “Rupee Panic:”

OK, the plunging rupee is the big economics story of the day, and I’m trying to get up to speed on the issues. My immediate question, however, is why the panic?

Yes, the rupee is down a lot in a short time — along with other emerging market currencies. In fact, its fluctuations are small compared with the obvious comparator, Brazil:

Bank for International Settlements and author’s estimate

(The BIS numbers only go up through July, and I estimated the last month from the dollar-rupee rate.)

We more or less know the story here. First, advanced countries plunged into a prolonged slump, leading to very low interest rates; capital flooded into emerging markets, causing currency appreciation (or, in the case of China, real appreciation via inflation). Then markets began to realize that they had overshot, and hints of recovery in advanced countries led to a rise in long-term rates, and down we went. (I don’t think QE has much to do with it, although your mileage may vary.)

So the recent decline is sharp. But should India panic?

This would be scary if India was like the Asian crisis countries of 1997-1998 or Argentina in 2001, with large amounts of debt denominated in foreign currency. But unless I’m misreading the data, it isn’t:

Now, the depreciation of the rupee will presumably lead to a spike in inflation — but it should be temporary.

So at first examination this doesn’t look like as big a deal as some headlines are suggesting. What am I missing?

The last post yesterday was “They Can’t Handle The Health Care Truth:”

Aaron Carroll talks about the Republican health care dilemma, and makes a good point: it runs deeper than the specific fact that Obamacare looks the way it does because it has to. At the most fundamental level, you can’t guarantee adequate health care to everyone unless the people who don’t need help right now — the young, healthy, and affluent — are induced, one way or another, to contribute to the care of those who do need help. You can do this purely with taxes, via a single-payer system (and maybe even by having the government act as provider), or you can do it, Swiss or Massachusetts style, via a combination of regulation, taxes, and subsidies. But some way of corralling the lucky healthy into contributing is necessary.

For the vast majority of this group, this is still a good deal — as Ezra Klein says, nobody stays young and healthy forever, and only a very small number of people are so rich that they are better off on a lifetime basis with no guarantee of insurance at all. But conservatives balk at the notion of any kind of redistribution, even if it makes almost everyone better off. So they are unable to come up with an alternative.

What they have are fantasies — claims that somehow unleashing the magic of the marketplace can make health care so cheap that everyone can afford it. There is absolutely no reason to believe that this is true.

And this also means that their only chance of defeating Obamacare was to stop it before it went into effect. Once it’s in place, most people will see real benefits — and Republicans will have nothing to offer instead.


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